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Domestic Factors and Economic Development

Updated on July 2, 2013

Institutional Factors Affecting Development

1. Education

  • Improve well being of the population and society
  • Better communication and greater potential for social change.
  • Improvement in the role of women.

◦ Empowerment through education.

◦ Child survival rates improve.

  • Improve level of health, especially for women. People are informed about dangers such as HIV/AIDS, poor sanitation and unclean water.
  • Achieving the Millennium Development Goal to ensure that children everywhere will have access to education by 2015
  • More opportunities for school children
  • The main problems facing the access of education are

◦ Disparities in wealth - not all families can afford school fees

◦ Children needed to work in family home/farm

◦ Religious factors - Hard line Islamic countries forbidding the education of girls

  • Real life example: In almost all the regions of the world the net enrolment ratio in 2006 was over 90%. The number of children of primary school age who were not attending a primary school fell from 103 million in 1999 to 73 million in 2006. However in Sub-Saharan Africa, the net enrollment ratio has only reached 71%.


2. Health

  • Greater economic development with a higher quality of healthcare
  • Higher HDI and life expectancy
  • Some governments subsidise healthcare substantially e.g UK and Australia while other countries have far less welfare programmes to assist people in paying for medical bills e.g Syrian Arab Republic
  • While developing countries recognize the need for better hospitals and more trained medical professionals they often are not able to afford them.
  • Often more economically developed countries offer financial assistance to developing countries to improve their healthcare schemes.
  • Real life example: Australia spends 17.2% of $733.9 billion on its 20.9 million inhabitants. The Syrian Arab Republic , with a similar population, spends 5.9% of $89.7 billion.

3. Infrastructure

  • Infrastructure needed for economic activity and development
  • Factors of Infrastructure:
  • Transport

◦ Roads

◦ Railways

◦ Seaports

◦ Airports

◦ Public Transport

◦ Sidewalks

  • Public utilities

◦ Electricity

◦ Gas

◦ Water supply

◦ Sewers

  • Public services

◦ Police and fire services

◦ Education service

◦ Health service

◦ Waste management

  • Communication services

◦ Postal system

◦ Telecommunication

◦ Radio and Television

  • For example, better roads and transport means a more mobile and efficient workforce and more children going to school.
  • Safe and effective sewage treatment leads to a healthier population
  • The provision of electricity and fuel means a higher quality of living in the household - cooking and cleaning is easier
  • Real life example: Sudan in Africa is a case in point, where civil wars from 1955 to 1972 and then from 1983 to 2005, coupled with a new civil war with the western region of Darfur which began in 2003 and is still ongoing, have caused much turmoil in terms of death and displacement of the population.


4. Political Stability and a lack of corruption

- Countries that have political stability are more likely to attract Foreign Direct Investment (FDI)

- Increased FDI can lead to higher growth

- Political stability can also lead to higher standards of living.

- Political instability causes uncertainty and may cause economic breakdown.

- It gets harder for a country with political instability to attract foreign investment or even aid.

- Corruption is dishonest exploitation of power for personal gain. It poses a huge challenge to both growth and development. It tends to be most prevalent where:

I. Totalitarian/Military government

II. Large capital investment projects

III. Accounting practices are not well controlled

IV. Low salary of government officials

V. Legal structure is weak

VI. Less freedom of speech

- There are many forms of corruption, which includes bribery, extortion, fraud, patronage, influence peddling and nepotism. All these can hinder growth in the following ways:

I. Electoral corruption means that the wishes of the people are not heeded.

II. Corruption reduces the efficiency of the legal system.

III. Corruption leads to an unfair allocation of resources.

IV. Bribes can increase the costs of businesses.

V. Corruption reduces trust in the company.

VI. Corruption means that officials may focus on more capital based projects where bribes are more common.

VII. Corruption means that officials turn a blind eye to regulations

VIII. Illegal money is moved out of the country which reduces the capital available for internal investment.

- Real life example: Sudan in Africa is a case in point, where civil wars from 1955 to 1972 and then from 1983 to 2005, coupled with a new civil war with the western region of Darfur which began in 2003 and is still ongoing, have caused much turmoil in terms of death and displacement of the population.

5. Legal system:

  • A fully functioning legal system is almost essential if development is to be achieved.
  • In many developing countries the legal system does not function well.
  • If the legal system does not function well there is no way to create and enforce contracts and there is no way to uphold property rights.
  • Property rights are essentially a “basket” of legal rights.
  • Basket includes:
  • - The right to own assets, such as land or buildings.
  • - The right to establish the use of our assets, such as adding to the
  • building—for example an owner might want to add sanitation to
  • a house.
  • - The right to benefit from our assets, such as renting out our land.
  • - The right to sell our assets.
  • - The right to exclude others from using or taking over our assets.
  • Property rights allow people to own and benefit from private property, so long as the legal system and security system can support and protect these rights.
  • If there are no enforceable property rights, as may be the case in many developing countries, then investment and growth will be very much reduced and economic growth may be limited. Development will be thwarted for all of the reasons above.

6. Financial system, credit, and micro-finance:

  • Developed and independent financial institutions are essential, if economic growth and development is to be achieved, and these are often underprovided in developing countries.
  • Developing countries have what is known as dual financial markets.
  • Financial markets- institutions where lending and borrowing is carried out.
  • Developing “official” financial markets tend to be dominated by foreign commercial banks.
  • The “unofficial” markets are not legally controlled and are thus illegal. Their main operation is to lend money, usually at very high interest rates, to those who are desperate and poor enough to have to borrow it.
  • Saving is necessary to make funds available for investment and investment is necessary for economic growth.
  • Saving is difficult enough in countries where there are high levels of poverty, but it is even harder if there is nowhere to save money that is safe and will give a good return.
  • When there are weak and untrustworthy financial institutions, people with investment income tend to buy assets, such as livestock, or they tend to invest their money outside the country (capital flight).
  • Financial services are necessary if low-income people are to be able to manage their assets and to allow them to increase in value, thus enabling them to then invest in things that will lead to their economic development, such as health care, shelter, and education.
  • The difficulties associated with saving and borrowing money are a significant barrier to economic growth and development. It makes it exceedingly difficult for poor people to raise themselves out
  • of poverty.
  • In developing countries poor people find it almost impossible to gain access to traditional banking and financial systems, since they lack assets to use as collateral, are often unemployed, and lack savings. Therefore, even if there is great entrepreneurial spirit, it is very difficult for people to start up businesses.
  • If they can find a way to borrow money it is often at exorbitant interest rates.
  • However, there is a type of financial service that is geared specifically to the poor. This is known as micro-finance and is the provision of financial services, such as small loans, savings accounts, insurance, and even cheque books.
  • The provision of small loans to individuals who have no access to traditional sources is known as micro-credit. A key element of original micro-credit schemes is that they did not originate in the developed world, but rather had their beginnings in developing countries.
  • Usually, the micro-credit loans are given to enable poor people to start up very small-scale businesses, known as micro-enterprises. These may include such things as roadside kiosks, bicycle repair services, market stalls, rice wine making, knitting, and woodworking.
  • The loans give protection against unexpected occurrences and seasonal problems, and may help families to gain a regular income, start to build wealth, and thus escape from poverty.
  • Women have tended to be the main recipients of micro-credit, for many reasons. It is thought that women are a better credit risk—they are more likely to pay back loans. Women are usually responsible for caring for children and so any reductions in a woman’s poverty will translate into improvements for the children. In many documented cases, this has allowed for more poor children to go to school.
  • When women take loans and can begin to earn an income, their social and economic status is raised and economic development is enhanced.
  • Real life example: Citi Bank, Credit Swiss, J.P. Morgan, Golden Sachs

7. Taxation

  • Tax revenue provides governments with the means to finance necessary public services, such as education and health care, and generally to improve the infrastructure of the country.
  • However, this is very difficult to do if governments do not earn a great deal of tax revenue.
  • It is very difficult for governments to collect tax revenue in developing countries.
  • Reasons for this; firstly, as a result of tax exemptions and inefficient or corrupt administration, it is estimated that less than 3% of the populations in developing countries pay income tax, as opposed to 60%–80% in developed countries.
  • Secondly, corporate tax revenues tend to be low, since there is relatively little corporate activity in developing countries and they also often offer large tax incentives in order to encourage domestic corporate activity and to attract FDI.
  • Thirdly, the main source of tax revenue in developing countries comes from export, import, and excise duties.
  • These taxes are relatively easy to collect, since they are paid when the goods pass through the country’s border posts. However, it is only possible to gain significant tax revenue if the country is heavily involved in foreign trade. It is worth noting that the international trading system through the WTO, with its emphasis on liberalization of trade, may have negative implications for countries that do earn significant revenue from tariffs.
  • Finally, as has been stated above, developing countries have problems with the administration of their tax systems in terms of inefficiency, lack of information and pure corruption. These elements, when combined, often mean that people are able to evade paying the taxes that they should.
  • Another factor that needs to be considered is the size of the informal market. It is well known that the size of informal markets as a percentage of GDP is far greater in developing countries than in developed countries.
  • Large informal markets once again lead to much lower tax revenues for governments in developing countries. If the incomes of people are not recorded because they are earned in informal markets, then there will be no tax paid on such income.
  • Lower tax revenues make it difficult for governments to promote growth and achieve development objectives. Furthermore, there are other consequences.
  • Workers tend to be unprotected in the informal markets and are very poorly paid, with little job security, poor working conditions, and no social care. Productivity in the informal markets tends to be very low; workers are often low-skilled migrants from rural areas with little education and low human capital.
  • Real life example: As a result of tax exemptions and inefficient or corrupt administration, it is estimated that less than 3% of the populations in developing countries pay income tax, as opposed to 60%-80% in developed countries.


8. The use of appropriate technology:

Appropriate technology is technology that is appropriate for the use with existing factor endowments of both production and consumption


– developing countries were urged to modernize and industrialize their output but this was not appropriate for their surplus of labour

- as using one-to-one capital to labour ratio provides greater employment than automated systems and so add to development


- for example a solar cooker (made of aluminum foil and plastic film) is cheap and requires only sunshine, which is abundant in many developing countries, also as it does not require wood no trees are lost and time is saved searching for it thus improving the position of women, who now have more time

9. The empowerment of women

  • In many developing countries the role of women is very much less important to that of men.
  • Educating women empowering them will increase economic development.

However, there are also extremely important externalities that occur when women become more empowered.

  • The well-being of their families is improved, especially in terms of the health of their children. With improved education, women are better informed about health care, hygiene, and diet, all of which improve the welfare of the family.
  • The education of children in the family group improve. The women pass on their own education and also see education as being more important, thus striving to achieve it for their children.
  • Because of the two points above, the quality of the workforce in the country will, over time, improve, with significant effects upon growth and development.
  • With greater empowerment women earn more money. Research shows that increases in the levels of income of women in developing countries lead to greater increases in health levels of families than similar increases in the income levels of men.
  • With better education and social standing women have more control over contraception, marry later, and so tend to have smaller families, thus lowering the rate of population growth.


10. Income distribution

Although all countries in the world have income inequality, it is fair to say that the gap between the rich and poor in developing countries is generally greater than that in developed countries.

High-income inequality can be a barrier to growth and development for a number of reasons.

  • Firstly, there are low levels of saving, because the poor save a very small proportion of their income as their expenses account for a large amount of their income. As we know, low saving means low investment and so low growth.
  • Secondly, the rich tend to dominate both politics and the economy and this tends to mean that policies are followed that are more in their favour.
  • Thirdly, high-income inequality in developing countries tends to be marked by the rich moving large amounts of funds out of the economy. Also, a large proportion of the goods purchased by the rich are imports and so their consumption does not really help the domestic economy. Thus, although we usually link income inequality simply to a consequence of low levels of development, we can also see that it can act as a barrier to growth and development.


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    • profile image

      Howard Schneider 

      6 years ago from Parsippany, New Jersey

      Excellent Hub stating all the key factors for economic development for a country. Great work, lionamazingking.

    • profile imageAUTHOR


      6 years ago from Singapore

      I am still new to HubPages. Does the score increase with time?

      And thanks :)


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