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

1989 Words Mar 11th, 2015 8 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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However, the extent to which primary product dependency may inhibit economic development is somewhat limited. For example, if the price of a country’s primary product is rising, then this would encourage development. Some countries have even developed on the basis of primary products, for example Botswana: diamonds; and Chile: copper (however, in the case of Botswana, its development may also be due to its political stability, thus allowing for resources to be allocated efficiently). 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

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