Assess the Effect of Three Factors Which May Limit Economic Development in Developing Countries

2008 Words Mar 29th, 2015 9 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
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This is because many developed countries may use protectionist measures to prevent developing countries from having free access to certain markets (which may include the markets for the developing countries’ primary product) thus making it more difficult for poorer countries to grow and develop. Foreign demand for a primary product may also limit economic growth as demand for a particular commodity will cause an increase in demand for a country’s currency, thus resulting in the appreciation of the currency. This would reduce the competitiveness of the country’s manufactured exports, thus leading to a decrease in the financial resources gained from exports which could have enabled the country to raise the level of economic welfare to encourage development. Moreover, falling terms of trade due to primary product dependency could limit economic development. This is illustrated by the Prebisch-Singer hypothesis states that primary products tend to be income inelastic whereas the demand for manufactured good is income elastic in the long run. Therefore, as real incomes rise, the demand for manufactured goods will increase at a faster rate than the demand for primary products. This therefore means that primary product dependency acts as a limit to development in developing countries because it means that in the long run the terms of trade would be better for manufacturing products thus there would be more financial