<4.9 BARRIERS TO GROWTH & DEVELOPMENT>

--IB GUIDE--

--"WHY DO CERTAIN COUNTRIES FIND IT DIFFICULT TO GROW & DEVELOP!"--

--POVERTY TRAPS/CYCLES--

--"GETTING STUCK IN A POVERTY CYCLE"--

--DEFINITION--

A POVERTY CYCLE (POVERTY TRAP) arises when low incomes prevent savings and thus the ability to invest in physical, human, and natural capital to raise productivity and income.
POVERTY -> LOW INCOME -> LOW/ZERO SAVINGS -> LOW INVESTMENT IN HUMAN, PHYSICAL & NATURAL CAPITAL -> INABILITY TO RAISE PRODUCTIVITY -> ZERO TO LOW-INCOME GROWTH -> POVERTY...

--GENERATIONAL POVERTY--

--'BREAKING OUT' OF THE POVERTY CYCLE--

The cyclical nature of poverty can not be broken without EXTERNAL INTERVENTION, by either GOVERNMENT or FOREIGN AID.

--"LDCs SHARE MANY CHARACTERISTICS THAT CREATE ECONOMIC, POLITICAL & SOCIAL BARRIERS TO GROWTH & DEVELOPMENT"--

--ECONOMIC FACTORS as BARRIERS--

--INCOME INEQUALITY--

LDCs generally exhibit HIGH LEVELS of INEQUALITY, therefore...

...the LOWER the ability of LOW-INCOME earners to invest in their own HUMAN and PHYSICAL CAPITAL, meaning they ARE UNABLE TO BECOME MORE PRODUCTIVE, impacting POTENTIAL OUTPUT.
...the LOWER the ability of LOW-INCOME earners to OBTAIN CREDIT (as they have no collateral), meaning POTENTIAL BENEFITS of greater investment are not realized.
...the greater the amount of wealth owned by HIGH-INCOME earners, who TEND to SAVE MORE and INVEST OVERSEAS, limiting the SPENDING on DOMESTIC GOODS as well as funds available for investment.
...the greater the POTENTIAL for the highest earners to wield significant POLITICAL POWER, which could go against national interests in favour of their own.

--LACK OF INFRASTRUCTURE--

INFRASTRUCTURE refers to PHYSICAL CAPITAL that is a result of INVESTMENT. It often includes PUBLIC and MERIT GOODS such as schools, hospitals, motorways, and electric grids, and therefore the extent of their provision has a direct impact on the level of development.

--BARRIERS TO INFRASTRUCTURE IN LDCS--

INSUFFICIENT GOV'T REVENUE => INSUFFICIENT FUNDING LEADS TO...
- - - ...INADEQUATE MAINTENANCE.
    - ...POOR QUALITY.
    - ...INSUFFICIENT SUPPLY, PARTICULARLY TO RURAL AREAS
    - ...LARGE OPPORTUNITY COSTS AS FUNDS CAN NOT BE SHARED
    - ...HASTY/WASTEFUL DECISIONS MADE WITHOUT PROPER EVALUATION

--LACK OF APPROPRIATE TECHNOLOGY--

'APPROPRIATE TECHNOLOGY' refers to TECHNOLOGIES that are SUITED to the ECONOMIC, GEOGRAPHICAL, ECOLOGICAL, and CLIMATE CONDITIONS of the country.
Many LDCs have LARGE POOLS OF UNEMPLOYED LABOUR RESOURCES and a LACK OF PHYSICAL CAPITAL as well as the means to MAINTAIN IT, as such LDCs NEED CAPITAL GOODS & TECHNOLOGIES THAT MAKE USE OF THEIR ABUNDANT LABOUR SUPPLIES and which ARE SIMPLE TO PRODUCE, MAINTAIN, and OPERATE.
Cleary LABOUR-INTENSIVE TECHNOLOGIES are MORE APPROPRIATE as they result in MORE LOCAL EMPLOYMENT, engaged in both its USE, MAINTENANCE, and ITS LOCAL PRODUCTION.
For example, a COW-DRAWN PLOUGH is more appropriate for an LDC than TRACTOR, as the former requires more labour (who do not require much training) to use, in addition, it creates income for those employed in its maintenance as well as local production (which again requires only minimal capital and skill)

--BARRIERS TO APP. TECH IN LDCS--

In reality, however, TECHNOLOGICAL DEVELOPMENTS in agriculture are DESIGNED BY DEVELOPED NATIONS for the very purpose of REPLACING LABOUR-INTENSIVE PRODUCTION with CAPITAL-INTENSIVE PRODUCTION, hence the LACK OF APPROPRIATE TECHNOLOGY available for developing nations.

--LACK OF HUMAN CAPITAL: EDUCATION--

--HIGHER LEVELS OF EDUCATION => HIGHER PRODUCTIVITY => G & D--

--BARRIERS TO EDUCATION IN LDCS--

1) INSUFFICIENT GOV'T REVENUE => INSUFFICIENT FUNDING LEADS TO INSUFFICIENT NUMBERS OF...
- - - ...TRAINED TEACHERS.
    - ...CLASSROOMS & FACILITIES.
    - ...TEACHING MATERIALS.
    - ...FACILITIES FOR DISABLED/SPECIAL NEEDS.
    - ...SCHOOLS IN RURAL AREAS. NICARAGUA BOLIVIA

2) GENDER DISCRIMINATION on CULTURAL GROUNDS. TALIBAN BAN

3) ONGOING CONFLICTS. UKRAINE

4) POVERTY MEANS CHILDREN MUST WORK. BANGLADESH

5) POVERTY MAKES EDUCATION COSTS PROHIBITIVE.

--LACK OF HUMAN CAPITAL: HEALTH--

--HIGHER LEVELS OF HEALTHCARE => HIGHER PRODUCTIVITY => G & D--

--BARRIERS TO HEALTHCARE IN LDCS--

1) INSUFFICIENT GOV'T REVENUE => INSUFFICIENT FUNDING LEADS TO INSUFFICIENT NUMBERS OF...
- - - ...TRAINED MEDICAL PRACTITIONERS.
    - ...MEDICAL FACILITIES & SUPPLIES. PPE IN S. AFRICA.
    - ...HOSPITALS IN RURAL AREAS.

2) CULTURAL RESISTANCE/SCEPTICISM OF MODERN PRACTICES.

3) POVERTY MAKES THE COST OF PRIVATE CARE PROHIBITIVE.

4) LACK OF ACCESS TO CLEAN WATER.

5) POOR SANITATION.

--DEPENDENCY ON PRIMARY SECTOR--

LDCS often SPECIALISE IN A NARROW RANGE OF PRIMARY COMMODITIES which DOMINATE ITS EXPORTS, however, the VOLATILE NATURE of these products means that farmers' INCOMES FLUCTUATE TREMENDOUSLY, which in turn LIMITS THE FARMER'S ABILITY TO PLAN INVESTMENTS to IMPROVE YIELDS and EXPORT COMPETITIVENESS.
Furthermore, with volatile EXPORT EARNINGS, there is LESS FOREX TO BUY MUCH NEEDED CAPITAL GOODS.
This inherent volatility and UNCERTAINTY also means GOV'T TAX REVENUE from this sector is UNCERTAIN, which LIMITS THEIR ABILITY OF THE GOVERNMENT TO PLAN INVESTMENTS in MERIT GOODS.
Below is Niger's exports:

--INACCESSIBLE INT'L MARKETS: TARIFFS--

TARIFF ESCALATION refers to the practice by DEVELOPED COUNTRIES of IMPOSING HIGHER TARIFFS ON SEMI-PROCESSED PRODUCTS THAN ON RAW MATERIALS AND EVEN HIGHER STILL ON FINISHED PRODUCTS, thus DISCOURAGING LDCs FROM DIVERSIFYING VERTICALLY the production chain and processing their raw materials into more final versions for export, which would mean developed countries would not only have to spend more on imports but be denied the chance to refine and add value to the raw material themselves.

--INACCESSIBLE INT'L MARKETS: SUBSIDIES--

DEVELOPED COUNTRIES PROTECT THEIR AGRICULTURAL SECTOR USING PRODUCTION SUBSIDIES which have the following impact on LDCs:
- - - - 1) MAKES LDC IMPORTS UNCOMPETITIVE as domestic products are more competitive which REDUCES EXPORT REVENUE for LDCs, hence LESS GOVERNMENT REVENUE can be collected for development purposes. This inevitably INCREASES POVERTY among farmers and can drive them into the INFORMAL MARKET.
      - 2) MISALLOCATES GLOBAL RESOURCES as we know a subsidy leads to OVERPRODUCTON, beyond the SOCIALLY OPTIMAL LEVEL, inevitably leading to SURPLUSES, which the developed nation will likely SELL on the INTERNATIONAL MARKET AT THE LOW SUBSIDISED PRICE, which MAKES OUTPUT FROM DEVELOPING NATIONS, hoping to compete in the international stage, UNCOMPETITIVE, leading to UNDERPRODUCTION in these countries. Hence MORE RESOURCES ARE EMPLOYED IN THE INEFFICIENT MARKET and FEWER in the MORE EFFICIENT MARKET.

--LARGE INFORMAL MARKETS--

THE INFORMAL MARKET refers to the sector of economic activity that is NOT LEGAL, REGISTERED, or REGULATED (As opposed to the 'FORMAL MARKET').
- - - In LDCs people are engaged in this market generally due to the LACK OF OPPORTUNITIES in the FORMAL MARKET.
    - Due to its unregistered nature TAXES ARE UNABLE TO BE COLLECTED, meaning the government has LESS REVENUE TO SPEND ON MERIT GOODS.
    - Due to the unregulated nature of the market, workers RECIEVE LOW PAY and usually work in POOR WORK CONDITIONS, which keeps them close to or within the POVERTY CYCLE.
    - EXAMPLES INCLUDE; Street barbers, taxi bikes etc...

--THREAT OF CAPITAL FLIGHT--

CAPITAL FLIGHT refers to the massive outflow of financial assets from a country, usually driven by economic or political uncertainties. It occurs when investors and individuals lose confidence in the stability of a country's economy or its currency. They seek to protect their assets by transferring them to more stable economies or currencies.

--INACCESSIBILITY OF LOCATION (LLDCs)--

--LEVEL OF INDEBTEDNESS--

--INHOSPITABLE CLIMATE/ENDEMIC DISEASES--

--TASK--

CREATE A MIND MAP with 'ECONOMIC BARRIERS' at the center, then for each barrier write a paragraph explaining how it constitutes a BARRIER to growth & development (Remember these two are distinctly different and you will ALWAYS need to state that at the beginning of any P2 answer)

--POLITICAL/SOCIAL FACTORS--

--WEAK LEGAL SYSTEM--

--INEFFECTIVE TAXATION SYSTEM--

DEVELOPING COUNTRIES in general LACK EFFECTIVE TAX SYSTEMS which hinders their ability to GENERATE TAX REVENUES to undertake investments in MERIT GOODS to raise the level of development.
- INCOME (DIRECT) TAXES: This is particularly problematic when collecting DIRECT TAXES, due to the fact that a considerable amount of income is earned in the INFORMAL MARKET as well as TAX AVOIDANCE by the wealthy elite who DUE TO POLITICAL POWER are able to LOWER THEIR LIABILITIES.
- MNC PROFITS (DIRECT) TAX: As mentioned above, the tax collected from the activities of MNCs is actually quite small due to LOW RATES GIVEN TO ATTRACT THEM IN THE FIRST PLACE as well as TRANSFER PRICING. Furthermore, the number of firms that enter the market is limited as those established firms connected with the ELITE are given TAX ADVANTAGES, that act as BARRIERS to ENTRY, further REDUCING THE TAX BASE.
- INDIRECT TAXES (GST): This fact highlights how government tax revenue is HEAVILY RELIANT ON INDIRECT TAXES, which are REGRESSIVE and therefore INCREASE INEQUALITIES and ENCOURAGING BLACK MARKETS and further evasion.
- INDIRECT TAXES (TARIFFS): This is likely to be the MOST RELIABLE SOURCE of revenue, though its only collected on goods that the LDCs themselves produce, meaning the majority of capital goods imported are tax-free.
- PROPERTY TAX: The majority of land/property ownership is in the hands of the POLITICAL ELITE, who therefore have LITTLE INCENTIVE TO RAISE THE PROPERTY TAX RATE.
- LACK OF CONCERN BY RULING ELITE: As the ELITE ALREADY HAVE ACCESS TO MERIT GOODS available in the PRIVATE SECTOR, they LACK THE INCENTIVE to gather more taxes for investments that will only be beneficial to the poor, which they will likely never use.

--WEAK BANKING SYSTEM--

--IMPORTANCE to DEVELOPMENT--

BANKING SERVICES, SAVINGS & ACCESS TO CREDIT are EXTREMELY IMPORTANT for GROWTH & DEVELOPMENT in LDCs, as without the availability of credit, people would only have their own meager savings (If any) to fund their investments
Investments types important for development include:
- - INVESTMENTS IN EDUCATION for both adults and children
  - INVESTMENTS IN HEALTHCARE for both adults and children
  - INVESTMENTS IN PHYSICAL CAPITAL for farmers to expand...

A functioning banking system also GIVES PEOPLE AN INCENTIVE TO SAVE, as they will RECEIVE INTEREST.
HOWEVER, in LDCs, ACCESS TO CREDIT FOR LOW-INCOME EARNERS is very poor for a number of reasons:
- - COMMERCIAL BANKS only cater to borrowers with large levels of COLLATERAL LACK OF WEALTH
  - Usually confine their borrowing to MNCs
  - Prefer to lend to MANUFACTIRERS rather than AGRICULTURE

CONTOUL OF ELITE

RELY IN INFORMAL LENDERS HIGH INTERS RATE

--WEAK PROPERTY RIGHTS--

"Exchange implies ownership therefore Without ownership there can be no market exchange"

PRIVATE PROPERTY RIGHTS (PPRs) give OWNERS
- - - 1) The EXCLUSIVE right to USE the resource.
    - 2) The EXCLUSIVE right to SELL the resource.
    - 3) The EXCLUSIVE right to RENT-OUT the resource.

--IMPORTANCE to DEVELOPMENT--

STRONGLY ENFORCED PPRs mean...
- - Entrepreneurs have the incentive to start businesses.
  - Private companies have collateral to borrow.
  - More employment opportunities would be created.
  - More property/profits taxes are collected by governments.
  - More tax revenue for merit goods & infrastructure.
  - Owners will use the resources more sustainably.
  - Female empowerment (Female ownership is often not permitted)
  - Displaced people in conflict, can return and rebuild their land.

--GENDER INEQUALITY--

--CORRUPTION--

--UNEQUAL POLITICAL POWER--

--TASK--

CREATE A MIND MAP with 'POLITICAL/SOCIAL FACTORS' at the center, then for each barrier write a paragraph explaining how it constitutes a BARRIER to growth & development (Remember these two are distinctly different and you will ALWAYS need to state that at the beginning of any P2 answer)

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