4.9.2 Economic, Political & Social Barriers

Dependency on the primary sector

• In 2022 copper exports from Zambia accounted for 70% of their total exports & primary products in excess of 90%. They are suffering from over-specialisation
• Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less-than-proportional increase in demand
  • This means that there is limited scope to continue increasing demand
• Primary products have very little added value
  • Exporting manufactured products raises the added value, income & profits
    
    

• Due to the inelastic nature of both the demand & supply of commodities, small changes in demand or supply can lead to large changes in price, meaning that prices can be volatile
  • When commodity prices rise, GDP rises - & vice versa

Rising income inequality

• A more equal distribution of income means that more households are able to consume a wider range of goods
  • Economies with a smaller medium-income band face less consumption which leads to less aggregate demand and less economic growth
• Rising income inequality worsens the problem as the rich get richer and the poor, relatively poorer

Lack of access to international markets

• International trade is a significant source of economic growth and higher incomes, leading to economic development
• Many countries cannot access more economically developed markets due to the trade barriers put in place by developed economies to protect their firms
• The World Trade Organisation (WTO) aims to increase trade liberalisation so as to improve access for all countries

Informal economy

• Workers in the informal economy are not taxed on their wages
• The lack of tax revenue reduces the provision of infrastructure, merit and public goods
• Many developing countries have a larger informal than the formal economy

Capital flight

• Occurs when money or assets rapidly leave a country
• This may happen due to political upheaval, economic sanctions, war, or changes to government policy (e.g. interest rates)
  • Sanctions applied to Russia in 2022 resulted in $75 billion of capital outflows
• Capital flight reduces the money available for investment, reducing growth & development

Indebtedness

• The higher the level of borrowing from institutions like the International Monetary Fund (IMF), the higher the monthly repayments
• Repaying debt reduces the money available for investment and expenditure on merit and public goods
• The higher the debt the worse the potential economic growth

Lack of access to infrastructure & appropriate technology

• Good infrastructure reduces business costs & attracts foreign direct investment
• Some developing countries have such poor infrastructure which makes it difficult to generate economic activity
  • This is one reason why China has invested so heavily in infrastructure projects in Asia & Africa as it unlocks economic potential

Low levels of human capital

• Low levels of education and healthcare reduce productivity
• Investing in supply-side policy to improve health and education increases the potential output of the country (shifts the production possibility frontier outwards)
• Higher education/skill levels → higher human capital → increased productivity → higher output → higher economic growth → higher income

Geography including landlocked countries

• Geographic features can limit economic growth
• Landlocked countries find it harder/more expensive to import and export products (shipping freight is much cheaper than air freight)
• Natural features such as deserts reduce the quantity of productive land that can be used to generate output and economic growth

Tropical climates and endemic diseases

• Tropical climates are often associated with debilitating diseases such as malaria or dengue
• These reduce the productivity and output of the workforce and limit/reduce economic growth

Legal system

• A strong legal system builds confidence in an economy
• Legal institutions help to create boundaries that households and firms can operate within
• This certainty attracts overseas investment
• This certainty helps to make business easier to conduct leading to higher economic growth

Tax structure

• A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality
• Sometimes the benefits of a good progressive tax system are eradicated by weak tax collection and tax enforcement

Banking system

• Lack of access to credit and banking limits economic growth
• Financial institutions enable individuals & firms to borrow money which can be used for investment or to generate growth
• A lack of financial institutions prevents this from happening

Property rights

• In many countries, the property is the main household asset which can be used to secure loans or generate income
• A lack of property rights in some developing countries prevents this from happening