Domestic factors and economic development

The following factors contribute to economic growth:

Education and health

Education is one of the most important domestic factors in any country. Not only does it provide benefits to the educated individuals; it also brings benefits to society. The workforce as a whole will be able to produce more than it previously could, but that is not all. Increased level of education improves communication and sparks social debate, which may help to reform the very foundations of society. Because of the all-important role of education in achieving development, the U.N has made universal enrolment in primary education one of its Millennium Development Goals to be achieved by 2015.

Improving healthcare in less-developed countries is another key in achieving economic development. Better healthcare means that the quality of the labour factor of production improves, and that the country can potentially produce more. However, one of the most important aspects of improved healthcare is perhaps a reduction in child mortality. Studies show that a reduction in child mortality reduces the long-term need to have many children, as the certainty of them surviving to adult age increase. A reduction in child mortality is, in itself, a very significant factor in achieving development since it means that parents have more resources to spend per child, and this increases their quality of life.

The use of appropriate technology

“Appropriate” technology is technology suitable for use with the factor endowments of particular developing countries. The factor endowments of developing countries are labour intensive. Whereas in more developed countries, technology is mainly used in production in order to save firms from having to hire more workers, this would not be appropriate in developing countries as it would only add to unemployment rather than increase the productivity of each worker. Instead, appropriate technology would be such technology that makes use of the labour surplus in order to increase production.

Access to credit and micro-credit

The limitations of the formal financial sector and the informal financial sector in providing financial services, especially credit, encouraged the micro-credit program to evolve. Micro credit is an enabling, empowering, and bottoms-up tool to poverty alleviation that has provided considerable economic and non-economic externalities to low-income households in developing countries. Credit creates opportunities for self-employment rather than waiting for employment to be created. It liberates both poor and women from the clutches of poverty. It brings the poor into the income stream. Given the access to credit under an appropriate institutional structure and arrangement, one can do whatever one does best and earn money for it.

The aim of microfinance is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. It is believed that the poor are generally excluded from the financial services sector of the economy so micro financing Institutions have emerged to address this market failure. By addressing this gap in the market in a financially sustainable manner, an micro financing institution can become part of the formal financial system of a country and so can access capital markets to fund their lending portfolios, allowing them to dramatically increase the number of poor people they can reach.

The empowerment of women

In the past decades, the health and education levels of women and girls in developing countries have improved a great deal--in many cases they are catching up to men and boys. But no such progress has been seen in economic opportunity: women continue to consistently trail men in formal labor force participation, access to credit, entrepreneurship rates, income levels, and inheritance and ownership rights. This is neither fair nor smart economics: Under-investing in women limits development, slows down poverty reduction and economic growth.

A host of studies suggest that putting earnings in women’s hands is the intelligent thing to do to speed up development and the process of overcoming poverty. Women usually reinvest a much higher portion in their families and communities than men, spreading wealth beyond themselves. This could be one reason why countries with greater gender equality tend to have lower poverty rates.

For example, studies show that when income is in the hands of the mother, the survival probability of a child increases by about 20 percent in Brazil, and in Kenya, a child will be about 17 percent taller, because mothers will invest more of their income in health and nutrition. In sub-Saharan Africa, agricultural productivity could be raised by as much as 20 percent by allocating a bigger share of agricultural input to women.

Income distribution

The view that that improved equality can help sustain growth—has become more widely held in recent years. The main reason for this shift is the increasing importance of human capital in development. Now that human capital is scarcer than machines, widespread education has become the secret to growth. "Broadly accessible education" is both difficult to achieve when income distribution is uneven and tends to reduce "income gaps between skilled and unskilled labor."

A 2011 note for the International Monetary Fund by Andrew G. Berg and Jonathan D. Ostry found a strong association between lower levels of inequality and sustained periods of economic growth. Developing countries (such as Brazil, Cameroon, Jordan) with high inequality (during the years being studied) have "succeeded in initiating growth at high rates for a few years" but "longer growth spells are robustly associated with more equality in the income distribution."

It is said that high levels of inequality might damage long term growth by amplifying the potential for financial crisis, discourage investment with political instability, making it more difficult for governments to make difficult choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis.

Inequality is associated with lower level of human capital formation (education, experience, apprenticeship) and higher level of fertility, while lower level of human capital is associated with lower growth and lower levels of economic growth. Inequality is associated with lower levels of taxation which in turn are associated with lower level of economic growth

Inequality in the presence of credit market imperfections has a long lasting detrimental effect on human capital formation and economic development.

The political economy approach, developed by Alesian and Rodrik (1994) and Persson and Tabellini (1994), argues that inequality is harmful for economic development because inequality generates a pressure to adopt redistributive policies that have an adverse effect on investment and economic growth.



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