Economic, Political & Social Barriers (HL IB Economics)

Revision Note

Types of Economic Barriers

Economic Factors that Influence Growth & Development

Factor	Explanation
Dependency on the primary sector	In 2022 copper exports from Zambia accounted for 70% of their total exports & primary products in excess of 90%. They are suffering from over-specialisation Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less-than-proportional increase in demand This means that there is limited scope to continue increasing demand Primary products have very little added value Exporting manufactured products raises the added value, income & profits Due to the inelastic nature of both the demand & supply of commodities, small changes in demand or supply can lead to large changes in price, meaning that prices can be volatile When commodity prices rise, GDP rises - & vice versa
Rising income inequality	A more equal distribution of income means that more households are able to consume a wider range of goods Economies with a smaller medium-income band face less consumption which leads to less aggregate demand and less economic growth Rising income inequality worsens the problem as the rich get richer and the poor, relatively poorer
Lack of access to international markets	International trade is a significant source of economic growth and higher incomes, leading to economic development Many countries cannot access more economically developed markets due to the trade barriers put in place by developed economies to protect their firms The World Trade Organisation (WTO) aims to increase trade liberalisation so as to improve access for all countries
Informal economy	Workers in the informal economy are not taxed on their wages The lack of tax revenue reduces the provision of infrastructure, merit and public goods Many developing countries have a larger informal than the formal economy
Capital flight	Occurs when money or assets rapidly leave a country This may happen due to political upheaval, economic sanctions, war, or changes to government policy (e.g. interest rates) Sanctions applied to Russia in 2022 resulted in $75 billion of capital outflows Capital flight reduces the money available for investment, reducing growth & development
Indebtedness	The higher the level of borrowing from institutions like the International Monetary Fund (IMF), the higher the monthly repayments Repaying debt reduces the money available for investment and expenditure on merit and public goods The higher the debt the worse the potential economic growth
Lack of access to infrastructure & appropriate technology	Good infrastructure reduces business costs & attracts foreign direct investment Some developing countries have such poor infrastructure which makes it difficult to generate economic activity This is one reason why China has invested so heavily in infrastructure projects in Asia & Africa as it unlocks economic potential
Low levels of human capital	Low levels of education and healthcare reduce productivity Investing in supply-side policy to improve health and education increases the potential output of the country (shifts the production possibility frontier outwards) Higher education/skill levels → higher human capital → increased productivity → higher output → higher economic growth → higher income
Geography including landlocked countries	Geographic features can limit economic growth Landlocked countries find it harder/more expensive to import and export products (shipping freight is much cheaper than air freight) Natural features such as deserts reduce the quantity of productive land that can be used to generate output and economic growth
Tropical climates and endemic diseases	Tropical climates are often associated with debilitating diseases such as malaria or dengue These reduce the productivity and output of the workforce and limit/reduce economic growth

Aside from the economic factors discussed above, a range of non-economic factors can have significant influences on economic growth & development

4-9-2-types-of-political---social-barriers

Political & social factors which hinder growth & development

The institutional framework

This refers to the functions of government including the legal system, law enforcement, banking, tax structures and property rights

Legal system	A strong legal system builds confidence in an economy Legal institutions help to create boundaries that households and firms can operate within This certainty attracts overseas investment This certainty helps to make business easier to conduct leading to higher economic growth
Tax structure	A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality Sometimes the benefits of a good progressive tax system are eradicated by weak tax collection and tax enforcement
Banking system	Lack of access to credit and banking limits economic growth Financial institutions enable individuals & firms to borrow money which can be used for investment or to generate growth A lack of financial institutions prevents this from happening
Property rights	In many countries, the property is the main household asset which can be used to secure loans or generate income A lack of property rights in some developing countries prevents this from happening

Lack of good governance

Leads to inefficient use of resources & poor decision-making. It may also result in laws/regulation which directly inhibits growth & development
Often money intended for investment is siphoned off by corrupt politicians resulting in a lower level of investment. Corruption also diverts funds to certain groups who have bribed or lobbied officials (e.g. multinational firms) resulting in projects that deliver a low level of growth & development

Unequal political power & status

Countries with strong trade union membership provide workers with more power and higher levels of income
With low trade union membership, the exploitation of workers through low wages is easier and income inequality is worse
Countries with a class system are less incentivised to increase economic growth and development in such a way that it removes the class barriers. This limits growth and development

Gender inequality

Gender, race or any other discrimination increases income inequality in an economy leading to lower levels of economic growth
Gender inequality reduces the incentive for women to work and this can mean a loss of productivity to an economy, leading to lower economic growth

Evaluating Barriers to Growth & Development

There are a common set of factors which prohibit economic growth and development, however, each country is unique and is likely to have a different combination of factors which are more prominent
Understanding the context of the country is vital to evaluating how significant the barrier to economic growth is
- E.g. Romania has a history of corruption which has reduced its development significantly when compared to other Eastern European countries
- E.g. India has had infrastructure problems (old rail systems and poor roads) which have limited its ability to grow. To address this weakness, significant government investment has been taking place over the past 10 years and the economy is responding well
- E.g. Malawi is a landlocked country whose exports are primarily agricultural. Agriculture accounts for 30% of its GDP and the cost of export is higher for a landlocked country. This reduces profits and limits economic growth.

Examiner Tip

The data response in paper will frequently have extracts which paint a picture of a developing economy. As you read through the data, think about the economic, political and social barriers to development and growth and seek to identify which ones seem to be most prominent in the extracts presented. Reading with this focus helps you to evaluate the context as you assimilate the information and puts you in a better position to answer the questions which follow.

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