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.

Problems of Free Trade for Developing Countries

Free essay: Problems of Free Trade for Developing Countries

1. Infant Industry Argument.

If developing countries wish to develop new manufacturing industries they may struggle to compete on an international scale. Therefore, in the short run at least, they may need tariff protection to enable their industries to develop. After a few years they may be able to reduce these tariffs. Many developed countries used tariff protection in the past, especially the Asian "Tiger Economies"
In this regard, it is said free trade usually benefits developed countries more than developing countries.

2. May Prevent Diversification

The lewis model of development suggests that development needs economies to switch from agricultural sector to industrial sector. This is because the marginal cost of production in agriculture is nearly zero. Therefore, moving to industrial production will be relatively costless. However, to diversify an economy protection may be needed. Otherwise developing economies will be stuck with the production of primary products. This makes the economy vulnerable to fluctuations in prices; there is also a low income elasticity of demand for products

3. Environmental Damage.

Free trade and the force of globalisation may lead to exploitation of natural resources.

see also: arguments against free trade

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.