Economics paper - June 2010: Primary product dependency and Strategies to promote development in LEDCs
a) To what extent is primary product dependency a constraint on economic growth and development in developing countries. 20 marks.
Level V: consideration of 3 factors with at least two evaluative points
Primary product dependency describes an economy that relies solely on the exporting of commodities e.g. Angola is dependent on the exporting of oil. Economic growth is the gradual increase in GDP per capita.
Primary product dependency is a large constraint on economic growth and development within LEDCs due to the fact that commodities and their producers are highly susceptible to price fluctuations. Price fluctuations constrain economic growth and development because any negative demand or supply side shocks would result in price changes that would be detrimental. An example of the harmful effects of price fluctuations is Ethiopia. Ethiopia’s primary source of income is the trade of coffee and they rely on it heavily. In the 2003, coffee prices plummeted to their lowest levels ever experienced in the Ethiopian coffee history. The prices no longer covered farmers’ costs of production. The income of coffee farmers plummeted and families could no longer afford basic necessities. Most primary products have a high price elasticity of both demand and supply are high. (Graph I: Price inelastic demand, Graph II: Price inelastic supply) When the price elasticity of demand is low, volatile shifts in supply can lead to large changes in price. However, when we consider a market where both PED and PES are low, changes in either demand or supply will result in dramatic changes in price, shown in the graphs above. However, despite high rises in prices, demand is likely to be stable in the short run because the demand is so inelastic. For example, oil prices are susceptible to dramatic changes but people continue to consume it because modern society is so reliant on energy resources. This reliance on fossil fuels is being tackled by advancements in car and production technologies. This means that the demand will become less inelastic and consumers will stop consuming fossil fuels and look towards alternative/substitute commodities. This will mean that price fluctuations will have even more dramatic results for producers in LEDCs, creating further constraints on economic growth and development.
Another issue with primary product dependency is that developing countries/LEDCs means that investment is being directed away from sectors that need investment. For example, if large amounts of government and foreign direct investment is going towards the production of coffee then the education sector will end up being neglected. This hinders development because investment in human capital is needed in most developing countries. By focusing a majority of government funds into the primary sector, the government is not working towards increasing economic growth or development. A real life example of this is the Zambian economy. The Zambian economy is known for its copper mining industry. However, in…