Limitations of Growth Essay (30 marks) Evaluate four major barriers to growth and development experience by LEDCs  Many developing countries find they are caught in the poverty trap for a number of reasons. They are ‘trapped’ in poverty cycle due to a constant cycle of low level of education, health care and human capital, which leads to low productivity, income, savings, investment and finally, economic growth. See diagram below; This essay will discuss the following four limitation of growth; lack of infrastructure, human capital inadequacies, primary productive dependence and corruption.
Many LEDCs have a lack of infrastructure, such as electricity, a reliable water supply and tele-communications. Poor infrastructure may be due to a lack of government spending due to various reasons, such as corruption or civil war – another limitation of growth in itself. A lack of infrastructure impacts growth because it means no one will want to invest in the country due to the extra costs incurred (i. e. transportation costs). Lack of FDI means the circular flow of income cannot be improved from overseas investment. As a result, AD cannot expand, and in the long-term will decrease (AD1-AD2) – which limits economic growth.
Even in the UK, infrastructure needs to be constantly improved in order to maintain productivity and competitiveness. India has one of the worst infrastructures in the world (86th of out 139 for overall quality). Unless this is improved, India cannot reach growth above 9%. Infrastructure is extremely expensive and requires large amounts of capital. The government would need to be prepared/able to invest large amounts. Countries with a savings gap (difference between planned saving and planned investment) won’t be able to do this. However, a lack of infrastructure doesn’t limit growth in all countries.
Afghanistan for example is rich in raw materials. Oil TNCs will not be put off from the lack of infrastructure due to the value of oil. The next limitation of growth is human capital inadequacies. This is the lack of education and training that is given to the labour force. As a result, they are not specialised or informed of ways to do different jobs. Therefore, labour becomes unproductive compared to other countries. If labour is uneducated, it can’t be used to its full potential, which affects AS and ultimately hinders economic growth. As a result, FDI is unlikely to invest as workers are unproductive and training is expensive.
For the same reason, the government isn’t willing to invest in education as costs are high and results can only be seen in the long term. This conflicts with short-term political interests. For example, in Ethiopia the total adult literacy rate is 36%. Even though there are educational institutions, children are unable to utilise them. Instead, they are sent off to work to support their families and miss out on education and remain illiterate. When they are older, they have their own family, have no time to be educated and the cycle continues.
This results in human capital inadequacies due to a reduced working population. The working population also suffers, so there is a loss of highly skilled workers. Zambia now loses 2/3 of teachers to AIDS. This causes the PPF to shift in from PPF1-PPF2 as the potential output of the economy falls due to a loss of labour. Human Capital issues results in unemployment or subsistence farming as there is a lack of investment. This means the country gets stuck in stage 1 of the Rostow’s Model. There is also the effect of the negative multiplier.
Unemployment pushes consumption down, and subsequently AD, hindering growth. Another evaluative point is that in many LEDCs, HIV and AIDs epidemics means adults are sometimes unable to work, pull children out of school and are forced to work. Therefore, even though there is the opportunity of education, many unable to benefit from it. The third limitation of growth is primary product dependency. LEDCs are know to rely on the primary sector – much of which is subsistence farming. The value of which is low and therefore locals don’t make much money, which can lead to many implications.
AD is affected because the poor rely on subsistence farming and therefore their low income means they spend less in the local economy, reducing consumption. AS is affected due to the risk of natural disasters impacting such industries can easily push down AS (i. e. supply shocks). An example is Mozambique, which relies on sugar production for much of its trade and development. However, flooding in 2000 spoilt nearly all of their crops and as a result, AS contracted significantly, shifting from AS1-AS2. Here the effect of the negative multiplier takes place.
Families depend heavily on income from one source. As a result of the sudden reduction in supply, they will have no money, which may lead to starvation and malnutrition. The fourth limitation of growth is corruption, as mentioned before. Zimbabwe was ruined by Robert Mugabe, a country that was once one of Africa’s richest. He redistributed land, removed skilled and knowledgeable white farmers with no compensation and replaced it to supporters of his party, who had little or no knowledge of how to farm the land. This lead to a drastic loss of agricultural output in the country, causing AS to decline.
He also printed money, which lead to hyperinflation and people’s life savings suddenly became worthless. Having said this, corruption is present in many governments, but doesn’t necessarily mean it’s a problem. Many fairly successful countries have very corrupt systems in place. For example, in India it is acceptable for bribes to take place when doing banking transactions, such as student loans. This doesn’t stop India from enjoying rapid economic growth. Countries that have been unable to grow face a number of limitations as they are interlinked. As discussed above, corruption may be the cause of human capital inadequacies and so on.