Barriers To Economic Growth
and/or Development
4.9
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What do you think some of the biggest real-world barriers
are to economic growth and/or development.
COME UP WITH 2-3 ANSWERS
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Poverty Traps & Cycles
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Poverty Cycle & Traps
Economists debate the existence and effects of poverty traps or cycles. Governments use these
diagrams to formulate greater understanding to guide intervention and if it's possible to break out
of the cycle.
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Poverty Cycle Diagram
Poverty cycle diagrams can be applied to economic growth or development
Economic Economic
Growth Development
Low Economic Low Education &
Growth Healthcare levels
Low levels of Low Human
Low Income
investment Capital
Low levels of Low Productivity
savings
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Economic Barriers
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Infrastructure
Infrastructure - Physical Capital in an economy that is often provided by governments
such as roads, railroads, police, education services, airports, public transport, etc.
Importance of infrastructure in development/growth:
Facilitates economic activity
Ensures protection of citizens
Poor infrastructure leads to poor supply chains leading to increased costs of production.
Infrastructure includes components like gas, drinking water, communication systems, etc.
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Appropriate Technology
Technology that relies mostly on the relatively abundant factor an economy is endowed
with. Typically small-scale, environmentally friendly, locally made, and affordable.
Technologies developed in high-income countries are typically sophisticated and require more
capital equipment (electricity, factories, etc.)
While the technology developed in low-income countries typically use less capital, more labor,
and easily repaired creating jobs locally.
Appropriate technology is related to sustainable development as it must be
environmentally friendly and produced locally.
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Low Human Capital
Human Capital - The education, training, skills, experience and good health embodied in
the labour force of a country.
Low human capital is a result of:
Poor education
Poor Healthcare
Poor job training opportunities
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Dependence on the Primary Sector
Primary Sector - Anything derived from the factor of production land. Includes
agricultural products, metals and minerals.
Typically, developing countries rely heavily on the primary sector while developed
countries focus more on manufacturing or services.
Issues with dependence on the primary sector:
Reliance on imports of manufactured goods and services
Instability. Unpredictable changes in prices and yields (crops/mine).
Exchange Rate issues - high demand for raw materials leads to an exchange rate increase
lowering export competitiveness in other sectors.
Political and Civil unrest. Land and natural resources are so valuable here, there is
frequently conflict.
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Lack of Access to International Markets
Trade is very important for a country's economic growth and development. Access to global
trade markets is uneven or restricted by protectionist policies for a significant portion of
low-income countries. Typically, protectionist policies placed on developing countries are
highly effective as easily substitutes are available from other countries due to low
technology and capital.
IMPORTANT: It's important to note that some protectionist policies such as tariffs may be defensive and
enacted by the lower-income country in order to protect infant industries to increase domestic
competition.
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Informal Economy
Formal vs Informal Sector
Formal economic activity is registered, taxed, and legally regulated while informal activity is hidden,
unrecorded, and unregulated.
Low-Income countries typically don't have the institutional framework to track trade as they lack
established tax systems or record keeping. Citizens in low-income countries also typically grow,
consume, and sell food, clothing, and shelter for their families, friends, and members of their local
community.
Why is an informal economy a problem for development?
Lower Incomes
Lack of safety net for entrepreneurs or workers as they are not
registered (no unemployment benefits)
Lack of government revenue leading to less money for publicly
private goods (education, healthcare, etc.)
Potentially illegal economic activity resulting in human rights issues
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The Power of the Informal Economy
Robert Neuwirth: The power of the informal
economy
TED
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Capital Flight
Capital Flight - An outflow of money from an economy. Typically these are due to negative
political, social, or economic changes. It should be noted that countries normally have some
outflow of funds but Capital Flight refers to a high degree of outflow.
Why is capital flight a problem for development?
Interest Rates will rise in hopes of keeping money in the economy. However, this also discourages
business and consumer loans.
The government may enact control over funds leaving the country. While this keeps funds in the
country, it serves as a deterrent for foreign investors as they may not be able to remove funds.
Demand-Side policies have less of an impact.
Lower domestic investment.
In the long-run, capital flight is typically associated with large foreign debt
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Capital Flight in 90 Seconds
China’s capital flight explained | FT World
Financial Times
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Indebtedness
Why do countries take on debt?
To service debts already owed. (Pay the principle on the loan)
Finance current expenditures
Finance long-term goals such as infrastructure, healthcare, industrial projects, etc.
The first two reasons are considered to be inappropriate as they further the amount of indebtedness and are
considered to be unsustainable. The third example can be appropriate if funds are allocated effectively.
Debt from loans has increased dramatically in middle-low-income countries. While these loans can
be beneficial for development and economic growth, they often come with strings attached as the
developed lending countries promote their own agendas focused on international trade.
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G7 Article
Start with a 6-minute silent reading time.
Read the article and discuss the following topics with a partner
What is the article discussing?
Why is China investing in Africa?
What is the purpose of lending the money to Africa stated in the article?
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Geographic Barriers
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Landlocked Countries
Landlocked countries don't have direct access to the sea. This typically prevents easy economic
integration as all imports/exports by sea must enter/exit through at least one other country.
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Climate
Each country lives in a different biome with varying climate conditions.
One of the largest issues with climate is drought. Due to lower-income countries' reliance on the primary
sector (agriculture, raw materials, etc.), stressed water supplies typically result in lower crop yields. Higher-
income countries focus less on the primary sector and therefore are less effected by drought.
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What is the most deadly animal in the world?
COME UP WITH AN ANSWER WITH A PARTNER
2 MINUTES
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Disease
Each country has different endemic diseases native to its region.
Issues with disease and development/growth
An unhealthy workforce leads to a lack of development/growth
Sick people cannot work and in countries with no safety nets, these people fall into a cycle of poverty.
Sick people are unable to devote time to increasing human capital (education, training).
Devastating impacts on overall well-being and relationships
Real-world examples of endemic diseases
HIV/AIDS
Malaria transmitted via mosquito (the most deadly animal) - most cases in Africa.
Sick people are unable to devote time to increasing human capital (education, training).
Devastating impacts on overall well-being and relationships
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Political Barriers
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Governance
Governance - Decision-making or processes within an organization or an institution.
Governance is not simply the government. Governance from non-government and government bodies
greatly impacts economic growth and development.
Effective Governance Traits
Transparent
Accountable
Consensus oriented
Equitable and inclusive
Follows rule of law
Responsive
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Governance
A lack of effective governance results in a power asymmetry (unsymmetrical power) where specific
stakeholders have greater power.
Power asymmetry results in certain favored groups receiving preferential treatment and furthering
the power disparity.
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Political Systems
Each country in the world has a unique political system ( legal institutions that determine
government structure and functions).
While each political system should only be evaluated on a case-by-case basis, democratic political
systems theoretically provide the greatest governance.
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Corruption
Corruption - Abuse of power for private gain.
Types of Common Corruption
Bribery
Embezzlement
Extortion
Blackmail
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Greek Corruption Case-Study
Fighting Corruption | Nikos Passas |
TEDxAcademy
TEDx Talks
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Institutional Barriers
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Legal Systems
Rule of Law - the ability of citizens to exercise power is restricted through well-defined and established
laws.
Laws should uphold core foundations of ideal legal systems such as accountability, just laws, accessible
and affordable justice, and transparency.
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Property/Land Rights
Systems need to exist to organize and structure the means of owning, selling and regulating
property.
Countries that have no formal system of property records typically experience greater levels of hostility
and general unrest. This lack of documentation and rights leads to challenges for economic growth and
development.
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Taxation System/Structure
Typically, higher-income countries receive greater tax revenues compared to lower-income
countries.
Tax revenues allow governments to boost economic growth and development through government
spending. Additionally, because developed countries tend to have little/no informal economy, they receive
most of their revenue from direct taxes while low-income countries with a large informal economy relies
primarily on indirect taxes.
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Banking System
Banking systems in low-income countries take on a significant amount of risk in these areas as individuals typically
have no collateral for loans, low savings, and low financial literacy. When a bank does choose to work with citizens
to provide loans, they are typically with high-interest rates to ensure a profit is made.
This lack of access to finances hinders economic activity as entrepreneurs are unable to gain funds through bank
loans. Additionally, citizens have a low degree of financial security as their money is not in a secure bank but most
likely physically stowed away.
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Social Barriers
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Gender Inequality
Limits to women's access to education, healthcare, job opportunities, or political opportunities impact economic
growth and development negatively in the following ways:
Lack of education leads to a lack in human capital
Unequal income
Low political representation in government
Little/no political or educational role models
Increased sexual and physical violence against women
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Caste and Ethnic Discrimination
Ethnic discrimination can be based on race, ethnicity, or social/cultural differences. Ethnic Discrimination is typically
targeted against a specific minority group in the population and has been solidified for a long period of time or new
immigrants.
Ethnic discrimination hinders economic development/growth resulting in:
Higher rates of unemployment and income for minorities
Lack of equal access to healthcare, education, and economic opportunities
Restriction of freedoms
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Caste and Ethnic Discrimination
Caste discrimination is primarily associated with South Asian countries such as India. Traditional caste systems
divide the population hierarchically based on birth. Individuals in the lowest groups typically experience the most
significant discrimination.
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