Economically Less Developed Countries (ELDCs) face a range of challenges that make it difficult for them to achieve sustainable economic development. These barriers can be categorised in three ways:

• Economic barriers
• Geographical barriers
• Political and social barriers

Economic barriers

The economic barriers to development are focused on the supplied side of the economy and the challenges ELDCs face in terms of increasing potential output and long-run aggregate supply. We know that economic development is more than just achieving sustained economic growth, but evidence suggests economic development is going to need long-term economic growth. Diagram 4.25 shows how the barriers to economic development faced by an ELDC might restrict its growth in potential output. Instead of reaching PPC2 without economic barriers, the ELDC economy only reaches PPC1.

Dependence on primary sector production

ELDCs are often economies with a high proportion of output and exports based on primary production. These are often undiversified economies which means an ELDC economy is focused on a small range of agricultural goods or extracted minerals. For example, agricultural output in Ghana accounts for 26 per cent of GDP and 64 per cent of Zambia’s exports are copper.

Dependence on the primary sectors acts as a barrier to development in the following ways:

• Commodities prices, particularly in agricultural goods, are subject to significant price instability because of supply-side shocks (due to the weather) combined with relatively price inelastic demand and supply. The demand for commodities is price inelastic because they are often used to produce necessity goods such as food and energy The supply of commodities tends to be inelastic because of growing seasons and mining capacity (oil, for example, can only be extracted so quickly from a well). Diagram 4.26 shows how inelastic demand and supply make a commodity price for a good such as cocoa so unstable.

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• Goods produced from agriculture and mining are often necessities whose demand does not grow as strongly when world incomes rise. They have a low-income elasticity of demand relative to manufactured goods. By specialising in commodities an ELDC is limiting their potential for economic growth relative to countries with strong manufacturing and service sectors where demand tends to increase as world incomes rise.
• Over-specialisation brings increased risk for an economy if the demand for a commodity decreases. Oil-producing countries like Iran, Venezuela and Saudi Arabia have experienced large falls in export revenues when the world price of oil has fallen.

Rate of investment

A crucial driver of economic growth and development is capital investment. Increasing the quantity and quality of machines, equipment and buildings raises a country's productivity and this increases potential output. In ELDCs a lack of investment is a significant barrier to economic development. Rates of investment in ELDCs are low relative to MEDCs for the following reasons:

• Low incomes in ELDCs lead to a low savings ratio which reduces the funds available to the banking sector to lend to businesses for investment. This is one type of poverty cycle and is shown in diagram 4.27. A poverty cycle is a 'feedback' loop a country experiences that maintains the level of poverty it experiences.

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• Many ELDCs do not have the financial markets needed by businesses for long-term finance. The financial markets in MEDCs can raise funds for industry by selling shares and bonds. Without these long-term sources of finance firms in ELDCs cannot access the funds needed to fund long-term investment projects.
• If an ELDC has political or economic problems, then the business environment carries significant risks for businesses, and they are less likely to invest in these situations. The current challenges faced by Venezuela are an example of an environment that is not conducive to investment.
• Extensive government regulation and bureaucracy in some ELDCs make it difficult and unattractive for businesses to invest.
• Government investment in public services and infrastructure is limited by a lack of finance because governments in ELDCs find it difficult to raise funds through ineffective tax systems. Low levels of income and profits also limit the taxes governments in ELDCs can raise from households and firms.

Appropriate technology

Another aspect of investment as a barrier to economic development is the use of inappropriate technology. Appropriate technology is capital that can be used to increase the standard of living without excessive exploitation of resources and to use sustainable materials appropriate to the cultural aspects of an ELDC. An example of appropriate technology would be in the Rangpur district of Bangladesh where 4,000 solar power units have been used to provide electricity for 20,000 people. Inappropriate technology would be to supply farming equipment to agricultural producers that are unsuitable for local farmers. For example, fertiliser and seed preparation technology was not adopted by farmers in Ghana because they had not received the specific training needed to apply these farming techniques.

Lack of investment in infrastructure

An important part of economic development in a country is for households and businesses to have a framework of infrastructure that supports their activities. This means effective: transport connections, energy and water supplies, telecommunications and internet services and buildings for commercial and residential use. For many ELDCs the lack of investment funds means their infrastructure is not developed enough to support economic development.

Indebtedness and capital flight

One source of funds for investment in ELDCs is external debt. Governments and businesses in ELDCs borrow money from banks and businesses in MEDCs. This is an effective source of finance for investment, but it becomes a problem when the external debt gets too large for the ELDC to manage. If there is an outflow of funds from the economy in repayments and interest payments this has a negative effect on the ELDC's balance of payments current account. When a country becomes heavily indebted it can lead to a debt crisis when there are large withdrawals of money from the economy. This is called capital flight. Liberia, for example, has very significant external debt which is a major constraint on its development.

Levels of human capital

The availability and skills of the working population are crucial in facilitating economic growth and economic development. An ELDC would like to have a mobile, skilled labour force with the right investment in appropriate technology to achieve the level of productivity needed for sustained economic development. However, ELDCs are often constrained by the following aspects of human capital:

• Poor levels of primary and secondary education mean young people do not develop the basic skills needed to make them productive in the labour market. Poor level of literacy, for example, means workers are limited to the roles they can do in a business.
• High rates of population growth in ELDCs mean many of these countries have young populations. This can limit the number of workers available for managerial positions which are important in raising productivity levels.
• Poor transport systems can reduce the mobility of the labour force.
• Many ELDCs have poor levels of healthcare which makes the workforce less productive. This can be in terms of the low productivity of workers who are in poor health, but also workers cannot be as productive if they are looking after dependants who are unwell.

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  Diagram 4.28 shows how low levels of labour productivity limit potential economic growth and prevent the supply side of the economy from reaching LRAS2.  

Access to international markets

Many ELDCs struggle to access international markets because of protectionism by MEDCs.  In agriculture, for example, farmers in the EU and the US are heavily protected by their respective governments through the use of tariffs, quotas and subsidies. Without access to international markets, the export potential of ELDCs is limited and this restricts their growth potential.

The informal economy

The informal economy in an ELDC is generally made up of many small operations that work outside the normal legal framework of business. Informal businesses range from single-person service enterprises such as cleaners, gardeners and street sellers to larger, illegal operations that deal in drugs.

The informal economy can act as a barrier to economic development in the following ways:

• Their operations do not pay tax and do not provide funds to improve public services and infrastructure.
• They tend to be and stay small operations so they do not develop the economies of scale needed to increase the efficiency and productivity of the economy.
• Informal firms can take potentially skilled workers away from formal organisations, where they are less likely to train their workers to make them more productive.
• Because the informal economy attracts some illegal activity like drug dealing it takes time and resources away from the police. Markets like illegal drugs also have a negative effect on welfare in society.
• Informal markets that involve activities such as recreational drugs are often associated with significant negative externalities which are a barrier to economic development.

Geographical barriers

Landlocked countries 

Landlocked countries have no direct access to the sea. Africa has 16 landlocked countries including Botswana, Ethiopia, Niger and Rwanda, etc. Being a landlocked country can be a barrier to economic development in terms of:

• A lack of access to fishing and other ocean-based industries such as tourism and shipping.
• Because landlocked countries do not have ports it increases transportation costs for businesses.
• It means a landlocked country is dependent on the free movement of goods through neighbouring countries which could be interrupted by political conflict and poor travel conditions.

Climate and other environmental barriers

Many ELDCs are located in regions that experience consistently high temperatures for a large proportion of the year. They are also countries that are susceptible to volatile, extreme weather events like cyclones and droughts. Other environmental challenges involve events like earthquakes and tsunamis. Climate and environmental factors can lead to the following barriers to economic development:

• Supply-side shocks negatively affect aggregate supply in the economy which reduces output and increases prices.
• The threat of supply-side shocks increases the risks for investors and this reduces long-term investment.
• High temperatures and unstable weather can have a negative impact on labour productivity particularly if capital cannot be used effectively in this type of environment.
• Droughts and rainy seasons can have a negative effect on agricultural productivity.

Diseases

We have already dealt with the impact poor health can have on labour productivity, but diseases that can be more prevalent in ELDCs can be a significant barrier to development when you consider them in the light of an under-funded healthcare system. The impact of the Covid 19 crisis in India, Brazil and South Africa is an example of this. Liberia and Sierra Leon were particularly badly affected by the Ebola crisis that impacted east Africa in 2015. Diseases that have a negative effect on the supply side and demand side of the economy are a barrier to development.  

Political and social barriers

The political and social environment are influential in affecting economic development and when this environment does not function effectively, it is a significant barrier to development.

Weak institutional frameworks

The key institutions in a country that provide effective governance are the legal system, the political system and the financial system. These three institutions will act as a barrier to development if they are not governed effectively to support economic development. Ultimately a country needs to have a well-supported, stable government to deliver economic development.

Legal system

If individuals and organisations are treated unfairly by the law then they will not trust the legal system and it will not work to support economic development. This is particularly true when there is corruption in the legal system, and it favours certain individuals and groups. An example of this would be businesses setting up production being treated unfairly in the process, so entrepreneurs do not have the confidence to set up and produce goods and services that create jobs and increase the national income. This legal system is particularly important when assigning property rights to individuals and businesses. If entrepreneurs cannot own the land where their business operates it makes it much more difficult for them to set up and produce.

Political

The political system needs to produce governments that the majority of the country support to fulfil their policy agenda. For many people, this is produced by an effective democratic process. If elections are corrupt and poorly managed, then this can deliver ineffective governments. Without a political system that delivers effective government the other elements of the institutional framework are unlikely to work to deliver economic development.

Robert Mugabe, former President of Zimbabwe

Zimbabwe is a country that has been governed poorly by successive presidents, Robert Mugabe and Emmerson Mnangagwa and the economic consequences of this have been falling real GDP and hyperinflation. Zimbabwe's political environment has been a significant barrier to its economic development.

Financial

For an ELDC to develop an industrial base, it needs to be able to access funds for capital investment. We have already touched on this under economic barriers. Many ELDCs have problems with their financial systems when they are corrupt and favour individuals with power and influence. If a wide base of ordinary people can access loans from banks this will facilitate entrepreneurship in the economy which will deliver the growth that gives economic development. If households and businesses cannot access finance this will be a barrier to development.  The Global Coalition against corruption cited the Democratic Republic of Congo as one of the most corrupt countries to do business in the world.

Inequality

Inequality based on ethnicity, gender, religion and social status can hinder economic development. If individuals and households are not treated equally in terms of work, education, property, the law and finance then large groups of society cannot engage in the process of creating income and employment as well as paying taxes to fund government services. Inequality also conflicts with one of the key aims of development.

Political unrest and crime

Countries suffering from political unrest and high rates of crime come up against significant barriers to economic development. It is very difficult for businesses to operate, attract finance, trade and be productive against the backdrop of civil unrest or a civil war. Countries such as Afghanistan, Yemen Syria and Iraq have struggled to make any progress with economic development because of the unrest in their countries.