Factors that Affect Growth & Development (AQA A Level Economics)

Higher savings result in higher investment & economic growth. It is believed that as economies develop, savings increase

• Increased savings → increased investment → higher capital stock → higher economic growth → increased savings

• If the dependency ratio is high, it means there is less money available for savings & investment

High levels of education and training increases productivity

Investing in supply-side policy to improve health and education increases the potential output of the country (shifts the production possibility frontier outwards)

The level of health directly impacts productivity of labour

Productivity influences output & income

Developed economies tend to have healthy workforces

The less developed the economy, the more sickness & disease there is

Aid or revenue intended for investment can be used by corrupt politicians, resulting in a lower level of investment

Corruption diverts funds to certain groups that have bribed or lobbied officials (e.g. multinational firms) resulting in projects that deliver a low level of growth and development

If government institutions are not functioning, it can be a barrier to growth and development. This includes:  

• The certainty of a strong legal system attracts investment and builds confidence in an economy

• A lack of property rights prevent household assets being used to secure loans or generate income in developing countries 

• A progressive tax system redistributes from those with higher income to those with lower income and reduces income inequality

• Sometimes the benefits of a good progressive tax system are eradicated by weak tax collection and tax enforcement

Good infrastructure reduces business costs and attracts foreign direct investment

• This is one reason why China has invested so heavily in infrastructure projects in Asia and Africa as it unlocks economic potential

• Some developing countries have such poor infrastructure which makes it difficult to generate economic activity

Low levels of education and healthcare reduce [popover id="DTxVl4QEb1cQKxdb" label="productivity"] 

Investing in supply-side policy to improve health and education increases the potential output of the country (shifts the production possibility frontier outwards)

Poor governance leads to inefficient use of resources and poor decision-making

• Eg. In Venezuela, the economic crisis, combined with poor governance and corruption caused skilled labour to migrate abroad 

If governments keep changing, it results in constantly changing policies & priorities 

E.g political instability and conflict in Afghanistan has reduced confidence in the economy & international investors are slower to invest as they are fearful of losing their investment

It is harder for landlocked countries to generate economic growth

Often transportation and administration costs are higher than those with access to ports, which increases the costs of production & decreases international competitiveness

Natural terrain can also be a limiting factor e.g the arid, mountainous terrain of Pakistan

A barrier to growth occurs if country is too dependent on a narrow range of primary commodities

In 2020, 25% of Bolivia's GDP was generated by exports. Commodities accounted for 60% of its exports

• When commodity prices rise, GDP rises - and vice versa

A more diversified range of exports prevents this