Barriers to Development

Economics: IB Diploma, topic 3.6.4

Barriers to Development - Corruption, Conflict and Geography

There are a host of factors which hold back the development of certain countries.

High levels of corruption and bureaucratic delays can harm growth by discouraging foreign direct investment (FDI).
Corruption also leads to allocative inefficiency because resources are allocated for personal gain rather than what is good for the economy.
Corruption makes it likely that domestic businesses will invest overseas rather than at home.
Corruption can lead to the government collecting less tax revenue, which has knock on effects for growth and anti-poverty policies.

Physical capital is destroyed by war. This shifts the LRAS in.
Human capital is destroyed or emigrates, shifting the LRAS in.
Resources are diverted from long term capital goods to short term military expenditure, harming the long-term trend rate of economic growth.
Conflict also discourages both domestic investment and foreign direct investment (FDI) because of the huge uncertainty it creates. This reduces aggregate demand (AD) and could also shift the LRAS to the left.

Issues such as climate and geographical location can restrict a country's ability to develop through targeting certain industries or impacting their ability to trade.
For example, a landlocked country may find it more difficult to pursue export-led growth.

There are a host of factors which hold back the development of certain countries.

Infrastructure includes physical capital, such as critical energy power and water supplies, sanitation, telecommunications and transport networks, schools and hospitals.
Poor energy reliability leads to shortages and blackouts, which deters foreign direct investment (FDI) and investment and reduces efficiency and productivity.
Poor trains and roads reduce the mobility of labour and the ability to get goods to export markets.

Savings are needed to provide finance for capital investment.
In many smaller low-income countries, high levels of poverty make it almost impossible to generate sufficient savings to provide the funds needed to fund investment projects.
Low savings rates and poorly developed financial markets make it more expensive for firms in less-developed economies (LDEs) to get funds for investment. Higher borrowing costs deter capital investment.

A lack of foreign currency may prevent businesses from being able to purchase 'big ticket' items, such as capital machinery, especially if the exporting country will not accept the currency being offered.
This makes investment by domestic firms more difficult and can restrict growth.

The Harrod-Domar model stresses the importance of the need for saving and investment to fund economic growth.
The higher the level of saving there is, the more money there is available for firms to borrow for investment.
The model also states that, if the productivity of capital improves, then so will the LRAS and economic growth.
Policies to improve either of the two above would help to improve the financial system to allow for savings to be channelled into funds for investment.

Which of the following are barriers to development?
Which of the following makes it difficult for firms to buy "big ticket" capital items from abroad?
Which of the following are examples of infrastructure?