Causes of Economic backwardness

Causes of economic backwardness

What is economic backwardness?

Economic backwardness is the simplest to define. If income does not suffice to meet the basic needs.

Social backwardness is people belonging to a certain group are considered to be inferior to other groups. This ultimately results in economic backwardness as because of this prejudice the group is denied opportunities and face unequal treatment in all walks of life.

Economic backwardness is what the Govt defines it. People who live below a certain income level are economically backward. Earlier, those below 2.5lacs per annum were considered economically backward of society. Now people above 4.5 lacs are considered cream of society. That is those below 4.5 lacs per annum are to be considered as economically backward.

Some causes of economic backwardness:

A.    UNEMPLOYMENT

1.       THE MARKET WAGE RATE PROCESS

2.       THE LABOR UNION WAGE RATE CONCEPT

3.       THE CAUSE OF UNEMPLOYMENT

4.       THE REMEDY FOR MASS UNEMPLOYMENT

5.       THE EFFECTS OF GOVERNMENT INTERVENTION

6.       THE PROCESS OF PROGRESS

B. PRICE DECLINES AND PRICE SUPPORTS

1.      THE SUBSIDIZATION OF SURPLUSES

2.      THE NEED FOR READJUSTMENTS

C. TAX POLICY

1.      THE ANTI-CAPITALISTIC MENTALITY

D. GOLD PRODUCTION

1.      THE DECLINE IN PRICES

2.      INFLATION AS A “REMEDIES”

Obstacles to Economic Development

Problems such as poverty, inequality, unemployment, and the lack of rural development are the result of economic, political, and social forces, both internal and external, which limit economic development.  This section identifies some of the most significant economic, political, and social obstacles to development and the next section provides policy options to address them. 

1. Poverty cycle:

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Low incomes --> Low savings --> Low investment --> Low productivity --> low income..

Absolute poverty: inability to just meet basic physical human necessities/needs of food/nutrition, clothing, health and shelter in order to survive

·         Because this is so difficult to measure accurately, many researchers simply estimate that 20% of the world’s population falls below this line

·         UNDP reports that most live in 10 countries, with the proportions falling below the poverty line in brackets: Bangladesh (80%), Ethiopia (60%), Vietnam (55%), Philippines (54%), Brazil (49%), India (40%), Nigeria (40%), Pakistan (29%), Indonesia (24%) and China (10%)

·         A characteristic of most LEDCs is the unequal distribution of income

·         What is interesting is the middle income LEDCs appear to have greater income inequality than very poor or high income countries

2. Economic obstacle: 

Although they are often linked, economic obstacles can be divided into those which are largely the result of domestic policies (internal) and those which are related to the structure of the international economy (external).  

A). Internal Obstacles

There are five main internal obstacles to economic development: underdeveloped financial systems, the lack of economic freedom, macroeconomic instability, and an underdeveloped infrastructure. 

Underdeveloped Financial Systems

Lack of Economic Freedom

Macroeconomic Instability

Balance of payments. 

Infrastructure

 

B). External Obstacles:

External obstacles also limit economic development. In contrast to developed countries, developing countries are very vulnerable to fluctuations in the global economy. For example. Africa's economic growth slowed in 2001 as a global economic slowdown impacted both aid and foreign direct investment in the region. This situation is the result of the following factors: dependence on exports of primary products, unequal terms of trade, changes in export demand, and dependence on external funding.

Dependence on Primary Product Exports

Unequal Terms of Trade

Changes in Export Demand

 Dependence on External Funding

 

Since most developing countries rely heavily on exports to generate governmental income and repay loans, a reduction in exports reduces government revenue. Consequently, the government either has to cut expenditures or run a budget deficit. Both hurt the poor and limit economic development. If the government takes out a loan to finance a deficit, it will have divert scarce funds to pay back the loans—reducing the amount of money available for schools, health care, investment, and so forth. In other words, internal and external economic obstacles are connected. 

 

3. Political obstacles:

In developing countries, political obstacles have a much larger impact on economic development than economic obstacles. This is because economic policies are created and implemented by politicians. Political obstacles include underdeveloped institutions and too much government intervention in the economy. 

Political instability

·         Important to attract FDI

·         Important that the next government assume the debt obligations of outgoing government

·         Rule by the will of the people OR for the government in power - who is the government working for?

4. Underdeveloped Institutions:

In most developing countries, governmental institutions are either absent, inefficient, or extremely weak. Even in countries with the requisite institutions, incompetent and/or unqualified civil servants, burdensome bureaucratic procedures, resistance to change, inept management, departmental rivalries, and pervasive cronyism greatly limit the government's effectiveness. Poor governance  has three main consequences:

1.       Unstable economic and political policies

2.       Creates obstacles to economic growth

3.       Fosters corruption

5. Social obstacles:

Social and cultural factors acting as barriers

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·         religion

·         culture

·         tradition

·         gender issues

·         Periods of economic growth are associated with structural transformation and social and ideological changes. In the past, 1/3 of growth came from population increases and 2/3s from productivity increases

·         Productivity increased due to technological change in terms of capital and human skills, encouraging research and development which led to further growth

·         The rise in income led to increased consumption:

·         Demand for income elastic industrial products rose quickly

·         Demand for income inelastic agricultural goods grew only slowly

·         This led to a rapid rural-urban shift which often destroyed traditional values

While not primary obstacles to economic development, social obstacles can also slow economic growth and limit economic development. Three of the most important obstacles are population growth, lack of access to education and environmental devastation.

6. Population Growth:

As noted in the Population Section  80 percent of the world's population lives in the developing world (i.e. the part of the world with the least amount of resources). In many developing countries, the population is growing faster than the ability of society to provide the education and skills necessary to improve economic growth.  In addition, a rapidly growing population lowers per capita income growth, especially for those who are already poor, live in rural areas, and depend on agriculture.

7. Lack of Access to Education:

Since human resources ultimately determine the character and pace of economic development, a poorly educated  workforce limits increases in productivity and competitiveness, thus slowing economic growth. There are two major factors which limit educational access: poverty and a rapidly expanding population. The former prevents poor families from sending their children to school and the latter dilutes educational expenditures, diminishing their effectiveness.

8. Environmental Devastation:

In traditional economic growth models, the cost of destroying the natural resources base was not included in GDP figures. However, as a result of increasing environmental degradation and declining economic growth rates in developing countries, more attention has been directed to the links between environmental issues and development. Damage to water supplies, land, and forests slows economic development by increasing health related costs, reducing agricultural productivity, and increasing the income gap between rich and poor. In other words, the destruction of environmental resources lessens developmental potential. 

9 .Macroeconomic Instability:

 

As a result of ineffective government policies and/or changes in the international economy, macro-economic instability has a devastating effect on economic development. Inflation leads to demands for wage increases that in turn can foster industrial unrest, slowing economic growth and investment.

Macroeconomic stabilization polices typically include three features:

1.       Limiting inflation 

2.       Restoring fiscal balance through reduced government expenditures, raising personal and business taxes, and reforming the financial system

3.       Eliminating the current-account deficit by devaluing the currency exchange rate and promoting exports.

10. Poor Governance:

Economic development is greatly effected by the quality of government. A country without a government that has an open policy-making process, an effective bureaucracy, published rules, and a transparent regulatory structure will limit economic development. (This link sends you to another section in this course. Use the browser Back button to return) 

11. Population Growth:

Economic development begins with the individual. In many parts of the world, the population is growing at rates that make it difficult to provide the population with the education and skills necessary to improve economic output. To overcome this situation, governments need to limit population growth.

 

12. Restrictions on trade and investment:

Rules and regulations, both official and unofficial, have a significant impact on economic development.

Because many developing countries do not have the requisite resources to foster economic growth, both domestic and international investment and trade are necessary for economic development. The flow of capital and goods in and out of countries improves living standards and helps expand local businesses.

13. Lack of the rule of law:

Research shows economic development is strongly affected by the quality of legal institutions. The rule of law creates a predictable and secure environment for people to produce, trade, and invest. This expands employment opportunities and incomes.

14. Educational Impediments: 

It is generally accepted that the human resources of a country, not its physical capital or natural resources, ultimately determine the character and pace of economic development. Therefore, a poorly educated and trained workforce limits increases in productivity and competitiveness, slowing economic growth

15. Environmental Devastation:

In the traditional economic growth model, the cost of destroying the natural resources base was not included in GDP figures. However in recent years, experts have become increasingly aware of links between environmental issues and economic development.  Environmental degradation slows economic development by weakening self-sufficiency, increasing health related costs, reducing agricultural productivity, and increasing the gap between rich and poor.  In addition to these costs, the destruction of resources lessens future growth potential. 

16. Ineffective taxation structure:

·         Taxation is often a difficult problem in LEDCs:

·         In many countries very little tax revenue is collected and government is forced to raise revenue by printing money or imposing export tariffs which inevitably reduces the incomes of rural people because most LEDCs export raw materials and agricultural products

·         A proper income tax system can provide the revenue for govt. and reduce inequality by making the wealthy pay a fair share for running the country

17. Lack of property rights:

·         And rule of law in general, including reasonable, predictable contract enforcement

·         No clear title to real property (land, houses) and high-value assets

·         Inheritance of property often cloudy

·         Capital gains from sales often subject to negotiation, thus not predictable

18. Corruption:

·         An issue worldwide; many different forms; some quite subtle in nature

·         Most involving bribes for getting imports into a country or in bidding on government contracts

·         Transparency International

19. Unequal distribution of income:

·         Redistribution of assets often does not happen or does not happen fairly (transparently)

·         If the most important cause of inequality is an unequal distribution of land, natural resources and capital, attempts must be made to redistribute at least some natural resources such as land

·         Land reform can often lead to a dramatic increase in farm productivity and incomes for the rural poor

·         Children of the elite have greater access to education and to the best jobs:

·         Policies to open access to education for the poor, to reduce absenteeism and improve the quality of education can lead to great increases in productivity

·         Gini coefficient/Lorenz Curve

20. Formal and informal markets:

·         Percentage of population engaged in a money economy v. subsistence/barter economy

·         The less informal markets operating, the more grasp on the macro economy the government has

21. Lack of infrastructure:

·         Important to attract FDI

·         Key to allow access to markets, schools, hospitals, wider world (even if just the capital city/urban area) Rescheduling & Restructuring

·         Market mechanisms: supply side measures increase output and investment

·         Lower inflation which stabilizes the exchange rate and creates enough confidence that the elite repatriate money lost through capital flight

·         Domestic interest rates fall leading to greater domestic investment and an improvement in the economy

·         Restructuring simply extends the length of the repayment problem, it does not eliminate the debt:

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22.  External Obstacles:

·         External obstacles also limit economic development. Since many developing countries rely heavily on export tariffs to generate governmental income, a reduction in exports reduces government revenue. As a consequence, the government will either have to cut expenditures or run a budget deficit. Both hurt the poor. If the government takes out loans to finance a deficit, it will have divert scarce funds to pay back the loans—reducing the amount of money available for schools, health care, investment, and so forth. A large deficit also fuels the demand for imports (because goods are not being produced domestically), causes a current account deficit, and worsens the country’s current balance of payments.

A) International trade barriers

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·         overdependence on primary products

·         consequences of adverse terms of trade

·         consequences of a narrow range of exports

·         protectionism in international trade

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B) International finance & indebtedness

·         Economic development has been promoted since 1960 as the best route for LEDCs to follow, justifying borrowing from banks to spend on projects:

·         The risky nature of lending to LEDCs requires: higher interest rates, much more expensive than the rate charged by the World Bank or aid agencies

·         Stock of debt: the ratio of debts to exports has averaged 125% to 150%

·         Debt servicing flow: includes interest payments and repayments of principal, and often exceeds 40% of exports for certain poorer LEDCs

C) Poor project evaluation

·         MEDC banks were only interested in securing loans through government guarantees, there was little checking of the projects the money was to be used for

·         Much of the borrowed money had been wasted on military arms or projects which did not have any hope of paying interest on the debt or ever repaying the principal

·         Many LEDCs printed money to cover the deficits which led to extremely high rates of inflation in some countries