Economic Development

  • Created by: TeganLM
  • Created on: 09-04-19 12:50

Barriers to development

Poor economic growth:

  • gov. cannot invest in improvements in healthcare/education (low fiscal dividend)

Poor social capital/corruption/institutional failure

  • uncertainty- lack of FDI and domestic investment- poor rule of law

Poor human capital

  • poor education= lack of skills- poor productivity
  • lower incomes
  • fewer doctors, teachers- lower levels of education and healthcare

Lack of infrastructure

  • increases supply costs for businesses- lack of FDI/domestic investment

Lack of access to international markets

  • difficult to grow through exports

Costly capital/lack of access to capital

  • low saving ratios: firms have less access to capital from banks= less investment
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Development theories/models

Harrod-Domar model

  • nations that lack capital + low productivity= low growth rates
  • little saving to fund investment therefore gov. should borrow to fund investment

Rostow's Model

  • need to help countries industrialise- priority should be the growth of the manufacturing industry
  • use surplus labour from the countryside to help factories develop


  • X increases- AD increases = econ growth= possible development
  • countries should specialise in areas where they have a comparative advantage (e.g. resource-rich) 
  • BUT: Prebisch-Singer hypothesis: growth in export of commodities= lower profits for producers
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theories/models 2

Import subsitution

  • high tariffs on imported goods= develop local industry 
  • infant industry argument 
  • BUT: trade diversion, comparative advantage theory, potential for exploitation of monopoly

Free-market approach

  • encourage efficiency and entrepreneurship
  • privatisation, reduction of tariffs, no budget deficit etc.
  • BUT: often badly affects the poor, country may lack infrastructure for sustainable business development

Statist approach

  • govt. intervention to develop infrastructure 

  • e.g. build roads, ports etc.
  • BUT: build-up of debt, corruption= mismanagement and inefficiency
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Foreign aid as a development tool

Can be helpful:

  • strong cenral government (i.e. lack of corruption)
  • used to support healthcare and education= long-term development
  • focused on the poorest helping themselves

Can be unhelpful:

  • corrupt government
  • fosters unsustainable reliance on donors
  • tied aid/ forces reduction in tariffs (trade opening)
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Borrowing to finance development


  • allows entrepreneurs to borrow start up capital
  • increased investment: increased productivity, increased AD, multiplier effect etc.


  • higher interest rates on loans to MNC's (less confidence of ability to pay it back)
  • interest rates can fluctuate due to global events rather than the country's own economic cycle
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Attracting MNC's (multi-national companies)


  • increased investment- increased AD, increased productivity= long run economic growth improves, multiplier effect, higher wages etc.
  • increased employment- increased consumption, increased stds. of living
  • increased fiscal dividend (corporation tax)
  • govt. expenditure increases- better infrastructure
  • X increases
  • BUT: does the LEDC offer tax breaks? strong central gov. to collect tax?


  • discourages development of local firms
  • reduces demand for local goods (increased competition)
  • profits repatriated back to developed nation
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Standards of living

GDP per capita is often used but has flaws:

  • differences in exchange rates- GDP measured in $ will fluctuate with exchange rates
  • differences in living costs- prices of goods and services will vary between countries (therefore adjust for PPP- purchasing power parity)
  • regional variations in income and spending
  • inequality

Inequality is measured by the Lorenz curve and Gini coefficient

Lorenz curve- closer the curve is to the curve of perfect equality= more equal society

Gini coefficient- closer to 0, more equal the society- 1 is perfectly unequal

  • economic growth and externalities- increasing GDP may be at the expense of sustainability
  • black economy and non-monetised sectors
  • reliability of GDP/GNP figures- difficult to collect in countries with a weak civil service

Therefore: use HDI (human development index); considers education, health etc.

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