Factors Influencing Growth and Development

Emerging and developing economies play a pivotal role in the world economy, exhibiting vast differences in their growth trajectories and development outcomes. Various economic and non-economic factors shape these patterns, affecting countries in diverse ways. This section provides a detailed examination of the principal influences on economic growth and development, with a global perspective and a particular focus on the challenges and opportunities faced by emerging and developing economies.

Impact of Economic Factors in Different Countries

Primary Product Dependency

Many developing economies are heavily reliant on the export of primary products, such as agricultural goods or raw materials. This dependency exposes countries to significant risks, including price volatility and fluctuating demand in international markets. Over-reliance on primary exports can hinder diversification, limit value-added activities, and perpetuate underdevelopment.

• Example: Countries such as Ghana (cocoa), Nigeria (oil), and Zambia (copper) face economic challenges when global prices for their key exports fall, impacting income, investment, and government revenue.

Volatility of Commodity Prices

The prices of commodities are susceptible to significant volatility due to changes in global supply and demand, speculation, and external shocks. This volatility can undermine economic stability, complicate fiscal planning, and deter investment. For commodity-dependent countries, periods of boom may be followed by sharp downturns, exacerbating poverty and inequality.

• Example: The oil price crash of 2014 had severe repercussions for oil-exporting economies like Venezuela and Nigeria, causing currency devaluation and fiscal crises.

Savings Gap: Harrod-Domar Model

The Harrod-Domar growth model suggests that economic growth relies on the level of savings and the productivity of investment (capital-output ratio). Many developing countries face a 'savings gap', where domestic savings are insufficient to finance the investment required for sustainable growth. This restricts capital formation, infrastructure development, and productivity improvements.

• Implication: Low savings rates often necessitate foreign aid or investment to bridge the gap, but reliance on external sources can create vulnerabilities and dependency.

Foreign Currency Gap

A foreign currency gap arises when a country is unable to earn sufficient foreign exchange through exports to finance essential imports (such as capital goods, technology, and energy). This shortfall can impede growth, restrict industrialisation, and cause balance of payments crises.

• Example: Many Sub-Saharan African economies face persistent foreign exchange shortages, limiting access to machinery and investment goods vital for economic development.

Capital Flight

Capital flight refers to the large-scale exit of financial assets or capital from a country, often due to political instability, economic uncertainty, or lack of investor confidence. It reduces the resources available for investment, undermines currency stability, and can exacerbate economic crises.

• Example: In periods of uncertainty, such as financial crises in Latin America, significant capital flight has led to currency collapses and recessionary pressures.

Demographic Factors

Population growth, age structure, and dependency ratios significantly influence economic development. High population growth can strain resources and public services, while a youthful population may offer a demographic dividend if matched by effective education and employment policies. Conversely, high dependency ratios can limit productive capacity.

• Example: India’s large working-age population presents opportunities for growth if sufficient jobs are created, while countries with aging populations may experience slower growth.

Debt

High levels of external or domestic debt constrain government spending, increase vulnerability to external shocks, and can divert resources away from crucial investments in health, education, and infrastructure. Debt crises can stall growth and necessitate austerity measures.

• Example: The debt burden in countries such as Argentina and Mozambique has led to IMF interventions and painful economic adjustments.

Access to Credit and Banking

Limited access to credit and formal banking services impedes entrepreneurship, investment, and consumption. Financial exclusion is more prevalent in rural areas and among lower-income groups, slowing economic development and perpetuating inequality.

• Example: Microfinance initiatives in Bangladesh and India have sought to address these barriers, promoting financial inclusion and supporting small businesses.

Infrastructure

Adequate infrastructure – including transport, energy, water, and telecommunications – is essential for productive activity, market access, and attracting investment. Infrastructure deficits raise costs, reduce competitiveness, and limit economic opportunities.

• Example: Poor road and electricity networks in many Sub-Saharan African countries hinder trade and industrialisation.

Education and Skills

Investment in education and skills development is crucial for raising productivity, fostering innovation, and enabling structural transformation. Poor educational outcomes limit the potential of human capital, constrain economic diversification, and perpetuate poverty.

• Example: East Asian economies such as South Korea have achieved rapid growth by investing heavily in education and upskilling their workforce.

Absence of Property Rights

Secure property rights are vital for investment, entrepreneurship, and economic security. Where legal systems are weak or property rights are poorly enforced, individuals and businesses may be reluctant to invest, limiting economic development and perpetuating informality.

• Example: In some developing countries, unclear land tenure and weak legal protection discourage investment in agriculture and urban development.

Impact of Non-Economic Factors in Different Countries

Non-economic factors play a significant role in shaping the growth and development trajectories of emerging and developing economies. These include:

• Political Stability and Governance: Stable governments and effective institutions foster investor confidence and enable better policy implementation, while political instability and corruption deter investment and impede development.
• Legal Systems and Rule of Law: The presence of transparent and effective legal frameworks ensures contract enforcement and the protection of rights, which are essential for economic activity.
• Social and Cultural Factors: Social norms, traditions, and cultural attitudes towards education, gender roles, and entrepreneurship can significantly influence participation in the labour force and the uptake of new technologies.
• Health and Disease Burden: High prevalence of disease (such as HIV/AIDS or malaria) reduces labour productivity and life expectancy, while improvements in healthcare provision can boost economic activity and well-being.
• Environmental Factors: Vulnerability to natural disasters, climate change, and environmental degradation can impede development and necessitate costly adaptation measures.
• Geopolitical Factors: Regional conflicts, trade barriers, and international relations may limit access to markets, increase uncertainty, and disrupt development efforts.

Summary

The growth and development of emerging and developing economies are influenced by a complex interplay of economic and non-economic factors. Understanding these influences is crucial for designing effective policies and promoting sustainable progress. Policymakers must address both sets of challenges to foster inclusive growth, reduce poverty, and achieve long-term development objectives.