Barriers to Development

Despite significant global progress, many countries remain trapped in poverty. Understanding the barriers to economic development is essential for designing effective policies. This lesson examines the key obstacles — from institutional failures and primary product dependency to savings gaps and unsustainable debt — drawing on important economic theories and real-world evidence.

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1. Institutional and Governance Barriers

Corruption

Corruption — the abuse of public power for private gain — is widely recognised as one of the most significant barriers to development.

• Corruption diverts public resources from essential services (healthcare, education, infrastructure) to private pockets.
• It discourages foreign investment because investors face unpredictable costs and insecure property rights.
• It distorts market incentives, encouraging rent-seeking rather than productive activity.
• Transparency International's Corruption Perceptions Index consistently shows a strong correlation between low corruption and high development.

Example: Nigeria has earned over $400 billion from oil exports since independence, but corruption and mismanagement mean that over 40% of the population still lives below the poverty line.

Weak Property Rights and Rule of Law

• Hernando de Soto (2000) argued in The Mystery of Capital that the lack of formal property rights in developing countries prevents the poor from using their assets as collateral for loans, locking them out of the formal economy.
• Without secure property rights, there is little incentive to invest in land, buildings, or businesses.
• Weak rule of law creates uncertainty and deters both domestic and foreign investment.

Political Instability and Conflict

• Civil wars, coups, and political instability destroy infrastructure, displace populations, and divert resources to military spending.
• The World Bank estimates that countries affected by fragility and conflict have poverty rates roughly double those of other developing countries.
• Example: The Democratic Republic of Congo is rich in natural resources (cobalt, copper, coltan) but decades of conflict have prevented economic development.

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2. Primary Product Dependency

Many developing countries depend heavily on exports of primary products — agricultural commodities (coffee, cocoa, cotton) and minerals (oil, copper, gold).

Problems with Primary Product Dependency

Problem	Explanation
Price volatility	Commodity prices fluctuate sharply due to inelastic supply and demand, weather events, and speculation. This creates unstable export revenues and makes planning difficult.
Declining terms of trade	The Prebisch-Singer hypothesis (Raúl Prebisch 1950, Hans Singer 1950) argues that the terms of trade for primary products tend to decline over time relative to manufactured goods, because demand for manufactures grows faster with rising incomes (higher income elasticity of demand).
Dutch disease	A resource boom (e.g., oil discovery) can cause the real exchange rate to appreciate, making other exports uncompetitive and hollowing out manufacturing — named after the Netherlands' experience with North Sea gas in the 1960s.
Resource curse	Paradoxically, resource-rich countries often have slower growth than resource-poor countries. Michael Ross (2001) and others have linked resource wealth to corruption, authoritarian governance, and conflict.
Low value added	Exporting raw materials generates less income than exporting processed or manufactured goods.

Key Definition: The Prebisch-Singer hypothesis states that the terms of trade for primary commodity exporters tend to decline over time relative to manufacturers, because income elasticity of demand for manufactured goods exceeds that for primary products.

The Prebisch-Singer Hypothesis — Evaluation

Supporting evidence:

• Long-run data on commodity prices relative to manufactures generally supports the trend, though with significant variation.
• Many commodity-dependent countries have experienced declining terms of trade (e.g., coffee-exporting countries in East Africa).

Criticism:

• Some primary products (oil, rare earth minerals) have experienced long-run price increases.
• Quality improvements in manufactured goods are not always captured in price indices.
• The hypothesis treats all primary products as a single category, ignoring diversity.

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3. Savings Gap and the Harrod-Domar Model

The Harrod-Domar Growth Model

The Harrod-Domar model (Roy Harrod 1939, Evsey Domar 1946) provides a simple framework linking economic growth to savings and investment:

Growth rate = Savings ratio / Capital-output ratio

Or: g = s / k

Where:

• g = rate of economic growth
• s = savings ratio (proportion of national income saved)
• k = capital-output ratio (the amount of capital needed to produce one unit of output)

Implications for Developing Countries

• Developing countries often have a low savings ratio because incomes are low — households spend most of their income on basic necessities.
• Low savings means low investment, which means low capital accumulation and low growth — a poverty trap or vicious circle of poverty.
• The model suggests that to achieve faster growth, developing countries need to increase their savings ratio or attract external capital (aid, FDI, borrowing).

Evaluation of the Harrod-Domar Model