Assess The Significance Of Three Factors Which Might Limit Economic Development In The Developing Countries

2005 Words9 Pages
Assess the significance of three factors which might limit economic development in the developing countries.
Economic development can be defined generally as involving an improvement in economic welfare, measured using a variety of indices, such as the Human Development Index (HDI). A developing country is described as a nation with a lower standard of living, underdeveloped industrial base, and a low HDI relative to other countries. There are several factors which may have the effect of limiting economic development in such countries. Factors such as these include: primary product dependency, the savings gap and political instability. Primary product dependency occurs where production of primary products accounts for a large proportion
…show more content…
Furthermore, countries such as Bolivia have nearly half the world’s known reserves of lithium. Given the subsidies being given to companies to develop electric cars and the decline in oil production and falling oil prices, demand for lithium can be expected to rise rapidly in the future which would greatly contribute to economic development in Bolivia. Further to this, FDI has increased significantly in recent years in countries dependent on primary products which have actually helped them to grow and develop.

A further limiting factor on economic development in developing countries is the savings gap. This factor can be explained by the Harrod-Domar model which illustrates the problem of how countries with a low GDP per head will experience low savings ratios (savings as a proportion of GDP). This is because their marginal propensity to consume (the proportion of any increase in income which is spent) will be high. Low savings means that it will be difficult to finance investment and, with low levels of investment, capital accumulation will be limited. This will then translate into low output and GDP.

Harrod-Domar model

In Africa for example, savings rates of around 17% of GDP compare to 31% on average for middle income countries. Low savings rates and poorly developed or malfunctioning financial markets make it more expensive for African public and private sectors to get funds for investment as higher borrowing costs impede capital investment. Moreover, in
Get Access