Domestic barriers to economic growth development
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Domestic barriers to economic growth & development. Political stability. ‘Stabel government and its ability to withstand forcible removal from power’. Political stability is associated with higher growth rates and better development outcomes.

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Domestic barriers to economic growth & development

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Domestic barriers to economic growth development

Domestic barriers to economic growth & development


Political stability

Political stability

  • ‘Stabel government and its ability to withstand forcible removal from power’.

  • Political stability is associated with higher growth rates and better development outcomes.

  • Periodically monitored by int’al organizations (WB) by use of indicators such as: revolutions, civil war, internal conflicts, ethnic tensions, frequency of elections, demonstrations, ...


Domestic barriers to economic growth development

  • Indispensable to growth and development:

    • Stable government is necessary for the creation of a stable economic environment (implementation and continuity of economic and other policies).

    • Stable economic environment necessary for investments leading to physical capital formation. Political instability makes investments riskier.

    • Needed to attract FDI.

    • Political instability leads to an outflow of financial capital (capital flight), which contributes to B.oP. deficits.


Domestic barriers to economic growth development

  • Political instability has negative impacts:

    • Disrupts every aspect of economic life.

    • Results in deep cuts in public spending on education, health, infrastructure and development programs.

    • Undermines investment by introducing incertainties wrt property rights, tax rules, expropriations,...

    • Induces capital flight, depriving the economy of resources that could have been used for domestic investment.


Domestic barriers to economic growth development

  • When accompanied by violence, can lead to destruction of infrastructure.

  • Increases vulnerability to hunger and famine, as governments divert resources to military or police activities.

  • Close relationship between political instability and levels of income, with low per capita income levels associated with higher levels of political instability.


  • Domestic barriers to economic growth development

    • Causality runs in both directions:

      • Political instability → low econ. growth → low incomes.

      • Low incomes → widespread dissatisfaction with economic conditions for which gov is held responsible → political instability.

      • Circle of political instability. Examples: countries in Africa and Central and Latin America.


    Corruption

    Corruption

    • WB definition: ‘the abuse of public office for private gain’.

    • Specially pronounced in countries where the legal system, mass media and the system of public administration are weak and underdeveloped.

    • Monitored by Transparency International (TI), that compiles the Corruption Perceptions Index, based on public opinion surveys.

    • Higher levels of corruption are found in countries with low per capita incomes and low rates of growth.


    Domestic barriers to economic growth development

    • Corruption leads to lower growth and poorer development performance:

      • Being like a tax, makes private investments more costly.

      • Bribes to be paid for access to basic services (to teachers, health workers) act as a regressive tax and the poor are deprived from basic social services.

      • Bribes go into the pockets of public servants and politicians, not being available to the government for the provision of social services.


    Domestic barriers to economic growth development

    • Can result in misallocation of resources as gov officials accept bribes to pursue uneconomic projects, while neglecting investments in basic social services (education, health, sanitation,...)

    • Restricts entry of new firms that must pay bribes to begin operations, preventing operation of competitive markets.

    • Damages people’s trust in the state, its institutions and leadership.

    • Weakens prospects for environmental sustainability as bribes are paid in order to avoid compliance with environmental regulations.


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