Primary product dependency

• 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, incomes & profits

Volatility of commodity prices

• 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
• In 2020, 25% of Bolivia's GDP was generated by exports. Commodities accounted for 60% of its exports
  • When commodity prices rise,?GDP rises?- & vice versa
• A more?diversified?range of exports prevents this

The savings gap: Harrod-Domar model

• In the 1950's two economists identified the?savings gap?as a major constraint on growth
• The?Harrod-Domar?model identified the following benefits of increased savings
  • Increased savings → increased investment → higher capital stock → higher economic growth → increased savings
• Based on this, any intervention (foreign or governmental) to?increase?the capital stock in an economy will lead to growth
• There are many criticisms of the model including
  • It does not account for many other factors such as?labour productivity, corruption, technological innovation
  • It was created based on data from wealthier?industrialising nations?as opposed to very poor undeveloped countries
  • It focused only on?physical investment?& ignored other types such as investment in human capital (labour)

The foreign currency gaps

• Foreign currency gaps?develop for a number of reasons
  • Oil importing countries?have to pay more (reserves decrease) when world oil prices rise whereas?oil exporting countries?receive less (less flowing in) when world oil prices fall
  • Large international?debt payments?may require continual outflows of currency
  • Capital flight?due to uncertainty or sanctions
• This means that?central banks?are forced to use their reserves to buy vital imports
• Developing a diversified, healthy export market prevents foreign currency gaps?from developing

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 billions of?capital outflows
• Capital flight reduces the money available for?investment,?reducing growth & development

Demographic factors

• If the?dependency ratio?is high it means there is less money available for savings & investment
• Many developing countries have high dependency ratios

Access to credit & banking

• 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

Infrastructure

• Good infrastructure?reduces business costs?& attracts foreign direct investment
• Some developing countries have such?poor infrastructure?that it 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

Education & skills

• Investing in this?supply-side policy?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 income

Absence of property rights

• In many countries, 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