5.3 Barriers to economic growth and/or development

1. 5.3 Barriers to economic growth and/or development • Povertymay be seen as the collective condition of poor people, or of poor groups, and in this sense entire nation-states are sometimes regarded as poor. To avoid stigma these nations are usually called developing nations. • When measured, poverty may be absolute or relative poverty.

2. 5.3 Barriers to economic growth and/or development• • Absolute poverty refers to a set standard which is consistent over time and between countries. An example of an absolute measurement would be the percentage of the population eating less food than is required to sustain the human body (approximately 2000-2500 calories per day).

3. 5.3 Barriers to economic growth and/or development • Relative poverty, in contrast, views poverty as socially defined and dependent on social context. One relative measurement would be to compare the total wealth of the poorest one-third of the population with the total wealth of richest 1% of the population.

4. 5.3 Barriers to economic growth and/or development • The World Bank defines poverty in absolute terms. The bank defines extreme poverty as living on less than $1a day US (PPP), and moderate poverty as less than $2 a day. • It has been estimated that in 2001, 1.1 billion people had consumption levels below $1 and 2.7 billion lived on less than $2.

5. 5.3 Barriers to economic growth and/or development Even if poverty may be lessening for the world as a whole, it continues to be an enormous problem: • One third of deaths - some 18 million people a year or 50,000 per day - are due to poverty-related causes. That's 270 million people since 1990, the majority women and children, roughly equal to the population of the US. • Every year nearly 11 million children die before their fifth birthday. • In 2001, 1.1 billion people had consumption levels below $1 a day and 2.7 billion lived on less than $2 a day • 800 million people go to bed hungry every day.

6. Percentage population living on less than 1 dollar day 2007-2008

8. The percentage of the world's population living on less than $1 per day has halved in twenty years. However, most of this improvement has occurred in East and South Asia. The graph shows the 1981-2001 period.

9. Poverty cycle • The cycle of poverty is the "set of factors or events by which poverty, once started, is likely to continue unless there is outside intervention.” • A poverty trap is any linked combination of barriers to growth and development that forms a circle, thus self-perpetuating unless the circle can be broken. • A poverty cycle is also sometimes known as a development trap.

10. Poverty cycle • The cycle's of poverty has been defined as a phenomenon where poor families become trapped in poverty for at least three generations. These families have either limited or no resources. There are many disadvantages that collectively work in a circular process making it virtually impossible for individuals to break the cycle. This occurs when poor people do not have the resources necessary to get out of poverty, such as financial capital, education, or connections. In other words, poverty-stricken individuals experience disadvantages as a result of their poverty, which in turn increases their poverty. This would mean that the poor remain poor throughout their lives. This cycle has also been referred to as a "pattern" of behaviors and situations which cannot easily be changed.

11. Poverty cycle

12. 5.3 Barriers to economic growth and/or development Main categories • Institutional and political barriers • International trade barriers • International financial barriers • Social and cultural factors acting as barriers • Poverty cycle

13. Institutional and political barriers • Insufficient provision of education • Insufficient health care systems • Lack of infrastructure • Weak institutional framework • The legal system • The financial system

14. Institutional and political barriers • Ineffective tax structure • Lack of property rights • Formal and informal markets • Political instability • Corruption • Unequal distribution of income

15. Insufficient provision of education • The UN’s Millennium Development Goals • GOAL 2:ACHIEVE UNIVERSAL PRIMARY EDUCATION • “Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling”

16. Insufficient health care systems • The UN’s Millennium Development Goals • Reduce Child Mortality • Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate • Improve Maternal Health • Reduce by three quarters, between 1990 and 2015, the maternal mortality ratio • Combat HIV/AIDS, Malaria and Other Diseases

17. Lack of infrastructure • Transport: roads, railways, seaports, airports, public transport, pavements • Public Utilities: electricity, gas, water supply, sewer • Public services: police, fire service, education, health, waste management • Communication service: postal, telecommunication, radio, television

18. Weak institutional framework • The legal system • Property rights allow people to own and benefit from private property, so long as the law supports them. (Pirates) • The Financial system • The difficulties associated with saving and borrowing money are a significant barrier.

19. Ineffective tax structure • It is estimated that less than 3% of the population in developing counties pay income tax, as opposed to 60%-80% in developed countries. • Why its difficult: • Because of tax exemptions and inefficient or corrupt administration • Corporate tax revenue tends to be low • Unless the country is engaged in trade its hard collect much revenue from imports, exports and custom duties.

20. Lack of property rights • Property rights can be considered a “basket” of legal rights. • The right to own assets, such as land or buildings • The right to establish the use of our assets • The right to benefit from assets, such as renting out land • The right to sell our assets • The right to exclude others from using or taking over our assets

21. Formal and informal markets • The size of informal markets as a percentage of GDP in developing countries is greater than in developed countries. • Informal markets tend to have much lower tax revenue for governments to be able to use for development. • Workers tend to be unprotected and are poorly paid • Little job security, poor working conditions and no social care. • Productivity tends to be low as workers are often low-skilled migrant with little education

22. informal sector • The informal sector is economic activity that is neither taxed nor monitored by a government, and is not included in that government's Gross National Product (GNP), as opposed to a formal economy. • Although the informal economy is often associated with developing countries, where up to 60% of the labor force (with as much 40% of GDP) works, all economic systems contain an informal economy in some proportion.

23. Political instability • Political instability causes uncertainty and can lead to complete economic breakdowns. • The likelihood of attracting foreign investment or even aid becomes much smaller. • A number of developing counties are experiencing civil war as a result of ethnic and/or religious conflict or boarder conflict.

24. Corruption • Corruption is defined as the dishonest exploitation of power for personal gain. • It tends to be most prevalent where: • Govts are not accountable to the people, especially military Govts • Govts spend large amounts on large-scale capital investment projects • Official accounting practices are not well formulated or controlled

25. Corruption • Govts officials are not well paid • Political elections are not well controlled, or are non-existent • The legal structure is weak • Freedom of speech is lacking

26. Corruption • Global Corruption Report 2009 • Corruption Perceptions Index 2009 • Transparency International

27. Unequal distribution of income • There tends to be low levels of savings, because the poor save a very small proportion of their income. • The rich tend to dominate both politics and the economy. • Developing countries tend to be marked by the rich moving large amounts of funds out of the economy (capital flight).

28. International trade barriers • Overdependence on primary products • Consequences of adverse terms of trade • Consequences of a narrow range of exports • Protectionism in international trade

29. Overdependence on primary products • The issue of commodities and development, is far more complicated than just the price levels. And it is further complicated by the new phenomenon of competition for use of agricultural products for fuel. The bottom-line for commodity dependent countries, including many in Africa, is the lack of control and predictability, as prices fluctuate and commodity markets are increasingly monopolized by large-scale companies. Without some kind of check on markets and large producers, the chances for breaking reliance on commodities and entering higher-value sectors of production are very low.

30. Overdependence on primary products • Advantages of Producing Primary Products • Will have a comparative advantage in producing • Important source of export revenue • Creates Jobs • Disadvantages of Relying on Primary Products • Prices are Volatile due to inelastic demand. e.g a fall in price of primary product would lead to a fall in revenue. • Limited resources. One day they may run out of its primary products and the economy will be vulnerable to this lack of diversification • Discourages investment in other aspects of the economy. • Concentrating on primary products does not help the long term development of an economy because there is a lack of investment in other aspects such as education. Comparative advantage can change over time

31. Consequences of adverse terms of trade • If prices in the primary products falls then the country could experience a deteriorating terms of trade. Current account deficits will increase and it will be very difficult for countries to finance current expenditure and necessary imports.

32. Consequences of a narrow range of exports • These countries face great vulnerability and uncertainty. • Countries that are reliant on tourism revenue, for example will be limited if developed countries go into economic recession, local terrorism, environmental events.

33. Protectionism in international trade • Protectionist measures by develped countries against the exports of developing countries may be very harmful. If the measures prevent developing countries from utilizing their comparative advantages and exporting to developed countries, then developing countries will be limited in their ability to earn foreign exchange.

34. International financial barriers • Indebtedness • Non-convertible currencies • Capital flight • Brain Drain

35. Indebtedness • Developing countries' debt is external debt incurred by the governments of Third World countries, generally in quantities beyond the governments' political ability to repay. "Unpayable debt" is a term used to describe external debt when the interest on the debt exceeds what the country's politicians think they can collect from taxpayers, based on the nation's Gross domestic product, thus preventing the debt from ever being repaid.

36. Indebtedness • Some of the current levels of debt were amassed following the 1973 oil crisis. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC funds deposited in western banks provided a ready source of funds for loans. While a proportion of borrowed funds went towards infrastructure and economic development financed by central governments, a proportion was lost to corruption and about one-fifth was spent on arms.

37. Heavily Indebted Poor Countries • Heavily Indebted Poor Countries(HIPC) are a group of 40 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank.

38. Problems with debt repayment • Indebtedness does not allow savings and consequently investment in human capital and infrastructure • Borrowing from overseas requires interest payments, restricting investment in human capital and infrastructure • Interest repayments divert funds from the health care system resulting in the inability to “address infectious disease” as a primary concern

39. Problems with debt repayment • High levels of debt discourage future loans as countries are less willing to lend to heavily-indebted LDC’s • Loss of freedom to determine national economic and social policies • Effects on domestic resource allocation ex. Need for cash crops • Diversion of export earnings into debt repayment

40. Non-convertible currencies • Many developing countries have non-convertible currencies. These can only be used domestically and are not accepted for exchange on the foreign exchange markets. Most developing countries operate a fixed exchange rate system where the domestic currency is pegged to a more acceptable currency, often the US dollar.

41. Non-convertible currencies • Non-convertible currencies means that trade is less likely to occur. They are often over-valued at their official, pegged, exchange rate. This usually means that a black market will arise.

42. Capital flight • Capital flight, occurs when assets and/or money rapidly flow out of a country, due to an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength. This leads to a disappearance of wealth and is usually accompanied by a sharp drop in the exchange rate of the affected country (depreciation in a variable exchange rate regime, or a forced devaluation in a fixed exchange rate regime).

43. Capital flight • This fall is particularly damaging when the capital belongs to the people of the affected country, because not only are the citizens now burdened by the loss of faith in the economy and devaluation of their currency, but probably also their assets have lost much of their nominal value. This leads to dramatic decreases in the purchasing power of the country's assets and makes it increasingly expensive to import goods, pay wages and collect taxes.

44. Brain Drain • Human capital flight (or 'brain drain') is the large-scale emigration of individuals with technical skills or knowledge; it is normally due to conflict, lack of opportunity, political instability, or health risks. Brain drain is usually regarded as an economic cost, since emigrants usually take with them the fraction of value of their training sponsored by the government. It is a parallel of capital flight, which refers to the same movement of financial capital.

45. Social and cultural factors acting as barriers • Religion • Culture • Tradition • Gender issues

46. Religion, Culture & Tradition • Religious beliefs have a strong influence on the culture of a community. Indeed, for many people around the world, religious beliefs are central to their culture and provide the moral codes by which they live. Even where people in the contemporary world believe that the traditional beliefs of their parents and societies are not so relevant to their everyday lives, underlying religious beliefs about human worth and how to relate to other people and the Earth are still important parts of their lives.

47. Religion, Culture & Tradition • Culture is important in the processes of social and economic development. Socially, it provides for the continuity of ways of life that people in a region or country see as significant to personal and group identity. Economically, various forms of cultural expression such as music, dance, literature, sport and theatre provide employment as well as enjoyment for many people. These contribute increasingly large amounts of money to the economies of most countries every year.

48. Religion, Culture & Tradition • In many societies, religious, social and cultural traditions have combined to make the role of women very different to that of men. Typically, they are expected to marry, raise children, work in the home and cultivate family plots of land.

49. Gender issues • For most women in the developing world, access to and control over income, productive assets and decision-making power remains elusive, even as they contribute the lion's share of productive and reproductive labor. Better primary education enrolments and health care services have been undercut in many cases by the HIV/AIDS pandemic; conflicts and fragilities on the continent have exposed women increasingly to gender-based violence, and climate change is weakening the ability of rural populations to subsist. Many women and children are working harder to grow food and collect water and firewood.