The Main Constraints To Economic Growth Economics Essay

There are different constraints to economic growth in any country. These constraints differ from one country to another according to different economic situations in these countries. The following are the main constraints that usually affect developing countries as well as developed ones.

1. Lack of Savings

The Harod Domar model suggests the levels of savings are important for determining levels of investment and hence the rate of economic growth. If there is a lack of savings, it limits investment and therefore, there is little prospect of economic development. However, sometimes the level of savings is misused on unproductive investment projects. The important thing is not level of savings but the economic management of investment resources. Also, low savings may be countered by foreign investment

2. Corruption

This can cause foreign aid to be siphoned off into the bank accounts of politicians. It means that resources for development will not be used in their entirety for economic development. In some cases the % of corruption can be very high. However, this has not stopped some countries from developing e.g. China. Corruption is endemic in the world. It is a major problem in China, but hasn’t stopped growth. Also, corruption may just take a % of investment, therefore there are still funds being used for investment. So unless stopping corruption, the economic growth in any country can not easily attained.

3. Human Capital

Lack of human capital is a constraint on growth. To diversify the economy and move towards industrialisation it is necessary to have skilled labour. The World Bank says human capital accounts for about 65% of economic development. Therefore, it can be a very significant constraint to growth. In many cases attempts to industrialise the economy suffered from lack of human capital. However, in many industries competitiveness can be achieved through low wage costs, as in China. Therefore, for labour intensive industries low wage costs can be more important than labour productivity.

4. Poor Macroeconomic Conditions

The fundamental problem behind the poor macroeconomic situation has been high and unsustainable fiscal deficits. High inflation and unstable exchange rates have made business decision-making and planning difficult. All this factors have reduced private sector investment, thus jeopardizing future economic growth.

5. Inefficient Tax and Incentive System

Although tax and incentives systems are broadly competitive, the tax system is geared towards revenue collection rather than towards supporting economic growth. The incentive system is complex, non-transparent, non-automatic and discretionary. It favours new international investments and does not consider existing domestic investors. This puts existing businesses at a disadvantage if they want to re-invest to modernise. The approval of incentives and allocation of land is slow and uncertain. Incentives once granted are not guaranteed, and the incentive regime is unpredictable because of policy reversals.

6. Poor Infrastructure

A country’s landlocked status is a major disadvantage to businesses as it increases the costs to importers and exporters relative to regional competitors. The weakness of the transport infrastructure includes poor access to ports, limited air links and freight capacity, limited rail capacity and poor condition of roads serving manufacturing, mining, tourism and rural producing areas. In addition, the problems with utilities (water, electricity and communication) affect production in the country because they are not only unreliable but also inefficient and expensive and hence slow economic growth.

7. Poor Private and Public Co-operation and Dialogue

When there has been weak co-operation and consultation between the private and public sectors due to a lack of a recognised, representative and legal institution that would serve as a liaison between the two sides, such as a Business Council. This gap definitely is a main constrain to economic growth.

As is the case in any new planning scheme there must be some advantages and disadvantages. Sustaining a fast economic growth is not an exemption; the following table summarises the main merits and demerits that affect any country’s ability of achieving faster economic growth. The advantages and disadvantages of economic growth are fiercely debated by economists, environmentalists and other commentators. In this note we consider some of the economic and social costs and benefits from expanding levels of production and consumption. In particular we focus on the idea of sustainable growth.

Table1: Metris and Demerits of Economic Growth

Advantages

Disadvantages

Improvements in living standards

Inflation risks

Rising Employment:

The environment degradation

The accelerator effect of growth on capital investment

Inequalities of income and wealth

Greater business confidence

Regional disparities

The “fiscal dividend” to the government (more money to finance spending projects).

Potential environmental benefits

Designed by the Author, 2010