Domestic barriers to economic growth & development

1. Domestic barriers to economic growth & development

2. Political stability • ‘Stabel government and its ability to withstand forcible removal from power’. • Political stability is associated with higher growth rates and better development outcomes. • Periodically monitored by int’al organizations (WB) by use of indicators such as: revolutions, civil war, internal conflicts, ethnic tensions, frequency of elections, demonstrations, ...

3. Indispensable to growth and development: • Stable government is necessary for the creation of a stable economic environment (implementation and continuity of economic and other policies). • Stable economic environment necessary for investments leading to physical capital formation. Political instability makes investments riskier. • Needed to attract FDI. • Political instability leads to an outflow of financial capital (capital flight), which contributes to B.oP. deficits.

4. Political instability has negative impacts: • Disrupts every aspect of economic life. • Results in deep cuts in public spending on education, health, infrastructure and development programs. • Undermines investment by introducing incertainties wrt property rights, tax rules, expropriations,... • Induces capital flight, depriving the economy of resources that could have been used for domestic investment.

5. When accompanied by violence, can lead to destruction of infrastructure. • Increases vulnerability to hunger and famine, as governments divert resources to military or police activities. • Close relationship between political instability and levels of income, with low per capita income levels associated with higher levels of political instability.

6. Causality runs in both directions: • Political instability → low econ. growth → low incomes. • Low incomes → widespread dissatisfaction with economic conditions for which gov is held responsible → political instability. • Circle of political instability. Examples: countries in Africa and Central and Latin America.

7. Corruption • WB definition: ‘the abuse of public office for private gain’. • Specially pronounced in countries where the legal system, mass media and the system of public administration are weak and underdeveloped. • Monitored by Transparency International (TI), that compiles the Corruption Perceptions Index, based on public opinion surveys. • Higher levels of corruption are found in countries with low per capita incomes and low rates of growth.

8. Corruption leads to lower growth and poorer development performance: • Being like a tax, makes private investments more costly. • Bribes to be paid for access to basic services (to teachers, health workers) act as a regressive tax and the poor are deprived from basic social services. • Bribes go into the pockets of public servants and politicians, not being available to the government for the provision of social services.

9. Can result in misallocation of resources as gov officials accept bribes to pursue uneconomic projects, while neglecting investments in basic social services (education, health, sanitation,...) • Restricts entry of new firms that must pay bribes to begin operations, preventing operation of competitive markets. • Damages people’s trust in the state, its institutions and leadership. • Weakens prospects for environmental sustainability as bribes are paid in order to avoid compliance with environmental regulations.