Constraints To Economic Growth in Developing Countries

Assess Three Constraints To Economic Growth in Developing Countries (Edexcel Unit 5b)

Lack of Savings. The Harod Domar model suggests the levels of savings are important for determining levels of investment and hence the rate of economic growth. If there is a lack of savings, it limits investment and therefore, there is little prospect of economic development. However, sometimes the level of savings is misused on unproductive investment projects. The important thing is not level of savings but the economic management of investment resources. Also, low savings may be countered by foreign investment

Corruption. This can cause foreign aid to be siphoned off into the bank accounts of politicians. It means that resources for development will not be used in their entirety for economic development. In some cases the % of corruption can be very high. However, this has not stopped some countries from developing e.g. China. Corruption is endemic in the world. It is a major problem in China, but hasn't stopped growth. Also, corruption may just take a % of investment, therefore there are still funds being used for investment.

Human Capital Lack of human capital is a constraint on growth. To diversify the economy and move towards industrialisation it is necessary to have skilled labour. The world bank say human capital accounts for about 65% of economic development. Therefore, it can be a very significant constraint to growth. In many cases attempts to industrialise the economy suffered from lack of human capital. However, in many industries competitiveness can be achieved through low wage costs, as in China. Therefore, for labour intensive industries low wage costs can be more important than labour productivity.