barriers to economic growth and development

Barriers to Economic Growth and Development

Limits to Growth and Development on the A2 Unit 4 Syllabus

• Students should consider factors such as:1. Poor infrastructure2. Human capital inadequacies3. Primary product dependency4. Declining terms of trade5. Savings gap; inadequate capital accumulation6. Foreign currency gap and capital flight7. Corruption, poor governance, impact of civil war8. Population issues9. Debt dependence

Introduction – Some Growth Data

Key issues• Is rapid growth sustainable?• Does it feed through to significant

improvements in human development?

2015 Human Development Index – Lowest Rankings

Human Development Index (HDI)

Life expectancy at birth

Expected years of schooling

Mean years of schooling

Gross national income (GNI)

per capita

GNI per capita rank minus HDI

rank

Country Value (years) (years) (years) (2011 PPP $)

Côte d'Ivoire 0.462 51.5 8.9 4.3 3,171 -24Malawi 0.445 62.8 10.8 4.3 747 13Ethiopia 0.442 64.1 8.5 2.4 1,428 2Gambia 0.441 60.2 8.8 2.8 1,507 -2

DRC 0.433 58.7 9.8 6.0 680 11

Liberia 0.430 60.9 9.5 4.1 805 7Guinea-Bissau 0.420 55.2 9.0 2.8 1,362 -1Mali 0.419 58.0 8.4 2.0 1,583 -8

Mozambique 0.416 55.1 9.3 3.2 1,123 1Sierra Leone 0.413 50.9 8.6 3.1 1,780 -16Guinea 0.411 58.8 8.7 2.4 1,096 0Burkina Faso 0.402 58.7 7.8 1.4 1,591 -13Burundi 0.400 56.7 10.1 2.7 758 1Chad 0.392 51.6 7.4 1.9 2,085 -22Eritrea 0.391 63.7 4.1 3.9 1,130 -6Central African Republic 0.350 50.7 7.2 4.2 581 1Niger 0.348 61.4 5.4 1.5 908 -5

Nations whose HDI Outcome > GNI Per Capita Ranking

Source: HDI report 2015, UNDP


Gross national income (GNI) per

capita


rankHDI rank Country Value (2011 PPP $)

67 Cuba 0.769 7,301 4776 Georgia 0.754 7,164 40

100 Tonga 0.717 5,069 3273 Sri Lanka 0.757 9,779 2981 Ukraine 0.747 8,178 259 New Zealand 0.913 32,689 23

113 Palestine, State of 0.677 4,699 212 Australia 0.935 42,261 176 Ireland 0.916 39,568 16

18 Israel 0.894 30,676 16145 Nepal 0.548 2,311 16116 Vietnam 0.666 5,092 1529 Greece 0.865 24,524 1417 South Korea 0.898 33,890 13

173 Malawi 0.445 747 1336 Poland 0.843 23,177 1052 Romania 0.793 18,108 1069 Costa Rica 0.766 13,413 105 Netherlands 0.922 45,435 9

14 United Kingdom 0.907 39,267 9

Nations whose HDI Outcome < GNI Per Capita Ranking

Source: HDI report 2015, UNDP


Gross national income (GNI) per

capita


rankHDI rank Country Value (2011 PPP $)

138 Equatorial Guinea 0.587 21,056 -8448 Kuwait 0.816 83,961 -46

121 Iraq 0.654 14,003 -44106 Botswana 0.698 16,646 -4141 United Arab Emirates 0.835 60,868 -3432 Qatar 0.850 123,124 -31

149 Angola 0.532 6,822 -30116 South Africa 0.666 12,122 -29109 Turkmenistan 0.688 13,066 -2839 Saudi Arabia 0.837 52,821 -27

152 Nigeria 0.514 5,341 -24172 Côte d'Ivoire 0.462 3,171 -2452 Oman 0.793 34,858 -2364 Seychelles 0.772 23,300 -1962 Malaysia 0.779 22,762 -1472 Turkey 0.761 18,677 -1211 Singapore 0.912 76,628 -790 China 0.727 12,547 -7

Paul Collier’s 4 “Development Traps”

• Professor Paul Collier has identified four “development traps” - they are

1. Conflict2. Reliance on

natural resources

3. Being landlocked with bad neighbours

4. Bad governance

Infrastructure Gaps

• Infrastructure gaps limit economic growth & human development because

1. They increase supply costs for businesses – this causes higher prices – hitting real incomes

2. Reduce geographical mobility of labour / higher structural unemployment

3. Damage export competitiveness and limit intra-regional trade

4. Make a country less attractive to inward foreign direct investment

5. Make an economy vulnerable to effects of climate change / natural disasters

6. Contribute to gender inequality

The Asian Development Bank forecasts that Asia needs US$8 trillion (S$11 trillion) in the decade to 2020 to plug the infrastructure deficit

Poor access to credit

Poor infrastructure

Excessive bureaucracy

Regulations and licensing requirements

Supply-Side Constraints

• Landlocked Zambia scores poorly in the infrastructure rankings published as part of the Global Competitiveness Index

• Quality of overall infrastructure 93/140• Quality of roads 81/140

• Quality of railroad 80/140• Quality of port infrastructure 131/140• Quality of air transport 112/140• Electricity and telephony 119/140

• 90% of Zambia’s power comes from hydro-electric plants making the country especially vulnerable to drought

• To earn foreign exchange, Zambia exports power from hydro-electric plants – this then damages electricity supply to the farming industry which employs 60% of people

• Copper mines absorb much of the available energy supply. There are frequent power outages affecting homes & businesses

• Much copper output is transported on poor roads which adds to costs and hurts profits

Infrastructure Gaps - Zambia

Human Capital Inadequacies

“The low level of human capital in Africa’s agricultural sector remains a significant constraint to growth, poverty reduction, and food security on the continent. “ World Bank

World Economic Forum Human Capital Index

“A nation’s human capital endowment—the skills and capacities that reside in people and that are put to productive use—can be a more important determinant of its long term economic success than virtually any other resource. This resource must be invested in and leveraged efficiently in order for it to generate returns—for the individuals involved as well as an economy as a whole.”Source: http://reports.weforum.org/human-capital-

report-2015/the-human-capital-index/

Human Capital Inadequacies• Human capital refers to skills, experience, attitudes, aptitudes

of the human input into production• In many countries secondary + tertiary school enrolment is low

and teaching quality is poor• In many countries there is a big gap between expected years of

schooling and mean (actual) years of schooling• Huge inequality within and between developing countries in

the quality of schooling and access• Lower and middle-income countries may suffer from brain

drains of their younger, more skilled workers• Weak human capital constrains labour productivity and ability

to harness new technologies• Human capital deficiencies often linked to malnutrition. Better

basic health care and nutrition often unlocks improved human capital by avoiding brain impairment.

• Mean years of schooling 6.5• Expected years of schooling (note mismatch with mean years) 13.5• Adult literacy rate (% aged 15 and older) 61.4%• Population with secondary education (% aged 25 and above) 35%• Primary enrolment (% of children of primary school age) 114%• Secondary enrolment (% of children of secondary school age) 101%• Primary school dropout rates (% of primary school cohort) 47%• Pupil-teacher ratio 49• Expenditure on education (measured as a % of GDP) 1.35%

• Only one third of adults have experienced some form of secondary education• The primary school drop-out rate is nearly 50%• The pupil teacher ratio remains high and spending on education is less than

1.5% of GDP. Teacher quality is variable and there are hundreds of thousands of aids orphans in Zambia – a key cause of the 40% child labour ratio

Human Capital Inadequacies - Zambia

Primary Product Dependence

• Many developing countries continue to have high dependence on extracting & exporting primary commodities

• These economies are vulnerable to volatile global prices• Significant risks from over-specialisation especially when the terms of

trade from their main exports decline• Resource-rich (factor input-driven) countries may suffer from the

natural resource curse including the Dutch Disease effect• Extractive rents often fuel corruption, inequality and wasteful

consumption as natural resources are depleted• High commodity prices can cause currency appreciation – and may lead

to the Dutch Disease / de-industrialisation• Often resource revenues are not used productively to diversify the

economy / and improve HDI outcomes through investment in education and health care.

• Result: Many countries rich in natural resources often have slow rates of growth and poor development scores

Primary Product Dependence

Primary Product Dependence - Malawi

Over 90% of Malawi’s exports of goods are agriculture or mining/extractive products. Only 8% of their exports are manufactured goods

The Natural Resource Curse

“Although large deposits of key resources such as oil would usually be considered a blessing for the development prospects of a country, it often turns out to be a ‘resource curse’”

Professor Paul Collier

“Close to one third of the wealth of low-income countries comes from their “natural capital” which includes forests, protected areas, agricultural lands, energy and minerals”

World Bank

http://users.ox.ac.uk/~econpco/research/africa.htm

The Natural Resource Curse

“The fundamental goal of resource-rich economies should be to transform their exhaustible natural resources into assets—human, domestic, and private capital and foreignfinancial assets—that will generate future income and support sustained development. But the record is mixed.”

Source: IMF Finance and Development, September 2013

Primary Product Dependence - Zambia

The extent of primary export dependence is shown in this graphic from the Observatory of Economic Complexity (MIT). Click here for the latest data on Zambian exports: http://atlas.media.mit.edu/en/profile/country/zmb/

Zambia is the 86th largest export economy in the world and the 66th most complex economy according to the Economic Complexity Index (ECI).

http://atlas.media.mit.edu/en/profile/country/zmb/

http://atlas.media.mit.edu/en/profile/country/zmb/

Primary Product Dependence – Volatile Copper Prices

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p-85Fe

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p-02Fe

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-14Jun-15

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Copper benchmark price, US dollars per tonne

Zambia is not the biggest copper producer in the world economy. In most cases Zambian copper mines are “price-takers” which means that they sell as much as they can at the prevailing world price.

Risks to Growth for Zambia from falling Copper Prices

Fall in export revenues - fall in AD – causing drop in Zambian GDP growth

Zambia now running a large current account deficit – draining FX reserves

Depreciation of currency – leading to accelerating inflation > 10%

Job losses in mining – rising cyclical & structural unemployment

Negative multiplier effects for supply-chain businesses, housing, retailing

Fall in tax revenues - rising budget deficit / debt – may need IMF support

Social consequences – mining companies have subsidised HIV medicines, inequality worsening as a result

Strategies for Reducing Primary Product Dependency

Better government – including more transparency & accountability to tax payers so that it is clear where natural resource revenues are going

Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and infrastructure or to inject money into an economy when aggregate demand dips

Higher taxes of natural resource profits (i.e. extracting resource rents and then reinvesting in the domestic economy to increase supply-side capacity)

Diversification – including processing, light manufacturing & tourism – giving higher value added and making the economy less susceptible to shocks

Savings Gap and Foreign Exchange Gaps as Barriers

• The Harrod-Domar model emphasizes the role of savings to help fund capital investment / capital deepening

• In many lower and middle income countries gross national saving is insufficient to fund investment

• Financial systems are frequently poorly developed rationing access to affordable credit / insurance

• Low national savings may limit investment and make developing countries dependent on external finance

• Overseas development assistance (aid)• Foreign direct investment• Remittance inflows• Private sector debt

• Many developing economies have low foreign exchange reserves to cover their spending on imports – risking running into a balance of payments / currency crisis.

Overcoming a Savings Gap – External Financial Flows

Capital Flight

• Capital flight is the uncertain and rapid movement of large sums of money out of a country

• There could be several reasons linked to a lack of investor confidence - factors include

1. Political turmoil / unrest / risk of civil conflict2. Fears that a government plans to take assets under state control3. Exchange rate uncertainty e.g. ahead of a possible devaluation4. Fears over the stability of a country’s banking system

• Many billions of $s each year are taken out of a country illegally especially in countries with high levels of corruption

• E.g. many Chinese leaders have relatives with offshore companies• The rise of crypto digital currencies such as Bitcoin may be encouraging

capital flight – a form of digital money laundering• Capital flight can undermine the stability of the financial system and

also bring about a much weaker currency which in turn then increases the prices of essential imported goods

Corruption as a Barrier to Growth & Development

1 Denmark 145 Central African Republic2 Finland 146 Congo Republic3 Sweden 147 Chad4 New Zealand 147 Democratic Republic of the Congo5 Netherlands 147 Myanmar5 Norway 150 Burundi7 Switzerland 150 Cambodia8 Singapore 150 Zimbabwe9 Canada 153 Uzbekistan10 Germany 154 Eritrea10 Luxembourg 154 Syria10 United Kingdom 154 Turkmenistan13 Australia 154 Yemen13 Iceland 158 Haiti15 Belgium 158 Guinea-Bissau16 Austria 158 Venezuela16 The United States Of America 161 Iraq18 Hong Kong 161 Libya18 Ireland 163 Angola18 Japan 163 South Sudan21 Uruguay 165 Sudan22 Qatar 166 Afghanistan23 Chile 167 Korea (North)23 Estonia 167 Somalia

Transparency International Corruption Perceptions Index for 2015Cleanest Most Corrupt


• According to the United Nations, “corruption undermines human development and democracy. It reduces access to public services by diverting public resources for private gain.”

• Corruption is due to a failure of governing institutions who lack transparency both in where their tax revenues are coming from and in how state resources are spent

• High levels of corruption damage growth & development:1. Inhibits direct foreign investment into an economy2. Leads to allocative inefficiency / i.e. diverting public resources

for private gain, extreme examples of extravagant wealth3. Contributes to persistent income & wealth inequality and

reduced progress in cutting the incidence of extreme poverty4. Causes a loss of trust - a breakdown of social capital5. Leads to substantially poorer human development outcomes

because governments are not collecting in enough tax revenues


Transparency International Corruption Perceptions Index for 2015

Many Trust Businesses more than Governments

Labour Migration and Brain Drain Effects

• It has been estimated that there were 232 million international migrants in the world in 2013

• 207 million of them were of working age, 15 years old and over.

• Of these migrants, 150 million were working or economically active.

Brain Drains - De-population as a Barrier to Growth

Evaluate some of the consequences of the net outward migration of skilled workers from developing countries

• Disadvantages1. Loss of human capital (expertise)

from the economy – this damages long-run supply-side potential and is a barrier to development

2. Loss of enterprising younger workers who might have started up businesses at home

3. Skills shortages will grow and could seriously affect HDI outcomes e.g. emigration of doctors and teachers

4. Fall in aggregate demand5. May make the country less

attractive to inward investment6. May make a country less innovative

Brain Drains - De-population as a Barrier to Growth

Evaluate some of the consequences of the net outward migration of skilled workers from developing countries

• Disadvantages1. Loss of human capital (expertise)

from the economy – this damages long-run supply-side potential and is a barrier to development

2. Loss of enterprising younger workers who might have started up businesses at home

3. Skills shortages will grow and could seriously affect HDI outcomes e.g. emigration of doctors and teachers

4. Fall in aggregate demand5. May make the country less

attractive to inward investment6. May make a country less innovative

• Possible Advantages1. Remittances from emigrants

flow back to increase GNI2. People living overseas (diaspora)

may be able to help finance private sector capital projects in the future

3. Acquisition of human capital by working & studying in other countries e.g. learning languages, earning degrees – possibly leading to brain deposits & gains?

4. May help to offset rapid natural growth of population

More Notable Barriers to Growth & Development

Vulnerable employment /

exploitation

Gender inequality and other forms of discrimination

Trade barriers e.g. limited access to

developed markets

Landlocked countries High inflation for some, deflation for

others

Income & wealth inequality

Evaluating Main Strengths and Weaknesses for Zambia

Competitive Strengths

1/ Rich natural factor endowment (copper & emeralds)

2/ Young workforce (half pop are under 15yrs old)

3/ Now a middle income country – GNI per capita increased by about 69% between 1980 and 2014.

4/ Progress in improving health outcomes /HDI rank is higher than average for Sub Saharan Africa

5/ Functioning democracy with political stability

Other Notes

• Zambia has become a favoured venue for inward investment worth 5-6% of GDP annually with much coming from China.

• Country still has strong long-run growth potential given it’s natural resource endowment

• Zambia has a functioning democracy but economic management is weak and Zambia has not successfully used revenues from copper mining/exporting into establishing a diversified industrial base – manufacturing is shrinking as % of GDP

• Can Zambia survive what many believe to be the end of the global commodity super price cycle?

Main Weaknesses in their Economy

1/ Vulnerable to global slowdown / Zambia does not have a stabilisation fund / wealth fund to draw upon

2/ High secondary school drop-out ratio – disparity between expected and mean years of schooling

3/ Low tax revenues / big tax avoidance issues

4/ Weak currency / growing fiscal & BoP deficits

5/ Finance is under-developed / very high interest rates of 30-40% for small businesses / farmers

Other Useful Contextual Knowledge

• 40% child labour (14% in developing countries)• Zambia is too dependent on hydro-electricity –

much goes to power the copper mines. Drought is leading to power shortages and affecting farming

• The big threat facing Zambia is stagflation i.e. a sharp reduction in economic growth accompanied to double-digit rates of inflation fuelled by a severe depreciation of the currency.

• Youth under employment is also a huge issue• Zambia’s economic growth has not translated into

significant poverty reduction

Main Strengths and Weaknesses for Mexico

Economic / Competitive Strengths

1/ Low unit labour costs – attractive to FDI

2/ Large / growing population (market size)

3/ Competitive currency helping exports

4/ Many free trade agreements completed

5/ Low unemployment and government debt

Other Notes

• Mexico is developing a strong comparative advantage in manufacturing especially in industries such as vehicle manufacturing

• Unemployment is low but there is significant under-employment in a dual economy

• Fast growing middle class is attractive to FDI especially from service businesses

• Rising consumption supports GDP growth• More than 90% of Mexican overseas trade now

covered by free trade agreements

Main Weaknesses in their Economy

1/ Concerns over violence and corruption

2/ Heavily dependent on oil revenues

3/ Informal labour market – dual economy

4/ High levels of income/wealth inequality

5/ Long tail of low productivity businesses

Other Useful Contextual Knowledge

• Mexico has over 4 million micro businesses that employ the majority of Mexicans – few have access to equity / loan finance which hampers finance for extra investment

• Key industries in Mexico have been dominated by monopolies such as Mexico Telecom and Pemex (Oil). The lack of contestability keeps prices and high and limits capital investment and innovation

Barriers to Economic Growth and Development

barriers to economic growth and development

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