Barriers to Economic Growth and

Development
Limits to Growth and Development on
the A2 Unit 4 Syllabus
• Students should consider factors such as:
1. Poor infrastructure
2. Human capital inadequacies
3. Primary product dependency
4. Declining terms of trade
5. Savings gap; inadequate capital accumulation
6. Foreign currency gap and capital flight
7. Corruption, poor governance, impact of civil war
8. Population issues
9. Debt dependence
Introduction – Some Growth Data

Key issues
• Is rapid growth sustainable?
• Does it feed through to significant
improvements in human
development?
 2015 Human Development Index – Lowest Rankings

Human Gross national GNI per capita

Life expectancy Expected years Mean years of
Development income (GNI) rank minus HDI
at birth of schooling schooling
Index (HDI) per capita rank

Country Value (years) (years) (years) (2011 PPP $)

Côte d'Ivoire 0.462 51.5 8.9 4.3 3,171 -24
Malawi 0.445 62.8 10.8 4.3 747 13
Ethiopia 0.442 64.1 8.5 2.4 1,428 2
Gambia 0.441 60.2 8.8 2.8 1,507 -2

DRC 0.433 58.7 9.8 6.0 680 11

Liberia 0.430 60.9 9.5 4.1 805 7

Guinea-Bissau 0.420 55.2 9.0 2.8 1,362 -1
Mali 0.419 58.0 8.4 2.0 1,583 -8
Mozambique 0.416 55.1 9.3 3.2 1,123 1
Sierra Leone 0.413 50.9 8.6 3.1 1,780 -16
Guinea 0.411 58.8 8.7 2.4 1,096 0
Burkina Faso 0.402 58.7 7.8 1.4 1,591 -13
Burundi 0.400 56.7 10.1 2.7 758 1
Chad 0.392 51.6 7.4 1.9 2,085 -22
Eritrea 0.391 63.7 4.1 3.9 1,130 -6
Central African Republic 0.350 50.7 7.2 4.2 581 1
Niger 0.348 61.4 5.4 1.5 908 -5
 Nations whose HDI Outcome > GNI Per Capita Ranking
Human Development Gross national income GNI per capita rank
Index (HDI) (GNI) per capita minus HDI rank
HDI rank Country Value (2011 PPP $)
67 Cuba 0.769 7,301 47
76 Georgia 0.754 7,164 40
100 Tonga 0.717 5,069 32
73 Sri Lanka 0.757 9,779 29
81 Ukraine 0.747 8,178 25
9 New Zealand 0.913 32,689 23
113 Palestine, State of 0.677 4,699 21
2 Australia 0.935 42,261 17
6 Ireland 0.916 39,568 16
18 Israel 0.894 30,676 16
145 Nepal 0.548 2,311 16
116 Vietnam 0.666 5,092 15
29 Greece 0.865 24,524 14
17 South Korea 0.898 33,890 13
173 Malawi 0.445 747 13
36 Poland 0.843 23,177 10
52 Romania 0.793 18,108 10
69 Costa Rica 0.766 13,413 10
5 Netherlands 0.922 45,435 9
14 United Kingdom 0.907 39,267 9
Source: HDI report 2015, UNDP
 Nations whose HDI Outcome < GNI Per Capita Ranking
Human
Gross national income GNI per capita rank
Development
(GNI) per capita minus HDI rank
Index (HDI)
HDI rank Country Value (2011 PPP $)
138 Equatorial Guinea 0.587 21,056 -84
48 Kuwait 0.816 83,961 -46
121 Iraq 0.654 14,003 -44
106 Botswana 0.698 16,646 -41
41 United Arab Emirates 0.835 60,868 -34
32 Qatar 0.850 123,124 -31
149 Angola 0.532 6,822 -30
116 South Africa 0.666 12,122 -29
109 Turkmenistan 0.688 13,066 -28
39 Saudi Arabia 0.837 52,821 -27
152 Nigeria 0.514 5,341 -24
172 Côte d'Ivoire 0.462 3,171 -24
52 Oman 0.793 34,858 -23
64 Seychelles 0.772 23,300 -19
62 Malaysia 0.779 22,762 -14
72 Turkey 0.761 18,677 -12
11 Singapore 0.912 76,628 -7
90 China 0.727 12,547 -7
Source: HDI report 2015, UNDP
Limits to Growth and Development on
the A2 Unit 4 Syllabus
• Students should consider factors such as:
1. Poor infrastructure
2. Human capital inadequacies
3. Primary product dependency
4. Declining terms of trade
5. Savings gap; inadequate capital accumulation
6. Foreign currency gap and capital flight
7. Corruption, poor governance, impact of civil war
8. Population issues
9. Debt dependence
 Paul Collier’s 4 “Development Traps”
• Professor Paul
Collier has
identified four
“development
traps” - they are
1. Conflict
2. Reliance on
natural
resources
3. Being
landlocked
with bad
neighbours
4. Bad
governance
 Infrastructure Gaps

• Infrastructure gaps limit economic growth

& human development because
1. They increase supply costs for
businesses – this causes higher prices –
hitting real incomes
2. Reduce geographical mobility of labour /
higher structural unemployment
3. Damage export competitiveness and
limit intra-regional trade
4. Make a country less attractive to inward
foreign direct investment
5. Make an economy vulnerable to effects
of climate change / natural disasters
6. Contribute to gender inequality

The Asian Development Bank forecasts that Asia needs

US$8 trillion (S$11 trillion) in the decade to 2020 to plug
the infrastructure deficit
 Infrastructure Gaps - Zambia
• Landlocked Zambia scores poorly in the
infrastructure rankings published as part of
the Global Competitiveness Index
Poor access to Poor • Quality of overall infrastructure 93/140
credit infrastructure • Quality of roads 81/140
• Quality of railroad 80/140
• Quality of port infrastructure 131/140
• Quality of air transport 112/140
• Electricity and telephony 119/140
Supply-Side • 90% of Zambia’s power comes from hydro-
Constraints electric plants making the country especially
vulnerable to drought
• To earn foreign exchange, Zambia exports
power from hydro-electric plants – this then
damages electricity supply to the farming
industry which employs 60% of people
Regulations
Excessive • Copper mines absorb much of the available
and licensing energy supply. There are frequent power
bureaucracy
requirements outages affecting homes & businesses
• Much copper output is transported on poor
roads which adds to costs and hurts profits
 Human Capital Inadequacies
“The low level of human capital in Africa’s agricultural sector remains a significant
constraint to growth, poverty reduction, and food security on the continent. “ World Bank

World Economic Forum Human

Capital Index

“A nation’s human capital

endowment—the skills and
capacities that reside in people
and that are put to productive
use—can be a more important
determinant of its long term
economic success than virtually
any other resource. This resource
must be invested in and leveraged
efficiently in order for it to
generate returns—for the
individuals involved as well as an
economy as a whole.”
Source: http://reports.weforum.org/human-capital-
report-2015/the-human-capital-index/
 Human Capital Inadequacies
• Human capital refers to skills, experience, attitudes, aptitudes
of the human input into production
• In many countries secondary + tertiary school enrolment is low
and teaching quality is poor
• In many countries there is a big gap between expected years of
schooling and mean (actual) years of schooling
• Huge inequality within and between developing countries in
the quality of schooling and access
• Lower and middle-income countries may suffer from brain
drains of their younger, more skilled workers
• Weak human capital constrains labour productivity and ability
to harness new technologies
• Human capital deficiencies often linked to malnutrition. Better
basic health care and nutrition often unlocks improved human
capital by avoiding brain impairment.
 Human Capital Inadequacies - Zambia
• Mean years of schooling 6.5
• Expected years of schooling (note mismatch with mean years) 13.5
• Adult literacy rate (% aged 15 and older) 61.4%
• Population with secondary education (% aged 25 and above) 35%
• Primary enrolment (% of children of primary school age) 114%
• Secondary enrolment (% of children of secondary school age) 101%
• Primary school dropout rates (% of primary school cohort) 47%
• Pupil-teacher ratio 49
• Expenditure on education (measured as a % of GDP) 1.35%

• Only one third of adults have experienced some form of secondary education
• The primary school drop-out rate is nearly 50%
• The pupil teacher ratio remains high and spending on education is less than
1.5% of GDP. Teacher quality is variable and there are hundreds of thousands of
aids orphans in Zambia – a key cause of the 40% child labour ratio
 Primary Product Dependence
• Many developing countries continue to have high
dependence on extracting & exporting primary commodities
• These economies are vulnerable to volatile global prices
• Significant risks from over-specialisation especially when the
terms of trade from their main exports decline
• Resource-rich (factor input-driven) countries may suffer from
the natural resource curse including the Dutch Disease effect
• Extractive rents often fuel corruption, inequality and
wasteful consumption as natural resources are depleted
• High commodity prices can cause currency appreciation –
and may lead to the Dutch Disease / de-industrialisation
• Often resource revenues are not used productively to
diversify the economy / and improve HDI outcomes through
investment in education and health care.
• Result: Many countries rich in natural resources often have
slow rates of growth and poor development scores
Primary Product Dependence
 Primary Product Dependence - Malawi

Over 90% of Malawi’s exports of goods are agriculture or mining/extractive

products. Only 8% of their exports are manufactured goods
 The Natural Resource Curse

“Although large deposits of

key resources such as oil
would usually be considered
a blessing for the
development prospects of a
country, it often turns out to
be a ‘resource curse’”
Professor Paul Collier
“Close to one third of the
wealth of low-income
countries comes from their
“natural capital” which
includes forests, protected
areas, agricultural lands,
energy and minerals”
World Bank
The Natural Resource Curse

“The fundamental
goal of resource-rich
economies should
be to transform
their exhaustible
natural resources
into assets—
human, domestic,
and private capital
and foreign
financial assets—
that will generate
future income and
support sustained
development. But
the record is mixed.”

Source: IMF Finance

and Development,
September 2013
 Primary Product Dependence - Zambia

Zambia is the 86th largest export

economy in the world and the 66th most
complex economy according to the
Economic Complexity Index (ECI).

The extent of primary export dependence is shown in this graphic from the
Observatory of Economic Complexity (MIT).
Click here for the latest data on Zambian exports:
http://atlas.media.mit.edu/en/profile/country/zmb/
 Primary Product Dependence – Volatile Copper Prices

Copper benchmark price, US dollars per tonne

12000
Zambia is not the biggest copper
10000 producer in the world economy. In
most cases Zambian copper mines are
“price-takers” which means that they
8000 sell as much as they can at the
prevailing world price.
6000

4000

2000

0
Jul-88

Jul-05

Mar-11
Dec-89
May-91
Oct-92
Mar-94

May-08
Oct-09
Apr-84

Jan-97

Apr-01

Feb-04

Dec-06
Jan-80
Jun-81
Nov-82

Aug-95

Jun-98
Nov-99

Aug-12
Jan-14
Jun-15
Sep-85
Feb-87

Sep-02
Risks to Growth for Zambia from falling Copper Prices

Fall in export revenues - fall in AD – causing drop in Zambian GDP growth

Zambia now running a large current account deficit – draining FX reserves

Depreciation of currency – leading to accelerating inflation > 10%

Job losses in mining – rising cyclical & structural unemployment

Negative multiplier effects for supply-chain businesses, housing, retailing

Fall in tax revenues - rising budget deficit / debt – may need IMF support

Social consequences – mining companies have subsidised HIV medicines,

inequality worsening as a result
Strategies for Reducing Primary Product Dependency

Better government – including more transparency &

accountability to tax payers so that it is clear where
natural resource revenues are going

Stabilisation Fund / Sovereign Wealth Fund – e.g. to

fund human capital and infrastructure or to inject
money into an economy when aggregate demand dips

Higher taxes of natural resource profits (i.e. extracting

resource rents and then reinvesting in the domestic
economy to increase supply-side capacity)

Diversification – including processing, light

manufacturing & tourism – giving higher value added
and making the economy less susceptible to shocks
 Savings Gap and Foreign Exchange Gaps as Barriers
• The Harrod-Domar model emphasizes the role of savings to
help fund capital investment / capital deepening
• In many lower and middle income countries gross national
saving is insufficient to fund investment
• Financial systems are frequently poorly developed rationing
access to affordable credit / insurance
• Low national savings may limit investment and make
developing countries dependent on external finance
• Overseas development assistance (aid)
• Foreign direct investment
• Remittance inflows
• Private sector debt
• Many developing economies have low foreign exchange
reserves to cover their spending on imports – risking running
into a balance of payments / currency crisis.
Overcoming a Savings Gap – External Financial Flows
 Capital Flight
• Capital flight is the uncertain and rapid movement of large
sums of money out of a country
• There could be several reasons linked to a lack of investor
confidence - factors include
1. Political turmoil / unrest / risk of civil conflict
2. Fears that a government plans to take assets under state control
3. Exchange rate uncertainty e.g. ahead of a possible devaluation
4. Fears over the stability of a country’s banking system
• Many billions of $s each year are taken out of a country
illegally especially in countries with high levels of corruption
• E.g. many Chinese leaders have relatives with offshore companies
• The rise of crypto digital currencies such as Bitcoin may be
encouraging capital flight – a form of digital money laundering
• Capital flight can undermine the stability of the financial
system and also bring about a much weaker currency which
in turn then increases the prices of essential imported goods
 Corruption as a Barrier to Growth & Development
Transparency International Corruption Perceptions Index for 2015
Cleanest Most Corrupt
1 Denmark 145 Central African Republic
2 Finland 146 Congo Republic
3 Sweden 147 Chad
4 New Zealand 147 Democratic Republic of the Congo
5 Netherlands 147 Myanmar
5 Norway 150 Burundi
7 Switzerland 150 Cambodia
8 Singapore 150 Zimbabwe
9 Canada 153 Uzbekistan
10 Germany 154 Eritrea
10 Luxembourg 154 Syria
10 United Kingdom 154 Turkmenistan
13 Australia 154 Yemen
13 Iceland 158 Haiti
15 Belgium 158 Guinea-Bissau
16 Austria 158 Venezuela
16 The United States Of America 161 Iraq
18 Hong Kong 161 Libya
18 Ireland 163 Angola
18 Japan 163 South Sudan
21 Uruguay 165 Sudan
22 Qatar 166 Afghanistan
23 Chile 167 Korea (North)
23 Estonia 167 Somalia
 Corruption as a Barrier to Growth & Development

• According to the United Nations, “corruption undermines

human development and democracy. It reduces access to
public services by diverting public resources for private gain.”
• Corruption is due to a failure of governing institutions who
lack transparency both in where their tax revenues are
coming from and in how state resources are spent
• High levels of corruption damage growth & development:
1. Inhibits direct foreign investment into an economy
2. Leads to allocative inefficiency / i.e. diverting public resources for
private gain, extreme examples of extravagant wealth
3. Contributes to persistent income & wealth inequality and
reduced progress in cutting the incidence of extreme poverty
4. Causes a loss of trust - a breakdown of social capital
5. Leads to substantially poorer human development outcomes
because governments are not collecting in enough tax revenues
 Corruption as a Barrier to Growth & Development
Transparency International Corruption Perceptions Index for 2015
Many Trust Businesses more than Governments
 Labour Migration and Brain Drain Effects
• It has been estimated
that there were 232
million international
migrants in the world in
2013
• 207 million of them
were of working age, 15
years old and over.
• Of these migrants, 150
million were working or
economically active.
 Brain Drains - De-population as a Barrier to Growth
Evaluate some of the consequences of the net outward migration
of skilled workers from developing countries
• Disadvantages
1. Loss of human capital
(expertise) from the economy –
this damages long-run supply-
side potential and is a barrier to
development
2. Loss of enterprising younger
workers who might have
started up businesses at home
3. Skills shortages will grow and
could seriously affect HDI
outcomes e.g. emigration of
doctors and teachers
4. Fall in aggregate demand
5. May make the country less
attractive to inward investment
6. May make a country less
innovative
 Brain Drains - De-population as a Barrier to Growth
Evaluate some of the consequences of the net outward migration
of skilled workers from developing countries
• Disadvantages • Possible Advantages
1. Loss of human capital 1. Remittances from emigrants
(expertise) from the economy –
this damages long-run supply- flow back to increase GNI
side potential and is a barrier to
development 2. People living overseas (diaspora)
may be able to help finance
2. Loss of enterprising younger
workers who might have private sector capital projects in
started up businesses at home the future
3. Skills shortages will grow and 3. Acquisition of human capital by
could seriously affect HDI working & studying in other
outcomes e.g. emigration of
doctors and teachers countries e.g. learning
4. Fall in aggregate demand languages, earning degrees –
possibly leading to brain
5. May make the country less deposits & gains?
attractive to inward investment
6. May make a country less 4. May help to offset rapid natural
innovative growth of population
Limits to Growth and Development on
the A2 Unit 4 Syllabus
• Students should consider factors such as:
1. Poor infrastructure
2. Human capital inadequacies
3. Primary product dependency
4. Declining terms of trade
5. Savings gap; inadequate capital accumulation
6. Foreign currency gap and capital flight
7. Corruption, poor governance, impact of civil war
8. Population issues
9. Debt dependence
More Notable Barriers to Growth & Development

Vulnerable Gender inequality and Trade barriers e.g.

employment / other forms of limited access to
exploitation discrimination developed markets

Landlocked countries High inflation for Income & wealth

some, deflation for inequality
others
 Evaluating Main Strengths and Weaknesses for Zambia
Competitive Strengths
1/ Rich natural factor endowment (copper & emeralds)
2/ Young workforce (half pop are under 15yrs old)
3/ Now a middle income country – GNI per capita
increased by about 69% between 1980 and 2014.
4/ Progress in improving health outcomes /HDI rank is
higher than average for Sub Saharan Africa
5/ Functioning democracy with political stability
Other Notes
• Zambia has become a favoured venue for inward
investment worth 5-6% of GDP annually with much
coming from China.
• Country still has strong long-run growth potential
given it’s natural resource endowment
• Zambia has a functioning democracy but economic
management is weak and Zambia has not successfully
used revenues from copper mining/exporting into
establishing a diversified industrial base –
manufacturing is shrinking as % of GDP
• Can Zambia survive what many believe to be the end
of the global commodity super price cycle?
Main Weaknesses in their Economy
1/ Vulnerable to global slowdown / Zambia does not
have a stabilisation fund / wealth fund to draw upon
2/ High secondary school drop-out ratio – disparity
between expected and mean years of schooling
3/ Low tax revenues / big tax avoidance issues
4/ Weak currency / growing fiscal & BoP deficits
5/ Finance is under-developed / very high interest rates
of 30-40% for small businesses / farmers
Other Useful Contextual Knowledge
• 40% child labour (14% in developing countries)
• Zambia is too dependent on hydro-electricity – much
goes to power the copper mines. Drought is leading
to power shortages and affecting farming
• The big threat facing Zambia is stagflation i.e. a sharp
reduction in economic growth accompanied to
double-digit rates of inflation fuelled by a severe
depreciation of the currency.
• Youth under employment is also a huge issue
• Zambia’s economic growth has not translated into
significant poverty reduction
 Main Strengths and Weaknesses for Mexico
Economic / Competitive Strengths
1/ Low unit labour costs – attractive to FDI
2/ Large / growing population (market size)
3/ Competitive currency helping exports
4/ Many free trade agreements completed
5/ Low unemployment and government debt
Other Notes
• Mexico is developing a strong comparative
advantage in manufacturing especially in
industries such as vehicle manufacturing
• Unemployment is low but there is significant
under-employment in a dual economy
• Fast growing middle class is attractive to FDI
especially from service businesses
• Rising consumption supports GDP growth
• More than 90% of Mexican overseas trade now
covered by free trade agreements
Main Weaknesses in their Economy
1/ Concerns over violence and corruption
2/ Heavily dependent on oil revenues
3/ Informal labour market – dual economy
4/ High levels of income/wealth inequality
5/ Long tail of low productivity businesses
Other Useful Contextual Knowledge
• Mexico has over 4 million micro businesses
that employ the majority of Mexicans – few
have access to equity / loan finance which
hampers finance for extra investment
• Key industries in Mexico have been dominated
by monopolies such as Mexico Telecom and
Pemex (Oil). The lack of contestability keeps
prices and high and limits capital investment
and innovation
Barriers to Economic Growth and
Development