4.3. The role of domestic factors

4.3. The role of domestic factors

Why are some countries rich and other countries poor? What is the role of domestic factors such as factors of production, incentives and institutions?

Task 2: Does geography matter?

Task 3: Is there any conclusion one can come to about the role of autocracy and growth in per capita income?

Task 4: Is there a correlation between the type of governance model, level of corruption and HDI value?

Task 5: Is trust a 'strong' contributor to economic development?

The following factors contribute to economic development

Education and health

Education is extremely important in improving the living standards of a country as it not only benefits the individuals receiving the education, but there is also a wider benefit to society. This is because a more educated, highly skilled workforce tends to have higher levels of productivity and therefore greater national output. This extra income earned from the increase in output can then be reinvested, either privately or by the government through redistributive policies, in order to further improve the country’s development. In addition, a more educated population improves communication and can lead to social reform.

The Cuban government spent 12.8% of GDP on education in 2010, whereas the Central African Republic only spent 1.2% in 2010 and 2011. The adult literacy rate for Cuba was 100% in 2012, but 37% for the Central African Republic in 2010. Cuba’s HDI value was 0.851 in 2013, in contrast to the Central African Republic’s value which was 0.341. It is therefore not surprising that Cuba’s population is more productive and it’s GDP per capita was $6,051.20 in 2011, whereas the Central African Republic’s was $494.90 in the same year.

Like education, the health of the population is an important component in achieving both development and growth. Increased access to public funded medical care is key to increasing the health of the population, as without this the disparity between rich and poor may widen both in terms of income and in terms of their quality of life. A healthier population increases the labour force as more children reach adulthood and have a longer life expectancy. Also each individual’s productivity can improve because they contract fewer illnesses and therefore need to take less time off from work.

Cuba’s health expenditure per capita was $603, whereas the Central African Republic’s was just $13 in 2013. Cuba's life expectancy at birth has remained at 79 years from 2010 to 2013, whereas the Central African Republic's has increased from just 49 years to 50.

Appropriate technologies

Labour intensive technologies: use more labour in relation to capital. These increase local employment and the use local skills and materials. Incomes and poverty alleviation should also increase.

Capital-intensive technologies: use more capital in relation to labour. In developing countries with large supplies of labour they displace workers and increase unemployment, reduce incomes and increase poverty. They require skill levels that may be costly and difficult to acquire, as well as relying on expensive imports. However, these are an important component for increase economics growth in more developed countries where there are higher levels of employment anyway.

Technology is important in aiding development, however, it must be suitable for the specific economic, geographical, ecological and climatic conditions. Developing countries tend to require technologies that make use of the abundance of workers, but are relatively easy to maintain and operate. Therefore, often developing countries adopt labour intensive technologies that are slightly more primitive than those adopted by developed countries. For instance, in a developing country it may be preferable to start using ploughs pulled by animals rather than tractors as tractors may lead to an increase in unemployment and have imported into the country, which adds to their expense. Also if tractor were used, then workers would also need to be educated in the more complex maintenance. This illustrates why development is usually a gradual process rather than a sudden change.

Technology has also been instrumental in improving the daily lives of individuals in developing countries. Inexpensive tablets and laptops are now being manufactured for children around the world to have greater access to education and reduce the digital divide between the rich and poor. The spread of mobile phones has increased the efficiency of businesses the world over as it has helped to decrease the costs associated with poor communication and given firms in developing countries to opportunity to access international markets more easily. In addition, companies are creating innovative ways to help developing countries make use of their natural resources to use as renewable energy, such as cheap solar panels that now provide electricity to villages where it was previously absent. Other technologies, such as water filters and toilets, are playing an important role in improving the sanitation within developing countries, which helps to reduce the spread of diseases.

Here are some specific examples of technology improving the lives of people in developing countries:

After mobile phones were made available to fishermen in Kerala in India, they were able to call several markets and agree on selling prices before landing their fish. Within a few weeks the fluctuation in fish prices subsided, increasing the fishermen's profit by 9% and reducing consumer prices by 4%.

To do business with Shoprite of South Africa when it opened supermarkets in Zambia, local farmers' cooperatives used new marketing and production techniques to improve the quality of their products and services. Shoprite now buys 90% to 95% of its fresh produce from Zambian farmers. In one cooperative, farmers' cash income increased from between $2 and $3 a month to between $50 and $70, and local access to health care and education services improved.

Both of these examples are from the World Bank (http://go.worldbank.org/0X34DF96Z0)

Micro-credit

Micro-credit: small loans are lent to businesses in developing countries, therefore, enabling them to become independent and self employed.

This can allow families and communities to escape poverty as they have a means of earning their own incomes without taking on large financial risks. This does not only benefit the direct recipients, but other locals as well since individuals can afford to spend more money in their local communities. Therefore, micro-credit can help to encourage self-reliance amongst the communities in which it is available so the benefits should continue for future generations.

Micro-credit is often given to women as they are often responsible for bringing up the next generation and therefore can have a profound influence on the future developed of the country. This therefore grants them the opportunity to raise the standard of living of their families and improve their own physical and social wellbeing.

Micro-credit can also prevent vulnerable individuals from being financially exploited as their is less need to rely on 'loan sharks', who are illegal moneylenders that often charge very high rates of interest. In addition, micro-credit is available to those who are usually unable to take out loans from conventional financial institutions. This is because micro-credit can be offered to individuals without the need for credit ratings or collaterals, which is security pledged for the repayment of a loan.

However, there are some limitations of micro-credit...

• Governments may feel less urgency to pursue other poverty reducing policies

• A lack of regulation may lead to 'loan sharks' claiming that they are legitimate micro-credit providers

• Micro-credit alone is unlikely to be successful at reducing poverty. This is because it may impact the lives of individuals, but the benefits will not be felt equally across the country. Such regional differences may occur because micro-credit providers are more likely to be found in cities as rural areas are more difficult to access.

• The government must be reliable in creating an environment conducive to entrepreneurship and investment. Corruption and poor management would likely threaten the success of micro-credit.

The empowerment of women

Across the world many societies still feature elements of gender inequality. However, women are an essential component of promoting both economic development and economic growth. Gender inequality has a detrimental effect on the quality and quantity of labour and consequentially leads to limited productivity. Allowing women to work and be active members in society directly increases the labour force, therefore, enabling the countries output to increase. In addition, women in developing countries are often responsible for rearing children, which means that the education that such children receive is likely to depend on the female members of their community. It therefore seems clear that it is important to educate women in order to improve the quality of the future labour force.

Policies to empower women may focus on:

• Decreasing the female mortality rate

• Increasing the access and quality of education for girls and women

• Improving the provision of healthcare for women

• Improving access to economic opportunities for women. This may include increasing women’s participation in the labour force and improving access to micro-credit.

• Increasing respect for women both in society and in domestic situations. For example, the government could ensure that women have the vote and are able to express their views.

• Limiting gender inequalities from being replicated in future generations. This may be done by using education to reduce misunderstandings about the differences between males and females.

Income distribution

Income inequality is a significant factor that contributes to poverty and impedes countries from developing. As a result of the unequal distribution of factors of production, inequalities in income begin to occur. For instance, when people settle in an area, individuals acquire land of different quality and quantity. Therefore, when they farm such land, the results and incomes vary. It would seem that in any society some degree of inequality is therefore inevitable and perhaps necessary in order to provide people with incentives to work.

However, small differences in income can perpetuate to become larger as time goes on. This can occur because the richer in society are more able to afford the opportunities needed to retain the high levels of income. For instance, in corrupt societies bribes may be paid in return for favours, whilst more generally the rich can afford healthcare and education for their children, which maintain their high standard of living. In the absence of progressive taxation and transfer payments, the poorer sector of society may fail to benefit from the successes of the higher income earners. This is particularly true if regions become segregated into the rich and poor, as the high incomes remain concentrated in the pockets of great wealth. This demonstrates how the rich may get richer, whilst the poor slip further into poverty.

Large income gaps between the rich and poor have social implications as well, which effect the standards of living. This is because such divisions create misunderstanding and prejudice. In turn, dissatisfaction amongst the poorest may increase and social frictions may be exacerbated.

Ultimately, it is important to have an effective progressive taxation system in order to deal with inequalities in the income distribution. This is because in a progressive taxation system, high-income earners pay a greater proportion in tax compared to low income earners. The revenue from such a system can then be used to fund transfer payment, including unemployment benefits, and public services, such as education and healthcare. These then allow the lower income earners to have access to more opportunities, which can improve their social and economic mobility.

Source: http://ibstudy.wix.com/ibeconomics#!43-the-role-of-domestic-factors/c1k3g, accessed Tuesday 10^th November 2015

Task 6: You will get into groups of 4 and take one of the following domestic factors. Watch the relevant videos and put your findings into the Google doc provided.

a. Education and health

b. The use of appropriate technology

c. Access to credit and micro-credit

d. The empowerment of women

e. Income distribution

Files to download