Factors Influencing Growth & Development (Edexcel A Level Economics A)

In 2022 copper exports from Zambia accounted for 70% of their total exports and primary products in excess of 90%. They are suffering from over-specialisation

Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less than proportional increase in demand

• This means that there is limited scope to continue increasing demand

Primary products have very little added value

• Exporting manufactured products raises the added value, incomes and profits

Due to the inelastic nature of both the demand and supply of commodities, small changes in demand or supply can lead to large changes in price

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

In the 1950's two economists identified the savings gap as a major constraint on growth

The Harrod-Domar model identified the following benefits of increased savings

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

Based on this, any intervention (foreign or governmental) to increase the capital stock in an economy will lead to growth

There are many criticisms of the model including

• It does not account for many other factors such as labour productivity, corruption, technological innovation

• It was created based on data from wealthier industrialising nations as opposed to very poor undeveloped countries

• It focused only on physical investment and ignored other types such as investment in human capital (labour)

Foreign currency gaps develop for a number of reasons

• Oil importing countries have to pay more (reserves decrease) when world oil prices rise whereas oil exporting countries receive less (less flowing in) when world oil prices fall

• Large international debt payments may require continual outflows of currency

• Capital flight due to uncertainty or sanctions

This means that central banks are forced to use their reserves to buy vital imports

Developing a diversified, healthy export market prevents foreign currency gaps from developing

Occurs when money or assets rapidly leave a country

This may happen due to political upheaval, economic sanctions, war, or changes to government policy (e.g. interest rates)

• Sanctions applied to Russia in 2022 resulted in $75 billions of capital outflows

Capital flight reduces the money available for investment, reducing growth and development

If the dependency ratio is high it means there is less money available for savings and investment

Many developing countries have high dependency ratios

Financial institutions enable individuals and firms to borrow money which can be used for investment or to generate growth

A lack of financial institutions prevents this from happening

Good infrastructure reduces business costs and attracts foreign direct investment

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

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

Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)

Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

In many countries, property is the main household asset which can be used to secure loans or generate income

A lack of property rights in some developing countries prevents this from happening