Haller (2012) defines economic development as a process that generates qualitative and quantitative changes in the economic and social nature of the society, enabling a country to cumulatively and durably raise its real gross domestic product (GDP). Sustained economic development eventually transforms low-income countries into modern industrialized nations characterized by superior material welfare, elimination of mass poverty, and the shift from agricultural to industrial economic activities.
The primary challenge to attaining economic development is the vicious cycle of poverty that persists in underdeveloped countries. According to New Age International (n.d.), the cycle refers to a loop of forces acting and reacting upon each other in a manner that keeps less developed countries in a state of poverty. The prevalence of poverty leads to the scarcity of resources and an inability to afford basic needs. On the supply side, poverty causes low volumes of savings, thus, less money is available for investment. The result low capital formation, productivity, employment, and income. On the demand side, poverty lowers the purchasing power of consumers resulting in low levels of demand in the economy (New Age International, n.d.). The products market contracts as producers reduce production levels. The absence of investment stimulus leads to a deceleration in capital formation, productivity, employment, incomes, and ultimately poverty arises. The linear stages of growth theory emphasized investment as the vehicle for economic development (Dang & Sui Pheng, 2015). According to the theory, the massive injection of capital into viable investment projects or productive industries is the key to achieving a rapid GDP growth. Hence, the curtailment of investment by the vicious poverty cycle erodes the benefits that could arise from economic development efforts.
Secondly, international market forces caused by free trade are partly to blame for the slow rate of economic development in low-income countries. These countries are mainly extractive in nature, whose products fetch low prices in the international market due to their low income elasticity of demand (International Labour Office [ILO], 2001). On the other hand, they import expensive manufactured products from developed countries, causing a worsening of their balance of payment and trade accounts that continuously depreciates their domestic currencies. Besides, the increased creation of synthetic industrial substitutes for unprocessed raw materials by developed countries threaten the bargaining position of developing countries in trade (ILO, 2001). Trade inequity has its roots in the international dependence theory that views trade liberalization as a tool for exploitation used by developed economies to obtain a cheap supply of raw materials and to deplete the natural resources of developing nations (Dang & Sui Pheng, 2015). A possible solution to this problem is diversification of exports by curbing their overdependence on primary products and embracing manufactured goods to strengthen their trade position in the face of declining commodity export prices over time. Moreover, countries can channel resources to particular areas of specialization within which they have a comparative advantage, thus increasing production while cutting overall costs.
Thirdly, market imperfections caused by heavy-handed government intervention in the economy in most developing countries slows down development. The neoclassical counter-revolution theory maintains that underdevelopment results from domestic market distortions and not from the predatory activities of developed countries (Dang & Sui Pheng, 2015). Government actions such as protectionism, subsidies, and natural monopolies lead to poor allocation of resources that curtail the growth of the private sector. The result is low investment and capital formation rates. For instance, in Ethiopia, the government is in charge of all public utilities in the country. Due to massive bureaucracy and political interference in management, the country experiences poor infrastructure and frequent electricity shortages (‘Ethiopia: What if they were really set free?’ 2016). Lastly, political instability in the majority of low-income countries creates an unfavorable business climate that hinders economic development (New Age International, n.d.). For instance, civil strife caused by religious intolerance in some middle-east countries has stifled economic activities.
References
Ethiopia: What if they were really set free? (2016, January 2). The Economist, 36-37. Retrieved from http://www.economist.com/news/middle-east-and-africa/21684816-if-government-let-people-breathe-they-might-fly-what-if-they-were-really-set?zid=304&ah=e5690753dc78ce91909083042ad12e30
Dang, G., & Sui Pheng, L. (n.d.). Theories of Economic Development. In Infrastructure Investments in Developing Economies (pp. 11-26). Retrieved from http://www.springer.com/cda/content/document/cda_downloaddocument/9789812872470-c2.pdf?SGWID=0-0-45-1483317-p177033406
Haller, A. (2012). Concepts of Economic Growth and Development: Challenges of Crisis and of Knowledge. Economy Transdisciplinarity Cognition, 15(1), 66-71. Retrieved from http://www.ugb.ro/etc/etc2012no1/09fa.pdf
International Labour Office (ILO). (2001). Trade Liberalization and Employment. Retrieved from http://www.ilo.org/public/english/standards/relm/gb/docs/gb282/pdf/sdg-2.pdf
New Age International. (n.d.). Economic Development and Growth. Retrieved March 6, 2016, from http://www.newagepublishers.com/samplechapter/000186.pdf
The International Economic Development Council (IEDC). (n.d.). Economic Development Reference Guide. Retrieved from http://www.iedconline.org/clientuploads/Downloads/IEDC_ED_Reference_Guide.pdf
