Constraints To Development Flashcards
Primary Product Dependency
The reliance on exports of a few primary products, such as minerals or agricultural goods, for a country’s income and employment.
Primary Product Dependency as a constraint to development
Zambia is a landlocked country in Southern Africa with a population of about 18 million. Its economy is heavily reliant on copper, which accounts for over 70% of its export earnings.
Challenges faced due to copper dependency:
• Volatile global copper prices: Fluctuations in the global copper market can have a significant impact on Zambia’s economy. For example, the price of copper dropped sharply in 2015, leading to a recession in Zambia.
• Dutch Disease: The influx of revenue from copper exports has led to an appreciation of the Zambian Kwacha, making other exports less competitive and hindering diversification of the economy.
• Limited job creation: While the copper industry generates revenue, it does not create a large number of jobs for the Zambian population. This contributes to high unemployment and poverty levels.
Primary Product Dependency constraint evaluation
Ghana: In 2007, Ghana discovered oil in its offshore waters, which has since led to sustained economic growth. The country has implemented a transparent and responsible management of its oil resources, including the establishment of a petroleum fund to invest in non-oil sectors. As a result, Ghana has been able to diversify its economy and improve its infrastructure, while avoiding the “resource curse” faced by other oil-rich countries. The country’s GDP has grown consistently since the discovery of oil, and its economy is expected to continue to expand in the coming years.
Volatility of Commodity Prices
Fluctuations in the prices of primary commodities that a country exports, which can have a large impact on the country’s economy, hitting incomes and investment, which can then limit future growth.
Volatility of Commodity Prices constraint
Copper Price fluctuations: Global demand and supply dynamics cause significant price swings, like the 2022-2023 rollercoaster ride. In 2022, copper prices soared to record highs due to pandemic disruptions and the Ukraine war, but then nosedived in 2023 with economic slowdown fears.
Volatility of Commodity Prices constraint evaluate
Countries like Saudi Arabia have so much oil, that is cheap to produce that they are well able to cope with price fluctuations. Through OPEC they also have a degree of influence on the price, limiting fluctuations.
Diversification: Botswana:
- Background: Formerly heavily reliant on diamonds, accounting for almost 80% of export earnings in the 1980s, Botswana recognized the dangers of single-resource dependence.
- Diversification strategy:
Investing in tourism: Botswana capitalized on its stunning wildlife and landscapes, developing a thriving ecotourism industry, now a major revenue earner.
- Promoting other industries: It fostered diversification in sectors like banking, manufacturing, and agriculture, reducing reliance on diamonds to around 30% of exports.
Focusing on education and human capital: The government heavily invested in education and healthcare, creating a skilled workforce and improving living standards.
Data:
GDP growth: While volatile, Botswana’s GDP growth has averaged over 4% for the past two decades, demonstrating relative stability compared to many resource-dependent countries.
Savings Gap: Harrod-Domar model
A model that suggests that a country’s rate of investment is limited by the rate of savings and its growth potential.
Saving Gap: Harrod-Domar model constraint
A country that has suffered from a savings gap is Ethiopia. Ethiopia has a low savings rate which has limited its ability to invest in productive activities and promote economic growth. As a result, Ethiopia has had to rely on foreign aid and loans to finance its development projects, leading to a large external debt burden and increased vulnerability to external economic shocks.
Additionally, the lack of domestic savings has also hindered the development of a vibrant domestic banking sector, limiting access to credit for the private sector and constraining business growth and job creation. These factors have contributed to Ethiopia’s slow and uneven economic growth, despite its rich natural resources and large workforce.
Savings Gap: Harrod-Domar model constraint evaluation
Vietnam
Background: Historically, Vietnam struggled with low domestic savings, hindering investment and economic growth.
Strategies:
Financial inclusion: Vietnam significantly expanded access to formal financial services like bank accounts and mobile money, particularly in rural areas. This allowed previously unbanked individuals to save and participate in the formal financial system.
Macroeconomic stability: The government maintained prudent fiscal and monetary policies, promoting inflation control and confidence in the economy, encouraging increased savings.
Investment in education and social safety nets: Improved education levels and social security programs fostered financial security and a longer-term perspective, leading to higher savings rates.
Results:
Domestic savings rate: Savings as a percentage of GDP have more than doubled in Vietnam over the past 20 years, from around 20% in 2000 to over 40% in 2023.
Investment growth: Increased domestic savings enabled Vietnam to boost investment in infrastructure, manufacturing, and other productive sectors, contributing to sustained economic growth.
Poverty reduction: Improved financial inclusion and higher savings rates contributed to poverty reduction in Vietnam, with the national poverty rate falling significantly.
Foreign Currency Gap
The gap between the amount of foreign currency a country has available and the amount it needs to finance imports, pay debts, and support its currency.
Foreign Currency Gap constraint
- Zimbabwe, which has faced a shortage of foreign currency, leading to restrictions on imports and economic difficulties.
- In 2021, oil accounted for more than 95% of Venezuela’s total export earnings.
Foreign Currency Gap constraints evaluation
Capital Flight
The movement of capital out of a country, taking away resources and weakening the economy
Capital Flight constraint
Capital flight refers to the movement of capital, either through legal or illegal means, from one country to another. In the case of Argentina, the country has experienced significant capital flight over the years, particularly in the 2000s. This has been due to several factors, including high inflation, political and economic instability, and lack of trust in the country’s financial system. The capital flight has resulted in a decline in investment, which has hindered the country’s economic growth and development. In addition, the loss of capital has put pressure on the country’s currency, leading to devaluation and exacerbating inflation. The impact of capital flight on Argentina’s economy has been significant and has contributed to the country’s repeated cycles of boom and bust over the years.
Capital Flight constraint evaluation
India:
Background: Historically plagued by capital flight due to bureaucratic hurdles, corruption, and limited investment opportunities, India initiated reforms to improve the investment climate.
Measures taken:
- Ease of doing business reforms: India simplified regulations and streamlined administrative processes to attract domestic and foreign investments.
- Financial sector liberalization: India opened up its financial sector, allowing greater access to capital and providing diverse investment options.
- Infrastructure development: Investing in critical infrastructure like roads, ports, and energy improved the investment environment and boosted confidence.
- Social safety nets: Strengthening social safety nets like healthcare and education reduced uncertainty and encouraged individuals to invest for the future within the country.
Results:
- Reduced capital flight: Capital flight from India has decreased significantly in recent years, from over 6% of GDP in the 1990s to around 1% in recent years.
- Increased domestic investment: India’s domestic investment has seen a substantial rise, contributing to its economic growth and job creation.
- Emerging investment destination: India’s improved investment climate has attracted increased foreign direct investment and positioned it as a promising investment destination
Demographic Factors
The characteristics of a country’s population, such as age structure, fertility rates, and migration patterns, which can impact economic growth and development.
Demographic factors constraint
Japan is facing a demographic problem in its aging population and declining birth rate. The population of Japan is aging rapidly, with more people reaching retirement age and fewer people entering the workforce. This is causing a decline in the labor force, which has reduced the country’s economic growth potential.
- Additionally, the aging population is putting a strain on the country’s healthcare and pension systems, which are becoming increasingly expensive to maintain. These factors have led to a decline in consumer spending, investment, and economic growth in Japan, as the country struggles to cope with its aging demographic and declining birth rate.
Nigeria is the most populous country in Africa, has a growing population, but faces a number of economic challenges related to its demographic factors. One issue is that the population is growing faster than the economy, leading to a large youth population with limited employment opportunities and high poverty rates. This has led to a large informal sector, which is often unstable and low-paying, and to an increasing number of people living in urban slums.
- Additionally, the population growth has put pressure on the country’s infrastructure, including healthcare, education, and housing. All of these factors have a negative impact on economic development, as they reduce the available labor force and limit productivity. Furthermore, the government has limited resources to invest in these areas, which makes it difficult to address these problems.
Demographic factors constraints evaluation
One example of a country that successfully overcame problems created by a rapidly growing population is China. In the late 1970s, China implemented the “One Child Policy” which aimed to control its rapidly growing population.
This policy, along with other reforms, led to a significant decrease in fertility rates and population growth. Additionally, investments in education and healthcare helped to improve the quality of the labor force, contributing to China’s economic development and growth. As a result, China has transformed from a low-income to a middle-income country, becoming the second largest economy in the world.
With a shrinking and ageing population, immigration can provide a solution, although politically this can sometimes be difficult, as the UK situation demonstrates.
Debt
The amount a country owes to its creditors, which can impact its ability to finance investment and support its currency.
Debt constraints
One example of a developing country whose growth has been constrained by high levels of government debt is Zimbabwe. In the late 1990s and early 2000s, Zimbabwe’s government debt rose significantly due to various factors such as economic mismanagement and an unsustainable land reform program.
- The high levels of government debt resulted in a decrease in government spending on important areas such as education, healthcare and infrastructure. This in turn hindered the country’s overall economic growth and development. Additionally, the high levels of debt made it difficult for Zimbabwe to secure further financing from international institutions and investors, further limiting its economic growth potential.
Debt constraints evaluation
The debt relief program for Honduras was part of the Highly Indebted Poor Countries (HIPC) Initiative, which was launched by the International Monetary Fund (IMF) and World Bank in 1996. Under the HIPC Initiative, Honduras was able to reduce its debt-to-GDP ratio from 130% in 2003 to an estimated 70% by 2006. The relief provided through the HIPC Initiative allowed Honduras to allocate more resources towards development spending, including education, healthcare, and infrastructure.
For example, after the HIPC Initiative, Honduras was able to increase its education spending from 2.6% of its GDP in 2002 to 3.2% in 2006. Similarly, the government was able to increase healthcare spending from 2.7% of its GDP in 2002 to 3.5% in 2006. These increases in spending helped to improve access to education and healthcare for the country’s citizens, which in turn supported its long-term economic growth and development. he country also saw an increase in foreign direct investment and an improvement in its credit rating, which allowed it to access capital markets at lower costs.
Overall, the debt relief program helped to boost Honduras’s economic growth and reduce poverty levels, contributing to the country’s overall development.
Access to Credit and Banking
The availability of credit and banking services, which can impact a country’s ability to finance investment and support economic growth.
Access to Credit and Banking constraint to development
Example: many African countries, where access to credit and banking services is limited, reducing investment and economic growth.
Access to Credit and Banking constraint evaluation
Microfinance schemes, FDI, and foreign aid are all examples of ways of accessing capital when there is limited access to credit and banking. Improvements to property rights can also improve access to credit.
