In this short video, we look through some KAA and evaluation paragraphs relating to this question: "Examine the barriers that hold back the level of economic development."
The first barrier facing developing countries is primary product dependency - this is when the economy is dominated by primary sectors (typically extraction of natural resources such as copper by the Democratic Republic of the Congo). These are typically sectors, where there is little opportunity for value added in processing and manufacturing. Technological advancement means that these industries are capital intensive, reducing the need for a large local workforce and limiting the need for investment in human capital. Workers in these industries often earn very low wages which limits progress in reducing extreme poverty.
However, the extent to which primary product dependency is harmful to development depends on the quality of governance and state capacity. For instance, states can act to diversify the economy using the windfall revenues and profits from primary products in the good years by investing in a Sovereign Wealth Fund (e.g. Norway) and a Stabilisation Fund set up by Ghana. Diversification also means that the workforce can work in industries with greater value added, such as the processing of oil, coffee and copper which will result in higher wages and per capita incomes and consumption which promotes development.
A second barrier to development is capital flight. This is when there is rapid, large-scale exit of financial capital due to a reduction in confidence. The exit of financial capital reduces the supply of loanable funds which then reduces access to credit of firms and governments. The resulting increased interest rates reduces borrowing by government and individuals. As a result, capital flight can lead to a fall in investment causing a contraction in AD, and thus an increase in demand deficient unemployment as GDP growth slows and firms are left with more spare capacity.
The extent to which capital flight poses a risk to development is dependent on how reliant countries are on liquid forms of capital inflows such as hot money/portfolio investment. This occurs when they are unable to attract FDI which is more stable and less susceptible to changes in investor sentiment. This is a problem that particularly affects lower-income countries. Additionally, developing nations without large foreign currency reserves will be affected from capital flight, as a central bank will be unable to defend the currency from depreciating.
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