5.3 Barriers to economic growth and/or development

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5.3 Barriers to economic growth and/or
development

• Poverty may be seen as the collective condition
  of poor people, or of poor groups, and in this
  sense entire nation-states are sometimes regarded
  as poor. To avoid stigma these nations are
  usually called developing nations.
• When measured, poverty may be absolute or
  relative poverty.

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5.3 Barriers to economic growth and/or
development

• Absolute poverty refers to a set standard which
  is consistent over time and between countries. An
  example of an absolute measurement would be the
  percentage of the population eating less food
  than is required to sustain the human body
  (approximately 2000-2500 calories per day).

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5.3 Barriers to economic growth and/or
development

• Relative poverty, in contrast, views poverty as
  socially defined and dependent on social context.
  One relative measurement would be to compare the
  total wealth of the poorest one-third of the
  population with the total wealth of richest 1 of
  the population.

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5.3 Barriers to economic growth and/or
development

• The World Bank defines poverty in absolute terms.
  The bank defines extreme poverty as living on
  less than 1a day US (PPP), and moderate poverty
  as less than 2 a day.
• It has been estimated that in 2001, 1.1 billion
  people had consumption levels below 1 and 2.7
  billion lived on less than 2.

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5.3 Barriers to economic growth and/or development

• Even if poverty may be lessening for the world as
  a whole, it continues to be an enormous problem
• One third of deaths - some 18 million people a
  year or 50,000 per day - are due to
  poverty-related causes. That's 270 million people
  since 1990, the majority women and children,
  roughly equal to the population of the US.
• Every year nearly 11 million children die before
  their fifth birthday.
• In 2001, 1.1 billion people had consumption
  levels below 1 a day and 2.7 billion lived on
  less than 2 a day
• 800 million people go to bed hungry every day.

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Percentage population living on less than 1
dollar day 2007-2008
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(No Transcript)
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The percentage of the world's population living
on less than 1 per day has halved in twenty
years. However, most of this improvement has
occurred in East and South Asia. The graph shows
the 1981-2001 period.
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Poverty cycle

• The cycle of poverty is the "set of factors or
  events by which poverty, once started, is likely
  to continue unless there is outside
  intervention.
• A poverty trap is any linked combination of
  barriers to growth and development that forms a
  circle, thus self-perpetuating unless the circle
  can be broken.
• A poverty cycle is also sometimes known as a
  development trap.

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Poverty cycle

• The cycle's of poverty has been defined as a
  phenomenon where poor families become trapped in
  poverty for at least three generations. These
  families have either limited or no resources.
  There are many disadvantages that collectively
  work in a circular process making it virtually
  impossible for individuals to break the cycle.
  This occurs when poor people do not have the
  resources necessary to get out of poverty, such
  as financial capital, education, or connections.
  In other words, poverty-stricken individuals
  experience disadvantages as a result of their
  poverty, which in turn increases their poverty.
  This would mean that the poor remain poor
  throughout their lives. This cycle has also been
  referred to as a "pattern" of behaviors and
  situations which cannot easily be changed.

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Poverty cycle
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5.3 Barriers to economic growth and/or development

• Main categories
• Institutional and political barriers
• International trade barriers
• International financial barriers
• Social and cultural factors acting as barriers
• Poverty cycle

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Institutional and political barriers

• Insufficient provision of education
• Insufficient health care systems
• Lack of infrastructure
• Weak institutional framework
• The legal system
• The financial system

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Institutional and political barriers

• Ineffective tax structure
• Lack of property rights
• Formal and informal markets
• Political instability
• Corruption
• Unequal distribution of income

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Insufficient provision of education

• The UNs Millennium Development Goals
• GOAL 2ACHIEVE UNIVERSAL PRIMARY EDUCATION
• Ensure that, by 2015, children everywhere, boys
  and girls alike, will be able to complete a full
  course of primary schooling

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Insufficient health care systems

• The UNs Millennium Development Goals
• Reduce Child Mortality
• Reduce by two-thirds, between 1990 and 2015, the
  under-five mortality rate
• Improve Maternal Health
• Reduce by three quarters, between 1990 and 2015,
  the maternal mortality ratio
• Combat HIV/AIDS, Malaria and Other Diseases

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Lack of infrastructure

• Transport roads, railways, seaports, airports,
  public transport, pavements
• Public Utilities electricity, gas, water supply,
  sewer
• Public services police, fire service, education,
  health, waste management
• Communication service postal, telecommunication,
  radio, television

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Weak institutional framework

• The legal system
• Property rights allow people to own and benefit
  from private property, so long as the law
  supports them. (Pirates)
• The Financial system
• The difficulties associated with saving and
  borrowing money are a significant barrier.

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Ineffective tax structure

• It is estimated that less than 3 of the
  population in developing counties pay income tax,
  as opposed to 60-80 in developed countries.
• Why its difficult
• Because of tax exemptions and inefficient or
  corrupt administration
• Corporate tax revenue tends to be low
• Unless the country is engaged in trade its hard
  collect much revenue from imports, exports and
  custom duties.

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Lack of property rights

• Property rights can be considered a basket of
  legal rights.
• The right to own assets, such as land or
  buildings
• The right to establish the use of our assets
• The right to benefit from assets, such as renting
  out land
• The right to sell our assets
• The right to exclude others from using or taking
  over our assets

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Formal and informal markets

• The size of informal markets as a percentage of
  GDP in developing countries is greater than in
  developed countries.
• Informal markets tend to have much lower tax
  revenue for governments to be able to use for
  development.
• Workers tend to be unprotected and are poorly
  paid
• Little job security, poor working conditions and
  no social care.
• Productivity tends to be low as workers are often
  low-skilled migrant with little education

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informal sector

• The informal sector is economic activity that is
  neither taxed nor monitored by a government, and
  is not included in that government's Gross
  National Product (GNP), as opposed to a formal
  economy.
• Although the informal economy is often associated
  with developing countries, where up to 60 of the
  labor force (with as much 40 of GDP) works, all
  economic systems contain an informal economy in
  some proportion.

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Political instability

• Political instability causes uncertainty and can
  lead to complete economic breakdowns.
• The likelihood of attracting foreign investment
  or even aid becomes much smaller.
• A number of developing counties are experiencing
  civil war as a result of ethnic and/or religious
  conflict or boarder conflict.

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Corruption

• Corruption is defined as the dishonest
  exploitation of power for personal gain.
• It tends to be most prevalent where
• Govts are not accountable to the people,
  especially military Govts
• Govts spend large amounts on large-scale capital
  investment projects
• Official accounting practices are not well
  formulated or controlled

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Corruption

• Govts officials are not well paid
• Political elections are not well controlled, or
  are non-existent
• The legal structure is weak
• Freedom of speech is lacking

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Corruption

• Global Corruption Report 2009
• Corruption Perceptions Index 2009
• Transparency International

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Unequal distribution of income

• There tends to be low levels of savings, because
  the poor save a very small proportion of their
  income.
• The rich tend to dominate both politics and the
  economy.
• Developing countries tend to be marked by the
  rich moving large amounts of funds out of the
  economy (capital flight).

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International trade barriers

• Overdependence on primary products
• Consequences of adverse terms of trade
• Consequences of a narrow range of exports
• Protectionism in international trade

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Overdependence on primary products

• The issue of commodities and development, is far
  more complicated than just the price levels. And
  it is further complicated by the new phenomenon
  of competition for use of agricultural products
  for fuel. The bottom-line for commodity dependent
  countries, including many in Africa, is the lack
  of control and predictability, as prices
  fluctuate and commodity markets are increasingly
  monopolized by large-scale companies. Without
  some kind of check on markets and large
  producers, the chances for breaking reliance on
  commodities and entering higher-value sectors of
  production are very low.

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Overdependence on primary products

• Advantages of Producing Primary Products
• Will have a comparative advantage in producing
• Important source of export revenue
• Creates Jobs
• Disadvantages of Relying on Primary Products
• Prices are Volatile due to inelastic demand. e.g
  a fall in price of primary product would lead to
  a fall in revenue.
• Limited resources. One day they may run out of
  its primary products and the economy will be
  vulnerable to this lack of diversification
• Discourages investment in other aspects of the
  economy.
• Concentrating on primary products does not help
  the long term development of an economy because
  there is a lack of investment in other aspects
  such as education. Comparative advantage can
  change over time

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Consequences of adverse terms of trade

• If prices in the primary products falls then the
  country could experience a deteriorating terms of
  trade. Current account deficits will increase and
  it will be very difficult for countries to
  finance current expenditure and necessary
  imports.

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Consequences of a narrow range of exports

• These countries face great vulnerability and
  uncertainty.
• Countries that are reliant on tourism revenue,
  for example will be limited if developed
  countries go into economic recession, local
  terrorism, environmental events.

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Protectionism in international trade

• Protectionist measures by develped countries
  against the exports of developing countries may
  be very harmful. If the measures prevent
  developing countries from utilizing their
  comparative advantages and exporting to developed
  countries, then developing countries will be
  limited in their ability to earn foreign
  exchange.

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International financial barriers

• Indebtedness
• Non-convertible currencies
• Capital flight
• Brain Drain

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Indebtedness

• Developing countries' debt is external debt
  incurred by the governments of Third World
  countries, generally in quantities beyond the
  governments' political ability to repay.
  "Unpayable debt" is a term used to describe
  external debt when the interest on the debt
  exceeds what the country's politicians think they
  can collect from taxpayers, based on the nation's
  Gross domestic product, thus preventing the debt
  from ever being repaid.

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Indebtedness

• Some of the current levels of debt were amassed
  following the 1973 oil crisis. Increases in oil
  prices forced many poorer nations' governments to
  borrow heavily to purchase politically essential
  supplies. At the same time, OPEC funds deposited
  in western banks provided a ready source of funds
  for loans. While a proportion of borrowed funds
  went towards infrastructure and economic
  development financed by central governments, a
  proportion was lost to corruption and about
  one-fifth was spent on arms.

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Heavily Indebted Poor Countries

• Heavily Indebted Poor Countries (HIPC) are a
  group of 40 developing countries with high levels
  of poverty and debt overhang which are eligible
  for special assistance from the International
  Monetary Fund (IMF) and the World Bank.

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Problems with debt repayment

• Indebtedness does not allow savings and
  consequently investment in human capital and
  infrastructure
• Borrowing from overseas requires interest
  payments, restricting investment in human capital
  and infrastructure
• Interest repayments divert funds from the health
  care system resulting in the inability to
  address infectious disease as a primary concern

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Problems with debt repayment

• High levels of debt discourage future loans as
  countries are less willing to lend to
  heavily-indebted LDCs
• Loss of freedom to determine national economic
  and social policies
• Effects on domestic resource allocation ex. Need
  for cash crops
• Diversion of export earnings into debt repayment

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Non-convertible currencies

• Many developing countries have non-convertible
  currencies. These can only be used domestically
  and are not accepted for exchange on the foreign
  exchange markets. Most developing countries
  operate a fixed exchange rate system where the
  domestic currency is pegged to a more acceptable
  currency, often the US dollar.

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Non-convertible currencies

• Non-convertible currencies means that trade is
  less likely to occur. They are often over-valued
  at their official, pegged, exchange rate. This
  usually means that a black market will arise.

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Capital flight

• Capital flight, occurs when assets and/or money
  rapidly flow out of a country, due to an economic
  event that disturbs investors and causes them to
  lower their valuation of the assets in that
  country, or otherwise to lose confidence in its
  economic strength. This leads to a disappearance
  of wealth and is usually accompanied by a sharp
  drop in the exchange rate of the affected country
  (depreciation in a variable exchange rate regime,
  or a forced devaluation in a fixed exchange rate
  regime).

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Capital flight

• This fall is particularly damaging when the
  capital belongs to the people of the affected
  country, because not only are the citizens now
  burdened by the loss of faith in the economy and
  devaluation of their currency, but probably also
  their assets have lost much of their nominal
  value. This leads to dramatic decreases in the
  purchasing power of the country's assets and
  makes it increasingly expensive to import goods,
  pay wages and collect taxes.

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Brain Drain

• Human capital flight (or 'brain drain') is the
  large-scale emigration of individuals with
  technical skills or knowledge it is normally due
  to conflict, lack of opportunity, political
  instability, or health risks. Brain drain is
  usually regarded as an economic cost, since
  emigrants usually take with them the fraction of
  value of their training sponsored by the
  government. It is a parallel of capital flight,
  which refers to the same movement of financial
  capital.

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Social and cultural factors acting as barriers

• Religion
• Culture
• Tradition
• Gender issues

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Religion, Culture Tradition

• Religious beliefs have a strong influence on the
  culture of a community. Indeed, for many people
  around the world, religious beliefs are central
  to their culture and provide the moral codes by
  which they live. Even where people in the
  contemporary world believe that the traditional
  beliefs of their parents and societies are not so
  relevant to their everyday lives, underlying
  religious beliefs about human worth and how to
  relate to other people and the Earth are still
  important parts of their lives.

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Religion, Culture Tradition

• Culture is important in the processes of social
  and economic development. Socially, it provides
  for the continuity of ways of life that people in
  a region or country see as significant to
  personal and group identity. Economically,
  various forms of cultural expression such as
  music, dance, literature, sport and theatre
  provide employment as well as enjoyment for many
  people. These contribute increasingly large
  amounts of money to the economies of most
  countries every year.

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Religion, Culture Tradition

• In many societies, religious, social and cultural
  traditions have combined to make the role of
  women very different to that of men. Typically,
  they are expected to marry, raise children, work
  in the home and cultivate family plots of land.

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Gender issues

• For most women in the developing world, access to
  and control over income, productive assets and
  decision-making power remains elusive, even as
  they contribute the lion's share of productive
  and reproductive labor. Better primary education
  enrolments and health care services have been
  undercut in many cases by the HIV/AIDS pandemic
  conflicts and fragilities on the continent have
  exposed women increasingly to gender-based
  violence, and climate change is weakening the
  ability of rural populations to subsist. Many
  women and children are working harder to grow
  food and collect water and firewood.