Growth and Development Factors

1. Which factor is binding varies from country to country, so the same barrier rarely constrains every economy equally.
2. The factors reinforce one another, so weakness in one area deepens weakness in others and can lock an economy into a poverty trap.

Primary Product Dependency

1. Commodity prices are volatile because supply (harvests, discoveries) and demand shift sharply while supply is price-inelastic in the short run, so small shifts cause large price swings.
2. A fall in a key commodity price cuts export revenue and government income at short notice, as when copper prices fall for Zambia or oil prices fall for Nigeria.
3. Primary products tend to have low income elasticity of demand, so world demand grows slowly as incomes rise; combined with rising demand for manufactured imports this worsens the terms of trade over time (the Prebisch-Singer hypothesis).

The Savings Gap and Harrod-Domar

$$growth\; rate=\frac{savings\; ratio}{capital-output\; ratio}$$

1. Poor households can save little, so domestic savings are low, which limits the funds banks can channel into new capital and holds the growth rate down.
2. Because growth rises with the savings ratio, raising savings or attracting external funds directly raises predicted growth, which is why closing the savings gap is central to development.
3. Access to credit and banking, microfinance such as the Grameen Bank in Bangladesh, and foreign direct investment can supplement domestic savings and lift the savings ratio.
4. This is the core case for aid and FDI: by adding to the savings available for investment they raise the savings ratio, and a higher savings ratio over an unchanged capital-output ratio implies faster growth.

Foreign Currency Gap and Capital Flight

1. Weak exports and heavy reliance on imported capital goods mean foreign-exchange earnings fall short of import needs, forcing cuts to investment or more borrowing.
2. Capital flight drains the pool of funds available for domestic investment and typically follows political instability or fear of a currency collapse, deepening the shortage just when finance is most needed.

Debt

1. Servicing a large debt crowds out public spending on health, education and infrastructure, slowing both growth and development.
2. Debt taken on in foreign currency becomes harder to service if the exchange rate falls, because each unit of domestic currency buys less foreign exchange, raising the real repayment burden.
3. Debt relief, for example under the IMF and World Bank Heavily Indebted Poor Countries initiative, frees resources for development spending.

Infrastructure and Education

1. Unreliable power, poor roads and congested ports raise business costs and limit trade, lowering productivity and deterring both domestic and foreign investment.
2. A workforce with weak education and skills has low human capital, which reduces productivity and slows the adoption of new technology, keeping output per worker low.

Property Rights

1. Without secure ownership, households and firms have little incentive to invest in or improve assets they could lose.
2. Insecure title also stops assets being used as collateral for loans, leaving potential wealth as dead capital that cannot finance investment.

Demographic Factors

1. Rapid population growth dilutes capital per worker and strains resources, holding back income per head.
2. Both very young and ageing populations raise the dependency ratio and strain public finances, as fewer workers support more dependants.
3. A large working-age share can deliver a demographic dividend if those workers are educated and productively employed, as India hopes to achieve.

Non-Economic Factors

1. Corruption diverts resources from productive use and weakens trust in the state, raising the cost and risk of doing business.
2. Poor governance and a weak rule of law deter investment and undermine long-term planning.
3. Armed conflict destroys capital, displaces people and can set development back by years, as in the Democratic Republic of Congo.
4. Geography and disease, such as being landlocked or facing high rates of malaria or HIV, can further limit growth.

Which factor most constrains development?

1. It can be capital: in the poorest economies a low savings ratio is the binding constraint, so through Harrod-Domar external funds from aid or FDI can unlock faster growth.
2. But institutions may matter more: without property rights, good governance and the rule of law, extra capital is wasted or stolen, which is why some resource-rich states stay poor.
3. On balance it depends on context: the most binding constraint differs between economies, and because the factors interact in a poverty trap, tackling only one may not be enough.