Monday, June 11, 2007

Why Economic Growth does not always benefit developing countries

Discuss Factors that caused a decline in economic and social development in some countries in 1990s, during a period of worldwide economic growth.

Why are many countries unable benefit from global economic growth. For example, growth rates in many sub Saharan African countries have lagged miserably behind growth rates in more developed countries. However, the experience of China, and to a lesser extent India, show that developing countries are not doomed to negative or low growth rates.

Factors that Can Prevent Developing countries experiencing Economic Growth

  • Specialisation in one Commodity

Developing countries may focus on production of one primary product. e.g. Cuba depends on Sugar.

Economic growth doesn't mean demand for all commodities increases. Sugar has a low income elasticity of demand, rising incomes means a smaller % increase in demand. Therefore, economic growth does not translate into higher demand for these goods.

Furthermore, the prices of commodities can easily fall due to excess global supply. Therefore, countries who rely on this product see a fall in revenue.

This is important because demand is very inelastic for these goods. Increase in supply causes big fall in price and incomes. It is important because a high % of revenue can come from one good. In recent years, coffee has been a good example of a commodity with a falling price.

Structural weakness

Many developing economies doesn't have sufficient transport and infrastructure to make the most from trade. Low levels of human capital mean the economy struggles to grow and diversify into manufacturing industries. However, the cheap labour costs may encourage inward investment in labour intensive industries. This has been one of the main reasons for China's success.

Agricultural based economy.

Countries who rely on agricultural output may suffer from adverse weather conditions. E.g. a prolonged drought in sub Saharan Africa can lead to loss of farming income and therefore lower growth.

Internal Conflict

Internal conflict or mismanagement can lead to declining living standards for many. E.g. war brings about lower life expectancy and deters foreign investment.

Corruption and Mismanagement

Government in many of the poorest developing countries misuse Aid and the proceeds of growth.

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