4.3: Domestic factors and economic development



  1. Corruption is an illegal activity involving the abuse of public office for private gain or the abuse/dishonest use of power.
  2. Infrastructure is the large-scale systems, services and facilities of a country that are necessary for economic activity. They are accumulated through investment, usually by the government, and refers to the transport system, public utilities, public services and communication networks.
  3. Capital flight occurs when money and other assets flow out of the country to seek a “safe haven” in another country.
  4. Micro-credit is the provision of small loans usually given to poor people in developing countries who have no access to traditional sources of finance to enable them to start up very small-scale businesses.


Domestic factors that affect economic development


1. Education

  • Improvements in education → Improvements in the well-being of the population.
  • Increased education → People are able to read and communicate better → Make discussion and debate more likely → May lead to social change.
  • Women being able to afford education → High child survival and fertility rates.
  • Improved education levels → Improve levels of health in society as people are able to understand different causes of life threatening diseases or ways in which diseases they obtained can be cured.
  • Provision of education → Increase in government funding and they aren’t readily available in developing countries.
  • Family economic conditions are one reason why children don’t get education due to families not being able to afford it → They will be used for labor.

2. Health care

  • Greater levels of health care + Greater educational opportunities → Improve levels of economic development.
  • There’s a strong correlation between health care, life expectancy and HDI figures.
  • There have been many developments in developing countries as there is more training for doctors and nurses, buildings for hospitals and clinics, provision of health services → Life expectancy has risen + World infant mortality rate has fell + More children are immunized + Maternal mortality rate has fell.


3. Infrastructure

  • Improvements in infrastructure → Improvements in well-being of the society → Improvements in economic development.
  • Better transportation networks should make it easier for people to travel to places within the city, such as schools, offices etc.
  • Developed radio and TV network should make it easier for people to link up with larger communities and listen to the news happening worldwide.


4. Political stability and lack of corruption

  • Countries with economic stability → More likely to attract FDI and aid → Domestic profits and savings stay in the country.
  • Increased access to FDI → Increase in economic growth, Increased access to aid → Increase in economic development.
  • When there’s political stability, citizens have a view on what’s going on with the government, government planning is more organized and law is enforceable → Higher living standards in a country.
  • Political instability → Causes uncertainty → Leads to civil war → Loss of damage + infrastructure + investment and sometimes aid → Attraction of FDI and aid becomes smaller → Reduced economic growth and development.
  • Governments aren’t accountable to citizens + Government spending on large scale capital investment projects + Poor accounting practices + Not well paid government officials + Uncontrolled/Nonexistent political elections + Weak legal statement + Lack of freedom of speech → Corruption in the country.


      Effects of corruption

  • Wishes of the citizens aren’t completed or heeded.
  • Reduces effectiveness of legal system → Make people do illegal activities.
  • Unfair allocation of resources → Market failure.
  • Bribes → Higher costs of firms in cash terms and management negotiation time → Higher prices for products.
  • Reduces trust in an economy → Countries find it harder to attract foreign investment → Less corrupt countries.
  • Increases the risk of contracts not being honored → Reduces internal and external investment.
  • Officials will make public investments into capital projects, such as education and health care → Reduces the quality of government services for the people.
  • Officials ignored regulations → Damaging effect on individuals and country.
  • Monetary gains from corruption are moved out of the country → Effect of capital flight → Reduces capital available for internal investment.
  • Constant paying of small bribes → Reduces economic well-being of a citizen.

5. Legal system

  • Honest and fully functioning legal system → Improvements in economic development.
  • Property rights are right to own assets, establish the use of assets, benefit from the assets, sell the assets and exclude others from using or taking over the assets.
  • Property rights allow people to own and benefit from private property.
  • No enforceable property rights → Reduced investment and economic growth → No economic development.


6. Financial system, credit and micro-finance

  • Development and independent financial institutions, which are essential for economic growth and development, tend to be limited in developing countries.
  • Developing countries tend to have an official, legal financial market and an unofficial, illegal financial market.
  • Savings are hard to countries that have high levels of poverty since they have nowhere to save money and get good return.
  • People in developing countries tend to have a hard time in gaining access to traditional banking and financial systems.
  • If an individual is interested in starting up a business, and they barely have their own finance, they can opt to micro-credit. Poor people and women tend to be the most common users of micro-credit.


●       Advantages of micro-credit:

  • Provides the means of escaping the poverty trap.
  • Micro-credit given to women allows improvement in their social and physical well-being and opportunity for them and their children to raise their standards of living.
  • Increases employment opportunities for poor people and women.
  • Gives access to people who can’t afford loans from private financial institutions.
  • Allows people to obtain loans at a lower rate than from “loan-sharks”.
  • Brings out self-reliance and entrepreneurial skills by self-employment.
  • Enable the borrowers to make better use of the loans by provision of basic skills.
  • Gives borrowers an opportunity to earn income from their land.

●       Disadvantages of micro-credit:

  • May cause the government to feel that they don’t have to invest in poverty-reducing programmes anymore.
  • People who take micro-credit loans don’t have business experience or knowledge → Possible for them to not pay back the loans.
  • Firms that took the micro-credit loan will remain to be small → Not much change in the overall poverty of a country.
  • No guarantee that the micro-credit loans will bring people out of the poverty line.


7. Taxation

  • Quite difficult for the governments to earn revenue in developing countries.
  • Corporate tax tends to be low since there’s barely any business activity in the countries.
  • Governments offer large tax incentives → Encourages corporate activity + Attract FDI.
  • Developing countries tend to have problems with administration of tax systems in terms of inefficiency, lack of info and corruption → People evade taxes.
  • Large informal markets → Lower tax revenues for the governments in developing countries → Difficult to promote growth and achieve development objectives.
  • Workers in informal markets are poorly paid, work in poor working conditions, have no job security and social care → Low productivity.


8. Use of appropriate technology

  • Increase use of technology → Increase in employment rate.
  • Some goods make it easier for people to do their tasks due to improvements in technology, such as going from cooking from wood to solar cooker.


9. Empowerment of women

  • Women empowerment → Vast improvement in economic development.
  • Education for women → Improvements in well-being of their family → Better informed about health care, hygiene and diet → Improves welfare of the family.
  • Educated women → Improvements in education of children in the family.
  • Educated women → Improvements in quality of the workforce → Improved economic growth and development.
  • Greater women empowerment → Women earn more money → Increases heal levels of families due to higher income levels.
  • Better education and social standing → Increased use of contraception, late marriage, smaller families → Reduced population growth.


10. Income distribution

  • The income gap between rich and poor are greater in developing countries than developed countries.
  • High income inequality → Barrier to growth and development.
  • Low levels of savings by poor people → Low investment levels → Low growth.
  • Politics tend to be in favor of rich people due to their influence → No pro-poor growth in the society.
  • Rich people in developing countries moving funds out of the country → Capital flight → Consumption of foreign products, purchased by rich people, doesn’t help the domestic economy → Low levels of development.