a) Explain three institutional factors that may contribute to potential economic growth in developing countries.
Three institutional factors that may contribute to potential economic growth in developing countries include a banking system, an educational system, and political stability. Institutional factors are factors that lead to a good quality infrastructure through suitable financial, legal and social institutional framework, all which are necessary for developing countries. Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP. Developing countries are countries with low levels of real GDP per head and relatively large primary sectors producing predominantly basic commodities.
A good banking system provides the financial infrastructure that enables businesses to flourish and grow because it provides them with funds, thus enabling investment.
A good educational system is also helpful because growth requires a high quality, well educated workforce. This in turn needs a good educational system to provide for as many people as possible. A good educational system will thus increase the quality of labour.
Finally, political stability is necessary because without it there will not be certainty and businesses require certainty to enable them to plan for the future. It can determine whether or not businesses and foreign investors are prepared and comfortable to undertake major investment projects. In addition, political instability may lead to low levels of foreign direct investment, which will in turn lead to low growth and taxation revenue, which would then lead to poverty and social conflict.
b)Evaluate the view that economic growth will lead to economic development.
Economic growth is a necessary but not sufficient condition of economic development. Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP while economic development s an increase in the ability of a country to produce goods and services thereby offering the opportunity for a higher material standard of living. Development is not the same as economic development as development is an increase in the potential for an economy to grow, not growth. The view that economic growth will lead to economic development can be evaluated through looking at the pros and cons.
There are several pros that come from growth which impacts development in a positive way. The first is government investment in education will improve the literacy rate. Another pro is increased levels of income which can lead to an increase in consumption of goods and services, especially if the good is a normal good. This increase in aggregate demand can help out the economy greatly. Finally, another aspect of growth which impacts development in a positive way is government investment in health care because it will decrease the mortality rate of the country. In addition, all three aspects will lead to positive externalaties for the society.
On the other hand, there are cons in growth which impacts development in a negative way. One con is income distribution, which can be a negative consequence because economic growth can result in uneven distributions of income. That is, changes or improvement in production which may make it more efficient by using less people means that some citizens will be driven out of jobs since they are no longer needed. Another con is damage to the environment from pollution of factories and carbon emissions. This increase also causes negative externalities to the society. Lastly, there will be a loss of resources since growth often requires nations to use up several natural resources, and thus use up the supply of non-renewable resources.
