Pearson Edexcel International Advanced Level Economics: Constraints on development (YEC11)

This guide covers the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics specification (YEC11), Issue 2, June 2018. It teaches part of section 4.3.6, item 2: the demographic, debt, credit, infrastructure and skills factors in 2a, and the non-economic factors in 2b. The specification groups Units 1 and 2 as International AS, and Units 3 and 4 as International A2, the additional content needed for the full International A Level. This topic is in Unit 4 (Developments in the global economy), which only full International A Level candidates take.

Commodity price volatility, primary product dependency, the savings gap, the foreign currency gap and capital flight are the other statements in 2a. They sit in a separate guide. Development strategies, debt relief and aid are also separate. Here you learn why a country struggles to grow and develop, not how it is rescued.

Related pages: revision notes, practice questions, Edexcel A Level Economics hub, printable checklist and free 10-minute diagnostics.

All figures below are invented. Country A, Country B and the other labels are fictional and illustrative.

What you must cover

Spec point	Constraint	Core question
2a	Size and age distribution of population	Does the population structure raise or lower output per person?
2a	Migration (demographic)	What does the flow of workers do to skills, output and public spending?
2a	Household and overseas debt	When does borrowing stop financing growth and start draining it?
2a	Access to credit and banking	Can savers and borrowers be matched at a sensible price?
2a	Infrastructure	Does it raise the productivity of every other input?
2a	Education and skills	Is human capital being built, and is it being kept?
2b	Corruption, poor governance	Are rules and incentives stable and fair?
2b	Civil wars, migration, terrorism	What do conflict and insecurity destroy?

Growth means a rise in real output. Development means an improvement in living standards and wellbeing. A constraint can hold back one without the other, so say which you mean.

Demographic factors

Size of population

A large population gives a big domestic market and a large labour force. It also means resources must be shared among more people. If output grows more slowly than population, output per person falls.

Worked example (Country A, illustrative). Birth rate 32 per thousand, death rate 9 per thousand, net migration minus 3 per thousand.

• Natural increase = 32 minus 9 = 23 per thousand, or 2.3%.
• Population growth = 2.3% minus 0.3% = 2.0%.
• Real GDP grows at 3.5%, so real GDP per person grows by (1.035 / 1.020) minus 1 = 1.47%, or about 1.5%.
• At 2.0% a year the population doubles in about 70 / 2 = 35 years (the rule of 70).

Half the growth is absorbed by extra people. Schools, housing and jobs must expand just to stand still.

Age distribution

The dependency ratio is (population aged 0 to 14 plus those aged 65 and over) divided by those aged 15 to 64, times 100. Age bands vary by source, so state yours.

	Country A	Country B
Aged 0 to 14	14 million	6 million
Aged 15 to 64	24 million	21 million
Aged 65 and over	2 million	9 million
Youth dependency	14 / 24 = 58.3%	6 / 21 = 28.6%
Old-age dependency	2 / 24 = 8.3%	9 / 21 = 42.9%
Total dependency	66.7%	71.4%

The totals look similar, but the problems differ.

• Young population (Country A). Heavy spending on schools and health, low household saving, and a flood of young people who need jobs. If they find work the country gains a demographic dividend, because a large working-age group lifts output per head and saving. If they do not, unemployment and unrest follow.
• Ageing population (Country B). Pension and health costs rise while the tax base shrinks. Saving may fall, and labour shortages can push up costs. In a developing economy ageing before incomes are high is a particular risk, because there is little fiscal room to cope.

Migration as a demographic factor

Net migration is immigration minus emigration. Emigration of skilled workers (brain drain) removes the people the country paid to train. Against that, remittances bring foreign currency, and returning migrants bring skills and contacts.

Worked example. Country F has 12,000 engineers and 1,500 emigrate in a year, a loss of 12.5%. Remittances are 1.2bn in a 30bn economy, 4% of GDP. The net effect depends on whether remittance income and returning skills exceed the lost output and the training cost. Evaluate with the share of skilled leavers, whether the jobs existed at home anyway, and whether remittances are spent on consumption or on investment.

Debt

Overseas debt

Borrowing from abroad can finance investment that raises future output. It becomes a constraint when repayments absorb the funds needed for growth.

Worked example. Country A owes 9.6bn, GNI is 24bn, export earnings are 6bn and annual debt service (interest plus repayment) is 0.9bn.

• Debt to GNI = 9.6 / 24 = 40%.
• Debt service ratio = 0.9 / 6 = 15% of export earnings.
• Suppose 60% of the debt (5.76bn) carries a variable rate that rises from 5% to 8%. Extra interest = 5.76 x 0.03 = 0.17bn, about 2.9% of export earnings.
• If the debt is denominated in dollars and the currency falls from 10 to 12.5 units per dollar, the currency has lost 20% of its dollar value. The debt in local currency rises from 96bn to 120bn, up 25%.

Money spent on debt service is not spent on schools, roads or health, which is the opportunity cost. A heavily indebted government may also cut spending, raise taxes or deter investors who fear default.

Household debt

Household debt matters through spending and stability. A household with debt of 26,000 and income of 20,000 has a debt-to-income ratio of 130%. If the interest rate on that debt rises from 5% to 8%, interest rises from 1,300 to 2,080, an extra 780, or 3.9% of income. Spending on goods falls, firms’ sales fall and growth slows. Poor households may also borrow at very high rates just to cover food, which keeps them from saving or investing in education.

Access to credit and banking

Banks and other financial institutions pool saving and lend it to those with productive plans. Where few people have bank accounts, saving is hoarded as cash or goods and lending is informal.

Worked example. A farmer can buy a pump for 600 and earn extra revenue of 150 a year (a 25% return, payback 4 years).

• Bank loan at 18% a year: interest 108, net gain 150 minus 108 = 42, so the investment pays.
• Informal lender at 10% a month: effective annual rate = 1.10 to the power 12, minus 1 = 213.8%. Interest is about 1,283 a year, so the farmer loses about 1,133. The pump is never bought.

Without affordable credit, profitable projects are not funded, firms stay small and the economy underinvests. Weak banks, a lack of collateral and no credit records all cause exclusion. A fragile banking system is also a constraint: a bank failure destroys savings and trust.

Infrastructure

Infrastructure includes roads, ports, electricity, water, telecoms and internet. It raises the productivity of labour and capital across the economy.

Worked example. A crop is worth 100 at the farm. Poor roads mean 30% spoils before market, so 70 reaches buyers. After a road upgrade only 10% spoils, so 90 arrives, a gain of 20 or 28.6% more produce delivered from the same effort.

Poor infrastructure raises costs, cuts competitiveness, and deters foreign direct investment. Frequent power cuts leave machines idle, or force firms to buy generators. Building it is expensive and slow, which is why the constraint can last for decades.

Education and skills

Human capital is the knowledge and skills of the workforce. Low literacy and weak skills mean low productivity, difficulty in adopting new technology, and limited ability to move into higher-value industries.

Worked example. Training costs 1,200 and raises annual earnings by 300. The simple return is 300 / 1,200 = 25% a year, payback 4 years. Poor households often cannot afford the cost, and weak credit markets stop them borrowing it, so the economy underinvests in skills.

Evaluate: quantity of schooling is not the same as quality; skills must match what employers need; and trained workers who emigrate (brain drain) cut the return to the country. Results take years to appear.

Non-economic factors

Corruption

Corruption is the abuse of public office for private gain. It acts like a tax and distorts decisions.

Worked example. A firm has revenue of 500 and costs of 400, so profit is 100. A bribe of 15% of revenue costs 75, which cuts profit by 75% to 25. Separately, an infrastructure budget of 80 loses 20% to leakage. Only 64 is spent. At 2 per kilometre that is 32 km of road instead of 40 km.

Corruption deters investment, misallocates resources and erodes trust in institutions. It may sometimes speed approvals, but the longer-run cost is usually higher.

Poor governance

Poor governance means weak rule of law, insecure property rights, unstable policy, an inefficient civil service and weak accountability. Without secure property rights, people do not invest or use land as collateral. Unstable policy raises risk and the return investors need.

Civil wars

War destroys capital, kills and displaces workers, diverts spending to the military and discourages investment. Recovery is slow.

Worked example. Real GDP index is 100 before the war. It then falls 8%, 15%, 10%, 6% and 4% in five years. The index becomes 92.0, 78.2, 70.4, 66.2 and 63.5. If the economy had grown at 3% a year it would stand at 115.9, so output is 52.4 below trend, a gap of 45.2% of potential. The gap persists after the fighting stops because capital must be rebuilt.

Migration (forced)

Under 2b, the migration that matters is often driven by conflict or persecution. Large refugee flows strain housing, schools and health in neighbouring countries, which may themselves be poor. The origin country loses working-age people. Hosts can gain labour, so make the case on both sides.

Terrorism

Terrorism raises security costs, deters tourists and investors, and increases uncertainty.

Worked example. Tourist arrivals fall from 800,000 to 600,000 (down 25%). At 900 per visitor the direct loss is 180m. With a multiplier of 1.6 (marginal propensity to withdraw 0.625) the fall in income is 288m. Security spending rising from 2% to 5% of a 50bn GDP diverts 1.5bn from other uses.

Linking the constraints

Constraints reinforce one another. Low income gives low saving, little investment and poor infrastructure, then low productivity and low income again. Corruption can weaken banks; war drives migration; debt cuts spending on schools.

Evaluation points to use:

• Which constraint matters most depends on the country: a landlocked economy with poor roads differs from a conflict-affected one.
• Cause or consequence? Low income may be both.
• Time scale: war damage can fade faster than weak education.
• Evidence: governance and corruption are hard to measure, and rankings rely on perceptions.

Common errors

• Treating a large population as always bad. Size and structure both matter.
• Mixing up debt service ratio (against exports) and debt to GNI.
• Calling all borrowing a constraint. Debt that funds productive investment is not.
• Listing causes without a chain: say how the factor lowers productivity or investment, then what it does to growth or living standards.
• Giving only one side on migration.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11) specification, Issue 2, June 2018, Pearson Education Limited, section 4.3.6, items 2a and 2b (the statements listed above).