Domestic Factors and

Economic Development

Lesson ObjectivesBy the end of this chapter you should be able toIdentify domestic factors that may contribute to economic developmentExplain how domestic factors may contribute to economic development

Institutional factors affecting developmentThere are a number of domestic factors that act as sources of economic development and barriers to developmentWhat do we mean the institutional framework?

Organisations, structures, rulesThe main institutional factors are

EducationHealthcareInfrastructurePolitical Stability and corruptionLegal systemFinancial system, credit and micro financeTaxationThe use of appropriate technologyThe empowerment of womenIncome distribution

Education

Improve the role of women in society – there are high correlations between women’s education and child survival rates and fertility rates

Sen says ‘Nothing arguably, is as important today in the political economy of development as an adequate recognition of political, economic, and social participation and leadership of women’

Improve levels of health – improving education (particularly literacy) improves the health of society.Individuals can read about and be informed about vaccines and water filtering. Also dangers such as HIV, sanitary habits, diet etc

Despite improvements around 38 million children of primary school age are still out of school in sub-Saharan Africa. In southern Asia 18 million.

Education requires vast fundingWithin a country there may be vast disparities between urban and rural areasChildren may need to workOften if the mothers received no education the children do not eitherEnrolment in secondary schools is lower than primary

Healthcare

Strong correlation between health care and life expectancy - it would appear that countries that spend a high proportion of GDP on healthcare have a higher life expectancy (there are many other variables at play)

Throughout the world infant mortality rates have fallen, life expectancy has increased, more children are immunised and maternal mortality rates are falling

Progress - there has been a lot of progress in terms of training doctors and nurses, building of hospitals, and provision of immunisation and safe water

There is still a lot to do

See table 29.2 P359

Healthcare

Healthcare

Better roads and better public transport – allows children to get to school, adults to get to market and goods to get to potential buyers

Electricity is needed for food preservationGas is needed for cooking

A developed radio and television network - makes it possible for people to link up with and participate in wider communities

Any improvement in infrastructure will improve the well being of the people

Infrastructure

Countries that have political stability are more likely to attract FDI and Aid – may lead to growth and development

Political instability can lead to wars and complete economic breakdown - this will lead to poor economic performance, high levels of poverty and low standards of living

When there is political stability citizens are more likely to have a say – leads to higher living standards

Corruption = dishonest exploitation of power for personal gain

Political stability and lack of corruption

Corruption is prevalent when- governments are not accountable to the peopleGovernments spend large amounts on large investment projectsAccounting practices are not controlledOfficials are not well paidElections are not well controlledLegal structure is weakFreedom of speech is lacking

Corruption hinders growth and Development

Corruption leads to reduction in effectiveness of legal system (people can buy their way out)

Electoral corruption means peoples wishes are not heeded

Corruption leads to an unfair allocation of resources – contracts don’t go to most efficient bidder

Corruption

Bribes increase the costs of business leading to higher prices

Corruption reduces trust in an economy – hard to attract FDI

Increased risk that contracts are not honoured - leads to lack of investment

Officials divert funds to projects that are not in the public interest

Officials turn a blind eye to regulations – don’t care about environment

Funds leave the country – capital flight

Constant paying of small bribes reduces economic well being of ordinary citizens

No way to uphold property rights and so removes theRight to own assetsRight to benefit from assets e.g. rentRight to sell assetsRight to exclude others from using or taking over assets

Investment and growth will be reduced and so economic growth and development will be limited (With no property rights there is no incentive to improve that property) Legal system

Most developing countries have dual financial marketsand so removes theOfficial (big banks that finance established large businesses)Unofficial (illegal who lend to those that are desperate)

Savings are needed for investment but saving is hard when there is poverty and no where safe to save that will give a good returnPeople will buy assets such as livestock or send their money abroad

Financial System

In developing countries poor people find it almost impossible to access traditional banking systemsNo collateralOften unemployedLack savings

Even if there is entrepreneurial spirit they cannot borrow to start up

Micro-Finance may be the answer

Micro finance videosInsert links

Very difficult for governments to collect3% in developing countries60-80% in developed countries

There is little corporate activityOften low tax incentives to encourage FDI

Taxation

Main source is exports, imports and customs duties – country needs to be heavily involved in foreign tradeBeing part of the WTO reduces tariffs

Large informal markets in developing countriesIf incomes are not recorded how can you collect tax?

Problems with administration – inefficiency, lack of information and corruption

If a government finds it difficult to collect taxes it will have less to spend on growth and development objectives

Technology needs to be appropriate for large labour surplusCheap to make and needs labour Provides greater employment than automated systems

AppropriateTechnology

Universal nut sheller – turned by hand and is used to shell nuts

Solar cooker for consumers – aids development because it doesn’t need wood

no loss of treesDon’t need to look

for fire wood – more time for other activities (improves the position of the woman)

Well being of families is improvedBetter informed about health care, hygiene and dietHealthier children lead to healthier adults and a better future workforce

Empowerment of Women

Increasing income levels for women – leads to increases in family welfare (more than an increase in men’s incomes)

The education of the children in the family group improves – pass on their own educationValue educationEducated children have better life opportunitiesLeads to a better quality future workforce

More control over contraception, marry later and have smaller families – lowers population growth

Low levels of income leads to low levels of savings leads to low levels of investment leads to low growth

Income Distribution

The rich dominate politics policies favour the well offNo pro-poor growth

No agreed measures of poverty

The rich consumer foreign goods – does not help domestic economy

Capital flight – rich send their money abroad

Income inequality leads to both poor growth and poor development

Using examples wherever possible, explain how each of the following can contribute to economic development1. Education2. Property Rights3. The use of appropriate technology4. Access to Credit5. Women’s empowerment