Unit 4.

9 Barriers to economic development

What you should know by the end of this chapter

Economic barriers:
• Dependence on the primary sector production
• Low level of investment
• Inappropriate technology
• Lack of investment in infrastructure
• Indebtedness and capital flight
• Low levels of human capital
• Restricted access to international markets
• The informal economy
Geographical barriers:
• Landlocked countries
• Climate and other environmental barriers
• Diseases
Political / social barriers:
• Weak institutional frameworks
• Inequality
• Political unrest and crime

Economic barriers

Nature of economic barriers

The economic barriers to developments are focused on the supplied side of the economy and the
challenges ELDC’s face in terms of increasing potential output and long run aggregate supply.

We know that economic development is

more than just achieving sustained
economic growth, but evidence suggests
economic development is going to need
long term economic growth. Diagram 4.25
shows how the barriers to economic
development faced by an ELDC might
restrict its growth in potential output.
Instead of reach PPC2 without economic
barriers, the ELDC economy only reaches
PPC1.

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Dependence on primary sector production
ELDCs are often Economies with a high proportion of output and exports based on primary
production. These are often undiversified economies which means an ELDC economy is focused on a
small range of agricultural goods or extracted minerals. For example, agricultural output in Ghana
accounts for 26 percent of GDP and 64 percent Zambia’s exports are copper.

Dependence on the primary sectors acts as barrier to development in the following ways:

• Commodities prices, particularly

in agricultural goods, are
subject to significant price
instability because of supply side
shocks (due to the weather)
combined with relatively price
inelastic demand and supply.
The demand for commodities is
price inelastic because they are
often used to produce necessity
goods such as food and energy.

The supply of commodities tends to be inelastic because of growing seasons and mining
capacity (oil, for example, can only be extracted so quickly from a well). Diagram 4.26 shows
how inelastic demand and supply makes a commodity price for a good such as cocoa so
unstable.
• Goods produced from agriculture and mining are often necessities whose demand does not
grow strongly when world incomes rise. They have a low income elasticity of demand
relative to manufactured goods. By specialising in commodities an ELDC is limiting their
potential for economic growth relative to countries with strong manufacturing and service
sectors where demand tends to increase as world incomes rise.
• Over specialisation brings risk if the demand for a commodity decreases. Oil producing
countries like Iran, Venezuela and Saudi Arabia have experienced large falls in export
revenues when the world price of oil has fallen.

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Rate of in Investment
A crucial driver of economic growth and development is investment in capital. Increasing the
quantity and quality of machines, equipment and buildings raises a country's productivity and this
increases potential output. In ELDCs a lack of investment is a significant barrier to economic
development. Rates of investment in ELDCs are low relative to MEDCs for the following reasons:

• Low incomes in ELDCs

leads to a low savings
ratio which reduces the
funds available to the
banking sector to lend
to businesses for
investment.

This is one type of poverty cycle and is shown in diagram 4.27. A poverty cycle is 'feedback'
loop a country experiences which maintains the level of poverty it experiences.
• Many ELDCs do not have the financial markets needed by businesses to long term finance.
The financial markets in MEDCs are able to raise funds for industry through selling shares
and bonds. Without these long-term sources of finance firms in ELDCs cannot access the
funds needed to fund long term investment projects.
• If an ELDC has political or economic problems, then the business environment carries
significant risks for businesses, and they are less likely to invest in these situations. The
current challenges face by Venezuela are an example of an environment which is not
conducive to investment.
• Extensive government regulation and bureaucracy in some ELDCs makes it difficult and
unattractive for businesses to invest.
• Government investment in public services and infrastructure is limited by a lack of finance
because governments in ELDCs find it difficult to raise funds through through ineffective tax
systems. Low levels of income and profits also limit the taxes governments in ELDCs can
raise from households and firms.

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Appropriate technology
Definition

Appropriate technology is capital that can be used increase the standard of living without excessive
exploitation of resources, and to use sustainable materials appropriate to the cultural aspects of an
ELDC.

Example

An example of appropriate technology would in the Rangpur district of Bangladesh where 4,000
solar power units have been used to provide electricity for 20,000 people.

Inappropriate technology

An aspect of investment as a barrier to economic development is the use of inappropriate

technology. Inappropriate technology would be to supply farming equipment to agricultural
producers that is unsuitable for local farmers. For example, fertiliser and seed preparation
technology was not adopted by farmers in Ghana because they had not received specific training
needed to applying these farming techniques.

Lack of investment in infrastructure

An important part of economic
development in a country is for
households and business to have a
framework of infrastructure that supports
their activities. This means effective:
transport connections, energy and water
supplies, telecommunications and internet
services and buildings for commercial and
residential use. For many ELDCs the lack of
investment funds means their
infrastructure is not developed enough to
support economic development.

Indebtedness and capital flight

One source of funds for investment ELDCs is through external debt. Governments and businesses in
ELDCs borrow money from banks and businesses in MEDCs. This is an effective source of finance for
investment, but it becomes a problem when the external debt gets to large for the ELDC to manage.
If there is an outflow of funds from the economy in repayments and in interest payments this has a
negative effect on the ELDC's balance of payments current account. When a country becomes
heavily indebted it can lead to a debt crisis when there are large withdrawals of money from the

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economy. This is called capital flight. Liberia, for example, has very significant external debt which is
a major constraint on its development.

Levels of human capital

The availability and skills of the working population are crucial is facilitating economic growth and
economic development. An ELDC would like to have a mobile, skilled labour force with the right
investment in appropriate technology to achieve the level of productivity needed for sustained
economic development. However, ELDCs are often constrained by the following aspects of human
capital:

• Poor levels of primary and secondary education which mean young people do not develop
the basic skills needed to make them productive in the labour market. Poor level of literacy,
for example, mean workers are limited to the roles they can do in a business.
• High rates of population growth in ELDCs mean many of these countries have young
populations. This can limit the number of workers available for managerial positions which
are important is raising productivity levels.
• Poor transport systems can reduce the mobility of the labour force.
• Many ELDCs have poor levels of
healthcare which makes the
workforce less productive. This
can be in terms of the low
productivity of workers who are
in poor health, but also workers
cannot be as productive if they
are looking after dependants
who unwell. Diagram 4.28
shows how low levels of labour
productivity limit potential
economic growth and prevent
the supply side of the economy
from reaching LRAS2.

Access to international markets

Many ELDCs struggle to access international markets because of protectionism by MEDCs. In
agriculture, for example, farmers in the EU and the US are heavily protected by their respective
governments through the use of tariffs, quotas and subsidies. Without access to international
markets the export potential of ELDCs is limited and this restricts their growth potential.

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The informal economy
The informal economy in an ELDC is generally made up of many small operations that work outside
the normal legal framework of business. Informal businesses range from single person service
enterprises such as cleaners, gardeners and street sellers to larger, illegal operations that deal in
drugs.

The informal economy can act as a barrier to economic development in the following ways:

• Their operations do not pay tax and do not provide funds to improve public services and
infrastructure.
• They tend to be and stay small operations so they do not develop the economies of scale
needed to increase the efficiency and productivity of the economy.
• Informal firms can take potentially skilled workers away from formal organisations, where
they are less likely to train their workers to make them more productive.
• Because the informal economy attracts some illegal activity like drug dealing it takes time
and resources away from the police. Markets like illegal drugs also have a negative effect of
welfare in society.
• Informal markets that involve activities such as recreational drugs are often associated with
significant negative externalities which area barrier to economic development.

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 Geographical barriers
Landlocked countries
Landlocked countries have no direct access to the sea. Africa has 16 landlocked countries including:
Botswana, Ethiopia, Niger and Rwanda, etc. Being a landlocked country can be a barrier to economic
development in terms of:

• A lack of access to fishing and other ocean-based industries such as tourism and shipping.
• Because landlocked countries do not have ports it increases transportation costs for
businesses.
• It means a landlocked country is dependent on the free movement of goods through
neighbouring countries which could be interrupted by political conflict and poor travel
conditions.

Climate other environmental barriers

Many ELDCs are located in regions that experience consistently high temperatures for a large
proportion of the year. They are also countries that are susceptible to volatile, extreme weather
events like cyclones and droughts. Other environmental challenges involve events like earthquakes
and tsunamis. Climate and environmental factors can lead to the following barriers to economic
development:

• Supply side shocks negatively affect aggregate supply in the economy which reduces
output and increases prices.
• The threat of supply side shocks increase risks for investors and this reduces long term
investment.
• High temperatures and unstable weather can have a negative impact on labour productivity
particularly if capital cannot used effectively in this type of environment.
• Droughts and rainy seasons can have a negative effect on agricultural productivity.

Diseases
We have already dealt with the impact poor health can have on labour productivity, but diseases
that can be more prevalent in ELDCs can be a significant barrier to development when you consider
them in the light of an under-funded healthcare system. The impact of the Covid 19 crisis in India,
Brazil and South Africa is an example of this. Liberia and Sierra Leon were particularly badly affected
by Ebola crisis that impacted on east Africa in 2015. Diseases that have a negative affect on the
supply side and demand side of the economy are a barrier to development.

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 Political and social barriers
The political and social environment are influential in affecting to economic development and when
this environment does not function effectively, it is a significant barrier to development.

Weak institutional frameworks

The key institutions in a country that provide effective governance are the legal system, the
political system and the financial system. These three institutions will act as a barrier to
development if they are not governed effectively to support economic development. Ultimately a
country needs to have well-supported, stable government to deliver economic development.

Legal system
If individuals and organisations are treated unfairly by the law then they will not trust the legal
system and its will not work to support economic development. This is particularly true when there
is corruption in the legal system, and it favours certain individuals and groups. An example of this
would be businesses setting up production being treated unfairly in the process, so entrepreneurs
do not have the confidence to set up and produce goods and services that create jobs and increase
the national income. This legal system is particularly important when assigning property rights to
individual and businesses. If entrepreneurs cannot own the land where their business operates it
makes it much more difficult for them to set up and produce.

Political
The political system needs to produce governments that the majority of the country support to
fulfil their policy agenda. For many people this is produced by an effective democratic process. If
elections are corrupt and poorly managed, then this can deliver ineffective governments. Without a
political system that delivers effective government the other elements of the institutional
framework are unlikely to work to deliver economic development.

Zimbabwe is a country that has been governed

poorly by successive presidents, Robert
Mugabe and Emmerson Mnangagwa and the
economic consequences of this have been
falling real GDP and hyperinflation.
Zimbabwe's political environment has been a
significant barrier to its economic
development.

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Financial
In order for an LEDC to develop an industrial base it needs to be able to access funds for
investment in capital. We have already touched on this under economic barriers. Many ELDCs have
problems with their financial systems when they are corrupt and favour individuals with power and
influence. If a wide base of ordinary people can access loans from banks this will facilitate
entrepreneurship in the economy which will deliver the growth that gives economic development. If
households and businesses cannot access finance this will be a barrier to development. The Global
Coalition against corruption sited the Democratic Republic of Congo has one of the most corrupt
countries to do business in the world.

Inequality
Inequality on the basis of ethnicity, gender, religion and social status can hinder economic
development. If individuals and households are not treated equally in terms of work, education,
property, the law and finance then large groups of society cannot engage in the process of creating
income and employment as well as paying tax to fund government services. Inequality also conflicts
with one of the key aims of development.

Political unrest and crime

Countries suffering from political unrest and high rates of crime come up against a significant
barriers to economic development. It is very difficult for businesses to operate, attract finance,
trade and be productive against the backdrop of civil unrest or a civil war. Countries such as
Afghanistan, Yemen Syria and Iraq have struggled to make any progress with economic development
because of the unrest in their countries.

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