Sentry Page Protection
The Role of domestic factors in economic development
With reference to a specific developing economy, and using appropriate diagrams where relevant, examine how the following factors contribute to economic development:
education and Health
Health and education confer both private benefits (to individuals) and external benefits (to others in society). Being able to read and write and increase one’s lifetime income earnings are some of the important private benefits that education brings. Reading and writing bring personal enjoyment, and there is a strong relationship between educational outcomes and the amount of income people earn. On average, individuals with only some primary schooling will earn less than someone with some high school education, who, in turn, will earn less than someone who completes high school, who, in turn, will earn less than someone who completes a university degree.
There is a strong relationship between educational attainment and the number of children a woman is likely to have, on average. Birth rates fall as women become more and more educated. The less children that women have, the more likely they are to be economically active at any given time.
In terms of external benefits, people who can read and write can communicate more effectively and participate more effectively in civil society – society being considered as a community of citizens linked by common interests and collective activity.
The best way a country can improve the skills and abilities of its population is to develop human capital through effective and sustained education. A country is going to need nurses, doctors, teachers, engineers, accountant and financiers, etc. if it is to grow and develop. Effective education improves the productivity of labour, and the productivity of labour is one of the most important factors that will determine a country’s long-run economic growth. The more productive a country’s labour force is, the higher its long-term growth trend will be.
There has been a steady increase in literacy rates in Pakistan which has been achieved by more children going to better schools more often and staying in schooling for longer. There is a strong relationship between educational achievement and economic growth – the real increase in GDP per capita.
Adult literacy rates have increased in Pakistan. Literacy is defined as having the “Ability to read and understand simple text in any language from a newspaper or magazine, write a simple letter and perform basic mathematical calculation (i.e., counting and addition/subtraction).” In 1951, just 16.4 per cent of the adult population was classified as being literate. This increased steadily, and in 2012 almost 70 per cent of adults were literate.
While notwithstanding the fact that correlation does not equal causation. The growth in Pakistan’s GDP and increases in adult literacy highlight the importance of the relationship between education and economic growth.
The increases in literacy rates have slowed somewhat of late, and there is wide variation between different demographic groups. For example, just 55 per cent of females were literate and in Balochistan – a southwestern province – literacy rates were around 30 per cent.
There is often quite a large disparity between developed and developing countries and how much they invest in education. This is both in absolute and relative terms. For example, Norway has a higher national income (real GDP) than does Pakistan, and it also spends more on education as a share of its GDP – 6.8 per cent compared to Pakistan’s 2.7%.
Education and economic growth
Healthcare in LDCs
There are obvious private benefits for individuals when it comes to being healthy. Lives are lived free from pain, disease and disability, and healthy individuals are more likely to be in employment and earning an income.
There are external benefits that arise when populations are relatively healthier. Society benefits because the quality of human capital is improved the healthier individuals are, on average. One of the most important determinants of economic growth and development is the quality of a nation’s human capital.
One important indicator of the state of a country’s health is the infant mortality rate. While Pakistan still has a high infant mortality rate, this rate has steadily trended lower since 1990.
In 1990, Pakistan’s under-five mortality rate was 139 per 1000 live births, and this fell steadily to 81 by 2015. It should be noted, that while Pakistan has been making steady improvements in this health outcome, it still does however have one of the highest mortality rates for children in South Asia.
Life expectancy in Pakistan has also increased steadily over time, from 45 to 66 years of age from 1960 to 2015. Again, while improving, Pakistan still has a relatively low life expectancy compared to developed countries (e.g., Norway) and its neighbours (e.g., Bangladesh and India).
Pakistan has also increased its Human Development Index (HDI) steadily over time. The Human Development Index is a composite statistic of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development.
Click image to link to UN HDI report on Pakistan
Here, Pakistan’s HDI has steadily increased from 0.35 in 1980 to 0.54 in 2014. Decreases in the child mortality rate, and increases in literacy rates, life expectancy and GDP per capita have all contributed to Pakistan’s increasing HDI.
There is often quite a large disparity between developed and developing countries and how much they invest in health services. This is both in absolute and relative terms. For example, Norway has a higher national income (real GDP) than does Pakistan, and it also spends more on health services as a share of its GDP – 9.2% compared to Pakistan’s 2.2%.
Essential statement: Increased investment in health and education increases the productivity of labour and leads to increased GDP per capita.
International literacy data
The most illiterate countries
Credit and Technology
The factor of production termed enterprise is highly dependent on the availability of credit. New businesses need start-up capital to set themselves up and start trading, and existing business need finance for operations and expansion.
Average incomes in developed countries such as Norway are relatively high when compared with developing countries such as Pakistan. Higher incomes lead to increased savings rates. Savers deposit income not spent into bank accounts, and banks then lend these savings out to new and established businesses. Savings rates are low in low income countries. Incomes are spent on necessities – food and water, housing, electricity and gas, and health care. Little if any disposable income is left over after individuals have satisfied their needs. Therefore, not much can be saved. And, if little is saved then the country’s banks have limited amounts of capital that they can lend to the business sector. Further, many areas of less developed countries will not have access to banking services.
To increase their productivity firms, need to purchase capital goods, and to finance the purchase of capital goods firms need access to credit. Productivity is thus dependent on the availability of credit.
Take for example, agriculture in Pakistan where output is relatively low. By and large, farming in Pakistan is small scale and farmers do not have enough land to benefit from economies of scale, including technical economies of scale. It is not financially viable for farmers on small plots of land to invest in technologically advanced capital goods. Productivity remains low in Pakistan’s small-scale farms, and so too does average farm income. With low average incomes, Pakistan’s farmers find it difficult to save. Without savings Pakistan’s farmers need access to credit to escape the cycle of low productivity leading to low incomes leading to low productivity, and so on and such forth.
With low levels of productivity in the agricultural sector, relatively more people are required to produce the same level of agricultural output as in developed countries. Thus, relatively more of the population in less developed countries like Pakistan are employed in the agricultural sector in comparison to the manufacturing and service sectors. To meet the demands of growing and increasingly urbanised manufacturing and services, a developing economy must have a productive agricultural sector.
Essential statement: Low productivity in less developed economies leads to relatively high average costs in firms and industries. Low incomes result in low savings and low levels of lending to firms by banks. Labour productivity will remain low if firms have difficulties in accessing the credit needed to finance the purchase of capital goods, without which, incomes will remain low
Microcredit is the lending of small amounts of money at low interest to new businesses in the developing world. This lending is unlikely to be larger than a few hundred dollars and is often provided to individuals or groups by international financial organisations.
Many individuals, often women, can make use of microcredit to start-up new small businesses when they are unable to obtain finance in any other way. Microcredit loans are paperwork light but can be relatively expensive in terms of time and administration as microcredit loans often cover individual and groups over widespread areas. To cover such costs microcredit loans have relatively high interest rates.
Global differences in microcredit interest rates are dramatic. The global average is about 35 percent, but the average in Uzbekistan is above 80 percent, and in Sri Lanka it is around 17 percent. Small loan sizes are the most commonly cited reason why microcredit rates are higher than normal bank rates.
Most microcredit loans are short-term and will usually be repaid within a year.
Start-up businesses that grow and become profitable can finance further business expansion through loans from banks and other financial institutions. Banks and finance companies will be regulated, and his form of business finance is preferable to informal lending in that the interest rates are lower and there is none of the extortion and violence to extract repayments that may be used by unregulated lenders.
Essential statement: Microcredit facilitates the start-up of small businesses which can then grow and attract bank loans to finance capital expansions, growing further and boosting the GDP of a developing country
Microfinance for the poor
200 countries, 200 years, 4 minutes
Documentary on Pakistan
Adopting advanced technology leads to large gains in productivity. However, it is important to bear in mind that developing countries will have a surplus of labour and relatively high levels of unemployment; i.e., the supply of labour exceeds the demand for labour. It can be argued, that due to high levels of unemployment in developing countries it does not make a lot of sense for expensive advanced technologies to be implemented by industry. This is for three reasons. Firstly, workers currently employed would lose their jobs as they were replaced with capital equipment (e.g., automated factory production lines) and the unemployment rate would rise. Secondly, relatively low levels of human capital in developing countries means that workers do not have the necessary skills to effectively implement and manage new technologies. Third, advanced capital equipment tends to be expensive and so it is less likely to be adopted by firms operating in countries where incomes are low.
It would perhaps be better, if developing countries were to adopt intermediate technologies throughout industries as this would have less impact on unemployment and be better suited to the skills of a less educated workforce. Further, because intermediate technologies are relatively less expensive, industry would benefit by adopting larger amounts of less productive technologies and still make large productivity gains overall. A lot of intermediate technology will increase overall productivity than a little advanced technology.
Essential statement: There is a surplus of low-skilled labour in less developed economies, thus labour intensive intermediate technologies could be adopted to increase overall productivity and reduce unemployment
Microfinance and poverty
Portfolios of the poor
Relatively more men than women are employed in developing countries.
Despite increases in recent years, female labour force participation in Pakistan, at 25%, is well below rates for countries with similar income levels. Even among women with high levels of education, labour force participation lags: only around 25% of women with a university degree in Pakistan are working.
This low female labour force participation represents a major loss of potential productivity. It also has important implications for women’s empowerment, as working women are more likely to play a role in household decision making compared with nonworking women in the same villages or even in the same families.
Many women in Pakistan would like to work; there are multiple reasons why they do not. One of the key reasons – on which policy could have an effect – is that women face restrictions on their physical mobility outside the home.
Several interconnected factors restrict women’s mobility outside the home, among them:
Other factors influencing the low labour force participation of women in Pakistan are lack of education and household duties. Pakistan has high levels of children not attending school (second highest proportion in the world), and the girls not attending school in Pakistan far outnumber boys not in attendance. Cultural and religious reasons contribute to this disparity.
Large inequalities exist in many developing countries, and gender inequality often arises from women being discriminated against. For example, labour force participation for females in Pakistan was less than 25% (Norway = 61%).
Pakistan stood at the bottom of the Global Gender Gap Index in 2015. In the Gender Gap Index, 2015, economic participation and opportunity is counted as a crucial measure of equality, and comprises five aspects: labour force participation, wage equality for similar work, estimated earned income, number of legislators, senior officials, managers, and number of professional and technical workers.
Pakistan did poorly in all five: the female labour force participation rate is 22% versus that for men at 67.8%; women are paid 23% less than men for similar work; women’s average monthly income is Rs9,760 compared to men’s monthly earnings of Rs15,884, and only 0.3% women are employed as managers, 6.4% as professionals and 0.9% as technical workers (Labour Force Survey 2014-2015).
Gender equality explained
Gender inequality in Pakistan
In developed countries, women have equal access to health and education, which does not hold true in most developing countries. There is a strong negative relationship between the years of education a woman attains and the number of children she will have, on average. The more educated a woman is the less children she will have and the greater her labour force participation will be.
As countries become more developed, women become better educated and have less children. Their labour force participation increases, and the quality and quantity of the labour force improves – leading to increased economic growth in national output (real GDP per capita).
Gender equality is monitored by the United Nations. The UN encourages and supports developing countries to enact policies that will effectively reduce levels of gender discrimination.
Essential statement: Increased educational outcomes for women lowers the birth rate and results in increased labour force participation.
Essential statement: The low educational outcomes and labour force participation of women in developing countries is an inefficient use of scare resources. Increased output and incomes, and reduced unemployment and poverty would result from the empowerment of women.
Developed countries employ a system of progressive taxation to redistribute income. Norway, for example, progressively increases marginal tax rates as individual incomes increase. Lower income households benefit from a system of lower average taxes and income support payments from government (transfer payments). Developed countries can use the higher tax revenues generated from the relatively wealthy to ensure that low income households have adequate income to afford the necessities and have a reasonable standard of living. Further, the tax revenues generated through a progressive tax system are used by governments to secure goods and services such as housing, health and education for all. Thus, there are high levels of opportunity available to all in most developed countries. Housing, education and health are available for all.
Labour productivity improves people have improved access to health and education. Improved productivity increases national output and income (real GDP per capita).
Many governments in developing countries are unable to facilitate the redistribution of income for several reasons:
Income inequality in Africa
Income inequality in Asia
However, a relatively high level of economic growth in many East Asian countries has led to better income equality. Progressive taxation systems have been introduced, the proceeds of which have been invested. Both human and physical capital have been developed as and more money is spent on health and education, and transport and telecommunications infrastructure.
Similarly, economic growth in developing East Asian countries such as Pakistan has been high, and this has resulted in increased savings. Increased savings improves inequalities in the distribution of wealth. Increased savings also leads to increased investment.
Political stability improves as inequalities in the distribution of income reduce. However, many developing countries have wide disparities in how income is distributed through society. Large proportions of the population in developing East Asian countries such as Pakistan have little to no chance of making any improvement in their standard of living. Many developing countries cannot afford transfer payments to support the incomes of poor families, such as the unemployed, sick and disabled. Poor and worsening standards of living are a recipe for political and social unrest.
Essential statement: Increased savings, rates of investment and improved social stability can result from a more equal distribution of income
PROGRESS CHECK - TEST YOUR UNDERSTANDING BY COMPLETING THE ACTIVITIES BELOW
You have below, a range of practice activities, flash cards, exam practice questions and an online interactive self test to ensure you have complete mastery of the IB Economics requirements for the Development Economics: 4.3 Domestic Factors in Economic Development topic.
USE THE FLASHCARDS IN ALL THREE STUDY MODES
IB Economics interactive QUIZZES AND TWO CLASSROOM GAMES
Test how well you know the IB Economics Developmental Economics: 4.3 Domestic Factors in Economic Development topic with the interactive self-assessment quizzes below. Aim for a score of at least 80 per cent.