Barriers
to Growth Facing Developing Economies
Illustration: The Brain Drain!
Many LDCs possess inadequate natural resources. This limited resource base is an obstacle to growth. Also the agricultural products, which LDC's typically export, are subject to significant price variation on the world market creating variations in national income.
Most economists agree that that are some barriers to growth which are common to most countries. Below are the most relevant.
Labor Resources
Capital Resources
Institutional Factors
LDC's often experience both unemployment and underemployment, which wastes labor resources
LDC'ss have an inadequate amount of capital goods and so find it difficult to accumulate capital. Domestic capital formation occurs through saving and investing. The potential for saving is low in many DVCs because the nations are too poor to save.
In summary DVCs save little and therefore invest little in real and human capital because they are poor and because they do not invest their outputs per capita remain low and they remain poor. Even if the vicious circle were to be broken a rapid increase in population would leave the standard of living unchanged
International Trade - Tariffs and Quotas from Developed World.
LDC's are often unable to sell the product for which they have comparative advantage because of high tariffs, quotas or other forms of protectionism from the the developed countries.
Difficulties in Developing Human Capital - Education and Training of Labor:
DVCs have low levels of labor productivity because of insufficient physical capital and lack of investment in human capital
Capital Flight - into Safer Havens Abroad:
There is also capital flight of saving from LDC's to more stable IACs. The investment obstacles include a lack of investors and entrepreneurs and a lack of incentives to invest in LDC's economies. Also, most LDC's suffer from poor infrastructure, which is another impediment to domestic or foreign investment.
Political Institutions - Waste and Corruption, poor law enforcement, the culture of bribery are severe impediments to development.
Brain Drain - Exodus of the best and brightest entrepreneurial or professional minds leave for better opportunities abroad.
Technological advance is slow in LDC's. Although these nations might adopt the technologies of industrial nations these technologies are not always appropriate for the resource endowments of the LDC's so they must learn to develop and use their own technologies.
Degree of Reliance on Market System. It has been proved, over and over, that development correlates positively with market reforms.
Rapid Population Growth - LDC's tend to be overpopulated and have high rates of population growth. These growing populations reduce the LDC's’ capacity to save, invest and increase productivity. They also overuse land and natural resources, and the migration of rural workers to cities creates urban problems
Indebtedness:
In the 1980s LDC's experienced a debt crisis in which they found they could not repay their loans. The factors contributing to this crisis were high prices for imported oil, a tight monetary policy in the United States, an appreciating dollar and unproductive investments by LDC's. The flow of private lending and investments in LDC's virtually ceased during this period.
In the 1990s the flow of private lending and investing increased as LDC debts were restructured and some LDC's economies were reformed to control budget deficits and inflation. More of the flows are now in the form of direct foreign investment in LDC's rather than loans to their governments; however the flow of most private capital goes to selective nations and it is still not certain that the debt crisis is over in some LDCs.
Social Institutions: castes, tribal allegiances; religious beliefs:
It is difficult for LDC's to alter the social, cultural and institutional factors to create a good environment for achieving economic growth.
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