Economic Factors

Primary Product Dependency

Over-reliance on commodities such as oil or copper can hold back development.

• Low income elasticity of demand may limit export revenue growth.
• Price volatility creates unstable incomes and GDP.
• Commodities often have low value added compared with manufactured goods.

Savings Gap

The Harrod-Domar savings gap suggests that low savings lead to low investment and therefore low growth.

This can trap developing economies in a cycle of underdevelopment.

A criticism is that the model is simplistic because it ignores productivity, human capital, and institutions.

Foreign Currency Gap

A lack of foreign exchange, caused by weak exports or heavy debt repayments, limits the ability to import capital goods and technology.

Capital Flight

Capital flight is the rapid outflow of money and assets due to instability, reducing funds available for domestic investment.

Infrastructure Deficit

Poor transport, energy, and communication networks raise costs for businesses and deter investment.

Access to Credit and Banking

Weak financial systems limit the mobilisation of savings and make it harder for firms, especially SMEs, to invest and grow.

Education and Skills

Low levels of education and training reduce productivity and make it harder to adopt new technologies.

Demographic Factors

A high dependency ratio, where many young or old people depend on each worker, can reduce savings potential and limit growth.

Non-Economic and Institutional Factors

• Corruption: Diverts resources away from productive investment, distorts decisions, and raises costs.
• Poor governance and political instability: Create uncertainty, deter foreign investment, and lead to inefficient resource use.
• Conflict and war: Destroy physical capital, disrupt production, and can set back development for decades.
• Absence of property rights: Weakens investment incentives and limits the use of assets as collateral for loans.
• Geography: Being landlocked or having difficult terrain can raise transport costs and reduce trade competitiveness.

The Relationship Between Growth and Development

Growth is usually necessary but not sufficient for development.

An economy may experience rising GDP without genuine development if the benefits are not widely shared or if growth causes environmental or social harm.

Development requires growth that is:

• inclusive, reducing poverty and inequality
• sustainable, especially environmentally
• broad-based, with a more diversified economy

Evaluation and Application

These factors are deeply interconnected. For example, corruption can worsen governance, which then deters investment and makes the savings gap harder to close.

There can also be two-way causation. Better development outcomes, such as stronger education systems, may reduce corruption and improve institutions over time.

A country's development path is unique, so there is no single formula for success. However, institutional quality, including good governance and the rule of law, is often seen as a fundamental prerequisite.

Policy responses should address the root causes. For a commodity-dependent economy, diversification and investment in human capital may be key. For an economy suffering capital flight, political stability and property rights may matter most.

Exam Preparation