Emerging & Developing Economies
SPEC 4.3 EMERGING & DEVELOPING ECONOMIES
Barriers to development, Harrod-Domar model, market-orientated & interventionist strategies, aid, debt relief & international institutions
Key Definitions
Harrod-Domar Model
A model suggesting economic growth depends on the level of saving and the productivity of investment — developing economies need investment but lack savings (savings gap).
Primary Product Dependency
When a developing country relies heavily on exporting raw materials/primary commodities, making it vulnerable to price volatility.
Capital Flight
When assets or money rapidly flow out of a country due to political instability, economic uncertainty or unfavourable exchange rates.
Microfinance
Small loans made to entrepreneurs and small businesses in developing countries who lack access to conventional banking.
Harrod-Domar Model
Growth = Savings Ratio (s) ÷ Capital-Output Ratio (k)
The Savings Gap Logic
Low incomes → low savings → insufficient domestic investment → low capital accumulation → low productivity → low incomes → vicious cycle of poverty.
To break the cycle, developing countries need external finance: FDI, foreign aid, or borrowing — but each has costs.
Exam Tip
Harrod-Domar explains why external finance is needed, not which type is best. Always evaluate: FDI (profit repatriation), aid (dependency), borrowing (debt trap). The model also assumes savings are efficiently channelled into productive investment — which requires functioning financial markets and institutions.
8 Barriers to Development
Each barrier must be explained as a chain of reasoning — not just listed.
BarrierChain of Reasoning
1. Primary product dependencyVolatile prices (inelastic S&D) → unstable revenue → can't plan investment. Prebisch-Singer: long-run ToT deterioration.
2. Savings gapLow income → low savings → low investment → low growth → vicious cycle (Harrod-Domar).
3. Foreign currency gapInsufficient export earnings to pay for imports of capital goods → limits industrialisation.
4. Capital flightInstability/corruption → assets moved abroad → domestic investment falls → growth stalls.
5. Debt burdenHigh debt-to-GDP → interest payments crowd out health/education/infrastructure → debt trap.
6. Infrastructure deficitsPoor roads/energy/telecoms → high production costs → deter FDI → limit trade.
7. No property rightsNo land title → can't use as collateral → no credit → limits entrepreneurship.
8. Demographic factorsHigh birth rate → large dependent population → less for productive investment. Growth diluted per capita.
Non-Economic Barriers
Non-Economic Factors
Corruption and weak governance: Diverts resources, deters investment, undermines rule of law
Civil conflict and political instability: Destroys infrastructure, displaces populations, deters FDI
Geography and climate: Landlocked countries face higher trade costs; tropical diseases reduce productivity
Cultural factors: Gender inequality restricts female labour force participation → wastes human capital
Colonial legacy: Institutional frameworks designed for resource extraction, not development
Examiner Alert
Paper 3 synoptic essays require both economic and non-economic analysis. Institutional quality (rule of law, corruption, governance) is increasingly seen as the most important prerequisite — without it, no strategy works.
Market-Orientated Strategies
StrategyMechanismLimitation
Trade liberalisationOpens economy → specialisation → efficiency → growthMay destroy infant industries
Promotion of FDICapital, technology transfer, jobs, tax revenueProfit repatriation; environmental risk
Removal of subsidiesReduces fiscal burden; removes distortionsHits poorest hardest
Floating exchange rateSelf-correcting BoP; no reserve drainVolatility deters trade/investment
MicrofinanceCredit for unbanked; empowers womenHigh rates; weak macro evidence
PrivatisationProfit motive → efficiency, innovationNatural monopoly exploitation; job losses
Interventionist Strategies
StrategyMechanismLimitation
Human capitalEducation + healthcare → productivity → growthVery long-term payoff
Protectionism (infant)Shield new industries until EoS achievedMay never grow up; retaliation
Managed exchange rateStability; competitive undervaluationRequires reserves; inflation risk
InfrastructureReduces costs → attracts FDI → tradeExpensive; corruption risk
Joint venturesTechnology/skill transfer + domestic controlMNC may dominate
Buffer stocksStabilise commodity prices → stable farmer revenueCostly storage; market distortion
Other Strategies
Lewis Model
Surplus labour in agriculture absorbed into modern industrial sector → productivity rises → growth. Relevant for China's industrialisation.
Tourism
Foreign currency, employment, infrastructure. Risk: enclave effect (revenue leaks to foreign firms), environmental damage, external dependency.
Fairtrade
Guaranteed minimum price → stable income → reduces volatility for small farmers. Limit: Small share of trade; certification dependency.
Primary Industries
Exploit resource endowment → export revenue. Risk: Resource curse — Dutch Disease, rent-seeking, corruption.
Aid as a Strategy
Types of Aid
Bilateral: Government to government. Multilateral: Via World Bank, IMF, UN. Tied aid: Must be spent on donor goods. Humanitarian vs development: Emergency relief vs long-term structural support.
Arguments FOR Aid
Fills savings gap (Harrod-Domar)
Funds infrastructure and human capital
Essential for humanitarian crises
Can target specific development goals (health, education)
Arguments AGAINST Aid
Creates dependency — reduces domestic institution-building
Tied aid benefits donors, not recipients
May prop up corrupt governments
Reduces incentive for domestic tax collection
Exam Tip
Oct 2020 P2: "Evaluate the extent to which aid is the most effective way to promote economic development." Nov 2021: "Evaluate the effectiveness of microfinance." Both are high-frequency past paper essays.
Debt Relief
HIPC Initiative
Heavily Indebted Poor Countries Initiative — IMF and World Bank cancel debt for qualifying countries that meet conditionality requirements. Frees government resources for health and education.
Benefits
Frees fiscal space → health, education, infrastructure. Breaks debt trap. Improves creditworthiness for future borrowing.
Limitations
Conditionality may force harmful austerity. May create moral hazard. Doesn't address root causes of underdevelopment.
International Institutions
InstitutionRoleEvaluation
World BankLong-term development loans/grants. Poverty reduction, infrastructure, human capital.Conditionality may not align with country priorities.
IMFShort-term BoP support. Structural adjustment programmes (austerity, deregulation, privatisation).Controversial: conditions may harm short-run growth. Procyclical damage.
NGOsOxfam, MSF, BRAC — aid, advocacy, development outside government. Reach marginalised communities.Limited scale; may lack coordination with government policy.
Exam Tip
P3 2022 asked: "Evaluate market-orientated strategies the government could use to promote economic development." P3 2023: "Discuss two likely benefits of debt relief." Know the institutions and their limitations.
Washington Consensus vs East Asia
Washington Consensus (1990s)
Market liberalisation: trade openness, privatisation, deregulation, floating exchange rates, fiscal discipline.
Results: Mixed. Latin American ISI (Import Substitution Industrialisation) largely failed due to inefficiency. Many African countries saw limited benefits.
East Asian Model
South Korea, Taiwan, Singapore — grew fastest using significant state intervention: industrial policy, managed exchange rates, directed credit, investment in education.
Key lesson: What works depends on country context, institutional quality, resource endowment, and stage of development.
Key Evaluation
Neither purely market-orientated nor purely interventionist strategies work universally. The best evidence supports a mixed approach tailored to context. This is the strongest AO4 conclusion for any development strategy essay.
Examiner Alerts
Top Student Errors
Listing barriers without chains: "Debt is a barrier" scores 0. "High debt-to-GDP → large interest payments → crowds out spending on infrastructure and human capital → lower growth → debt trap" scores full marks.
Generic strategy evaluation: "It depends on many factors" is L1. Name the factors: institutional quality, conditionality, time horizon, country context.
Ignoring non-economic factors: Paper 3 synoptic essays require BOTH economic and non-economic analysis. Always include governance/corruption/conflict.
Aid = good/bad binary: Top answers distinguish between types of aid (tied vs untied, humanitarian vs development) and evaluate each separately.
Forgetting Harrod-Domar assumptions: The model assumes savings translate efficiently into investment — this requires functioning financial institutions, which many developing countries lack.
AO4 Evaluation Toolkit
5 Evaluation Points for Development Essays
Institutional quality: "No development strategy works without basic rule of law, secure property rights, and absence of corruption. Institutional reform may be a prerequisite for any strategy."
Context-dependence: "East Asian state-led models succeeded; Latin American ISI largely failed. What works depends on the specific country's institutions, resources, and stage of development."
Aid dependency: "Consistent aid may reduce incentive for domestic institution-building and tax collection. Sustainability requires transition to domestic revenue generation."
FDI quality: "Capital and technology transfer occur only if MNC reinvests locally. Profit repatriation limits long-run domestic benefit. Environmental and labour exploitation risks."
Conditionality harm: "IMF structural adjustment may force austerity in recession — procyclical damage. Evidence on whether conditions improve long-run outcomes is mixed."
Practice Question
Question (8 marks — Paper 3 style):
Examine two reasons why primary product dependency may act as a barrier to economic development.
1
Price volatility: Primary commodities have inelastic supply (long production lags) and shifting demand → large price swings → unstable export revenue → government cannot plan long-term investment in infrastructure/education → development held back. Apply: e.g. copper-dependent Zambia faces revenue collapse when copper prices fall.
2
Declining terms of trade (Prebisch-Singer): Long-run trend: prices of primary commodities fall relative to manufactured goods → each unit of exports buys fewer imports of capital goods → foreign currency gap widens → limits industrialisation. Apply: contrast with East Asian countries that diversified into manufacturing.
Practice Question
Question (25 marks — Paper 2):
"Evaluate the extent to which aid is the most effective way to promote economic development."
(Oct 2020 actual past paper question.)
Intro:
Define economic development (not just growth — HDI improvement, poverty reduction). Thesis: aid is useful but not sufficient — depends on type, governance, and complementary strategies.
KAA1:
Aid fills the savings gap (Harrod-Domar) → funds investment → infrastructure, health, education. Multilateral aid (World Bank) targets specific development goals. Humanitarian aid essential in crises.
KAA2:
Alternative strategies may be more effective: FDI brings technology transfer + employment; trade liberalisation enables specialisation (CA theory); microfinance empowers entrepreneurs. Each addresses different barriers.
Eval 1:
Aid dependency — "Consistent aid can reduce incentive for domestic institution-building and tax collection. Tied aid often benefits donors. Sustainability requires transition to domestic revenue."
Eval 2:
Institutional quality — "No strategy works without governance. Aid to corrupt governments may be wasted. Institutional reform may be the prerequisite for any approach to work."
Concl:
"Aid is a necessary component of development, particularly for the poorest countries and humanitarian crises, but it is not sufficient alone. The most effective approach combines targeted aid with trade access, FDI promotion, and crucially, institutional reform. Context determines which mix works best."
Summary
Key Concepts
ConceptKey Point
Harrod-DomarGrowth = s/k. Low savings → need external finance. Assumes efficient financial system.
8 BarriersPPD, savings gap, forex gap, capital flight, debt, infrastructure, property rights, demographics.
Market strategiesTrade lib, FDI, subsidy removal, floating ER, microfinance, privatisation.
InterventionistHuman capital, infant industry, managed ER, infrastructure, joint ventures, buffer stocks.
Other strategiesLewis model, tourism, Fairtrade, primary industries, aid, debt relief.
InstitutionsWorld Bank (long-term), IMF (short-term BoP), NGOs (grassroots).
Must-Know Definitions
Harrod-Domar, PPD, capital flight, microfinance
HIPC, structural adjustment, FDI
Lewis model, Fairtrade, buffer stocks
Must-Know for Essays
8 barriers as chains of reasoning
Market vs interventionist comparison
Aid evaluation (dependency, tied, types)
Institutional quality as prerequisite
Exam Tip
This topic is extremely high-frequency on Paper 2 Section C (25-mark essays on aid, FDI, microfinance) and Paper 3 (synoptic development questions). Past papers: Oct 2020 (aid), Nov 2021 (microfinance), June 2018 (FDI), P3 2022 (market-orientated strategies), P3 2023 (debt relief).
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