Obstacles to Economic Development

Obstacles to Economic Development Describes, there are many obstacles to economic development which are as follows:

Vicious Circles of Poverty

There is a circular relationship known as the vicious circles of poverty, that tend to perpetuate the low level of development in LDCs.

The basic vicious circle stems from the fact that in LDCs total productivity is low due to deficiency of capital, market imperfections, economic backwardness, and underdevelopment.

However, the vicious circles operate both on the demand side and the supply side. The demand side of the vicious circle is that the low level of income leads to a low level of demand which in turn, leads to a low rate of investment and hence back to deficiency of capital, low productivity, and low income.

This is shown in the low capital diagram.

Obstacles to Economic Development

diagram 2

diagram 2Low productivity is reflected in low real income. A low level of real income means low savings.

Low-level savings also lead to a lack of capital, including low investment, and as a result of a lack of capital, lead to low income, including low productivity.

Thus the vicious circle is complete in the next diagram. The low level of real income, reflecting low investment and capital deficiency is a common fracture of both the vicious circles.

 

Low Rate of Capital Formation

The most pertinent obstacle to economic development is the shortage of capital. Poverty is one of the reasons and the result is that a country has a low rate of capital formation.

In an underdeveloped country, the masses are poverty-ridden. Their marginal productivity is extremely low, low productivity leads to a low real income, low saving, low investment, and a low rate of capital formation.

Such small sums as they may be able to save are often hoarded in the form of currency or used in purchasing gold and jewelry, etc,

It is the high-income group that does most of the saving in underdeveloped countries. But these savings do not flow into productive channels.

The main reasons for the lack of incentives to save and invest in underdeveloped countries. These include “imperfect maintenance of low and order political instability, unsettled monetary conditions”.

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