Question

International investment and economy

what is the executive summary of Among the problems that hinder growth in developing economies are poor infrastructure, lack of financial institutions and a sound money supply, a low saving rate, poor capital base, and lack of foreign exchange. Explain how these problems are interconnected.

Answer 1

In today’s world, the developing countries are facing “structural constraints” which include poor infrastructure, lack of financial institutions, unsound money supply, low saving rate, poor capital base and lack of foreign exchange. All these factors combined together can be termed as “poverty traps”.

Developing countries demand high infrastructure development but the sources available are limited which leads to low ability of people to start their own businesses and have no access to markets because of which the people become dependent on others for employment which leads to little or no savings.

The financial infrastructure of developing countries is least developed, there are only few banks available. This leads to people to travel to distant areas for banking transactions because of which people prefer to save money in their houses and are unable to take advantage of the benefits provided by financial institutions (fixed deposits, loans, etc.). The banks fail to provide loans to the people because of which the interest rates are always high and therefore, the money supply is always low.

The capital base in developing countries is poor because of lack of financial institutions. A person who wants to start his business is unable to raise capital and unable to earn interest on his savings because of high risk factors involved and high costs. The foreign exchange rates in developing countries are low due to differences in inflation, differences in interest rates and current account deficit.