Factors that Affect Growth & Development (AQA A Level Economics)

Factor 

Explanation

Investment 

• Higher savings result in higher investment & economic growth. It is believed that as economies develop, savings increase
  • Increased savings → increased investment → higher capital stock → higher economic growth → increased savings
  • If the dependency ratio is high, it means there is less money available for savings & investment

Education and training

• High levels of education and training increases productivity
• Investing in supply-side policy to improve health and education increases the potential output of the country (shifts the production possibility frontier outwards)

Healthcare

• The level of health directly impacts productivity of labour
• Productivity influences output & income
• Developed economies tend to have healthy workforces
• The less developed the economy, the more sickness & disease there is

Barrier 

Explanation

Corruption

• Aid or revenue intended for investment can be used by corrupt politicians, resulting in a lower level of investment
• Corruption diverts funds to certain groups that have bribed or lobbied officials (e.g. multinational firms) resulting in projects that deliver a low level of growth and development

Institutional factors

• If government institutions are not functioning, it can be a barrier to growth and development. This includes:  
  
  • The certainty of a strong legal system attracts investment and builds confidence in an economy
  • A lack of property rights prevent household assets being used to secure loans or generate income in developing countries 
  • A progressive tax system redistributes from those with higher income to those with lower income and reduces income inequality
  • Sometimes the benefits of a good progressive tax system are eradicated by weak tax collection and tax enforcement

Lack of infrastructure 

• Good infrastructure reduces business costs and attracts foreign direct investment
  • This is one reason why China has invested so heavily in infrastructure projects in Asia and Africa as it unlocks economic potential
  • Some developing countries have such poor infrastructure which makes it difficult to generate economic activity

Human capital 

• Low levels of education and healthcare reduce [popover id="DTxVl4QEb1cQKxdb" label="productivity"] 
• Investing in supply-side policy to improve health and education increases the potential output of the country (shifts the production possibility frontier outwards)

Governance 

• Poor governance leads to inefficient use of resources and poor decision-making
  
  • Eg. In Venezuala, the economic crisis, combined with poor governance and corruption caused skilled labour to migrate abroad 
• If governments keep changing, it results in constantly changing policies & priorities 
• E.g political instability and conflict in Afghanistan has reduced confidence in the economy & international investors are slower to invest as they are fearful of losing their investment

Geography

• It is harder for landlocked countries to generate economic growth
• Often transportation and administration costs are higher than those with access to ports, which increases the costs of production & decreases international competitiveness
• Natural terrain can also be a limiting factor e.g the arid, mountainous terrain of Pakistan

 Primary commodities 

• A barrier to growth occurs if country is too dependent on a narrow range of primary commodities
• In 2020, 25% of Bolivia's GDP was generated by exports. Commodities accounted for 60% of its exports
  • When commodity prices rise, GDP rises - and vice versa
• A more diversified range of exports prevents this