Factor
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Explanation
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Dependency on the primary sector
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- In 2022 copper exports from Zambia accounted for 70% of their total exports & primary products in excess of 90%. They are suffering from over-specialisation
- Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less-than-proportional increase in demand
- This means that there is limited scope to continue increasing demand
- Primary products have very little added value
- Exporting manufactured products raises the added value, income & profits
- Due to the inelastic nature of both the demand & supply of commodities, small changes in demand or supply can lead to large changes in price, meaning that prices can be volatile
- When commodity prices rise, GDP rises - & vice versa
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Rising income inequality
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- A more equal distribution of income means that more households are able to consume a wider range of goods
- Economies with a smaller medium-income band face less consumption which leads to less aggregate demand and less economic growth
- Rising income inequality worsens the problem as the rich get richer and the poor, relatively poorer
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Lack of access to international markets
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- International trade is a significant source of economic growth and higher incomes, leading to economic development
- Many countries cannot access more economically developed markets due to the trade barriers put in place by developed economies to protect their firms
- The World Trade Organisation (WTO) aims to increase trade liberalisation so as to improve access for all countries
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Informal economy
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- Workers in the informal economy are not taxed on their wages
- The lack of tax revenue reduces the provision of infrastructure, merit and public goods
- Many developing countries have a larger informal than the formal economy
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Capital flight
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- Occurs when money or assets rapidly leave a country
- This may happen due to political upheaval, economic sanctions, war, or changes to government policy (e.g. interest rates)
- Sanctions applied to Russia in 2022 resulted in $75 billion of capital outflows
- Capital flight reduces the money available for investment, reducing growth & development
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Indebtedness
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- The higher the level of borrowing from institutions like the International Monetary Fund (IMF), the higher the monthly repayments
- Repaying debt reduces the money available for investment and expenditure on merit and public goods
- The higher the debt the worse the potential economic growth
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Lack of access to infrastructure & appropriate technology
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- Good infrastructure reduces business costs & attracts foreign direct investment
- Some developing countries have such poor infrastructure which makes it difficult to generate economic activity
- This is one reason why China has invested so heavily in infrastructure projects in Asia & Africa as it unlocks economic potential
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Low levels of human capital
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- Low levels of education and healthcare reduce productivity
- Investing in supply-side policy to improve health and education increases the potential output of the country (shifts the production possibility frontier outwards)
- Higher education/skill levels → higher human capital → increased productivity → higher output → higher economic growth → higher income
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Geography including landlocked countries
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- Geographic features can limit economic growth
- Landlocked countries find it harder/more expensive to import and export products (shipping freight is much cheaper than air freight)
- Natural features such as deserts reduce the quantity of productive land that can be used to generate output and economic growth
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Tropical climates and endemic diseases
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- Tropical climates are often associated with debilitating diseases such as malaria or dengue
- These reduce the productivity and output of the workforce and limit/reduce economic growth
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