Question

subjects -International investment and economy

What is the conclusion 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.(300)

Answer 1

Developing countries are distinguished by low output per capita, poor health and nutrition, high fertility rates, poor education, and saving rates that are usually too low to finance sufficient investment in human and physical capital.

Worker productivity is low in developing countries because the stocks of human and physical capital are low, technological advances are not widely diffused throughout the economy, entrepreneurship is scarce, financial markets are not well developed, some talented professionals migrate to high-income countries, formal and informal institutions do not provide sufficient incentives for market activity, and governments may serve the interests of the group in power rather than the public interest.

The key to a rising standard of living is increased productivity. To foster productivity, developing nations must stimulate investment, support education and training programs, provide sufficient infrastructure, and foster supportive rules of the game.

Increases in productivity do not occur without prior saving, but low incomes in developing countries offer less opportunity to save. Even if some higher-income people in poor countries have the money to save, financial institutions are not well developed, and savings are often sent abroad where there is a more stable investment climate.

Import substitution is a development strategy that emphasizes domestic production of goods that were imported. Export promotion concentrates on producing for the export market.

Foreign aid has been a mixed blessing for most developing countries. In some cases, that aid has helped countries build the roads, bridges, schools, and other capital infrastructure necessary for development. In other cases, foreign aid has simply increased consumption and insulated government from painful but necessary reforms. Worse still, subsidized food and used clothing from abroad has undercut domestic production and economic development, particularly in Africa.