Institutional Change (DP IB Economics)

Changing Institutional Factors

• Sound institutions, free from corruption and well-established help a country to progress in human development
    

1. Access to credit and banking (finance)

• 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 and causes the poverty trap to continue
   

• Mobile banking has increased significantly in most developing countries

  • This allows customers to conduct financial transactions more easily and facilitates a flow of finance in more remote areas
     

• Microfinance has been very successful in breaking the poverty trap for some households in LEDCs

  • The Grameen Bank pioneered the use of microfinance in Bangladesh and the country saw significant gains in economic development
     

The Advantages and Disadvantages of Microfinance

2. Property and land rights

• 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 and causes the poverty trap to continue

The Advantages and Disadvantages of Permitting Property Rights

3. Women's empowerment

• Gender inequality reduces the incentive for women to enter the workforce resulting in a smaller production possibility curve for the nation

  • This represent a loss of efficiency for a nation

  • Household income is suppressed which worsens the quality of life
     

• Increasing women's empowerment reverses these effects

  • The additional income helps to break the poverty trap in LEDCs

  • Increased opportunity incentivises young girls to study harder which helps to close any existing education gaps between genders

4. Reducing corruption

• Corruption reduces investment, limits economic growth and affects the pattern of government spending within a country

  • These consequences of corruption hold back economic development and growth

  • Corruption is often enabled or led by the government or figures in the government
     

Tackling corruption has the following advantages:

1. There is more confidence in the economy and foreign direct investment increases

2. Money allocated to development projects in the country actually gets used for development

3. As national output rises, tax revenue rises and the government is able to provide more services, merit goods, and public goods

4. An increase in national output leads to more employment opportunities, which can raise household income