IB DP Economics: Barriers and strategies for growth and development – Revision Notes

These notes follow the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. They cover sub-topic 4.9, barriers to economic growth and/or economic development, and sub-topic 4.10, growth and/or development strategies. Both are SL and HL, with no HL-only content. All countries and figures are invented.

Full explanations are in the study guide. Test yourself with the practice set. The IB DP Economics hub and printable checklist show where these sub-topics sit, and the free diagnostics show what to revise first. Related: economic integration.

Poverty cycle in one line

Low income -> low saving and low tax revenue -> low investment in capital,
health and education -> low productivity -> low income

Any linked set of factors is acceptable. Explain every arrow. Break the cycle with a large push at one point.

Barriers: economic

Barrier	One-line effect	Good link to make
Rising inequality	The poor cannot afford education or start firms	Weak demand, social tension
Lack of infrastructure and appropriate technology	Higher costs, cut-off farmers	Technology must suit local skills
Low human capital	Low output per worker	Health and education reinforce each other
Primary sector dependence	Volatile prices, low value added	Export earnings swing
No access to international markets	Cannot reach higher prices or scale	Trade barriers, poor transport
Informal economy	Outside tax and legal protection	Lost revenue, small firms
Capital flight	Funds leave the country	Political risk, weak currency
Indebtedness	Debt service crowds out spending	Debt service ratio
Geography, including landlocked	Trade passes through neighbours	Higher transport cost
Tropical climate, endemic disease	Poor health, lower yields	Health spending, lost days

Barriers: political and social

Barrier	One-line effect
Weak legal system	Contracts hard to enforce, so less investment
Ineffective taxation	Low revenue, few public goods
Weak banking system	Savings not turned into loans
Insecure property rights	No collateral, little incentive to improve
Gender inequality	Talent wasted, lower family investment in girls
Lack of good governance, corruption	Funds diverted, investors deterred
Unequal political power and status	Policy serves a narrow group

Strategies

Strategy	Strength	Limitation
Import substitution	Builds industries, saves foreign exchange	Inefficiency, higher prices
Export promotion	Foreign exchange, scale	Relies on foreign demand, costly
Economic integration	Larger market, competition	Some industries lose
Diversification	Less exposure to one price	Slow, needs skills and capital
Social enterprise	Reaches neglected groups	Small, short of finance
Trade liberalisation	Cheaper inputs, competition	Weak firms exposed
Privatisation	Efficiency, cash for the state	Monopoly risk, job losses
Deregulation	Easier to start firms	Weaker protection
Redistribution (taxes, transfers, minimum wages)	Lower inequality, more human capital	Cost, incentives, possible job losses
Merit goods (education, health, infrastructure)	Productivity, long-run gains	Slow returns, high cost
Inward FDI	Jobs, capital, technology	Profit outflows, dependence
Foreign aid (humanitarian, development, ODA, NGOs, debt relief)	Funds projects, frees budgets	Tied, dependence, corruption
World Bank and IMF	Finance and advice	Conditions on loans
Institutional change	Lower risk, more investment	Slow, hard to enforce

Institutional change covers: improved access to banking (microfinance, mobile banking), women’s empowerment, reducing corruption, property rights and land rights. Infrastructure covers: energy, transport, telecommunications, clean water and sanitation.

Key definitions

• ODA: government aid flows to developing countries.
• Humanitarian aid: short-term help in emergencies. Development aid: long-term project funding.
• Debt relief: cancelling or reducing debt.
• Microfinance: small loans and savings services for people excluded from formal banks.
• Mobile banking: banking and payments by phone.
• Appropriate technology: fits local skills, costs and conditions.
• Debt service ratio: debt repayments (interest plus capital) divided by export earnings, as a percentage.

Method boxes

Percentage fall in export earnings when one product’s price changes (volume unchanged)

1. Find that product’s share of total exports.
2. Multiply the share by the percentage price fall.

Example: copper is 60% of exports and its price falls 40%. Earnings fall by 0.60 x 40 = 24%.

Debt service ratio

1. Divide debt service by export earnings.
2. Multiply by 100.

Example: debt service 0.5 billion and exports 2.0 billion gives 25%. After relief cuts debt service to 0.3 billion the ratio is 0.3/2.0 = 15%.

Revenue forgone through the informal economy

1. Find informal output as a percentage of GDP: 8/32 = 25%.
2. Apply the average tax rate: 8 x 0.20 = 1.6 billion.

State the assumption that the same rate would apply.

Evaluating a barrier or strategy

1. Explain the effect with a chain of reasoning.
2. Give a strength and a limitation.
3. Add a condition: size, time, country context or interaction.
4. Reach a justified judgement.

Significance, intervention and the SDGs

• Significance of barriers: judge by size (how many people or how much output), root or symptom, country context and interaction with other barriers. Landlocked geography matters more in Halvern than in an island country.
• Intervention against markets: markets give efficiency, competition and FDI but under-supply merit goods and ignore equity. Governments can fund health, education and infrastructure but may lack capacity or face corruption. The best mix depends on the country’s institutions.
• Sustainable Development Goals: compare progress toward selected goals in two or more countries. State which goals, which indicators and the starting points.

Worked reminders

FDI. A plant costing 800 million employs 2,000 workers at 5,000 each: wage bill 2,000 x 5,000 = 10 million a year. Profit of 90 million with 70% sent abroad gives 90 x 0.7 = 63 million leaving, 27 million staying.

Microloan. A loan of 300 at 12% a year gives interest 300 x 0.12 = 36. Extra income of 40 a month is 480 a year. After interest and repaying the 300, 480 - 36 - 300 = 144 remains.

Must-know distinctions

• Growth means more output. Development means better lives, including health, education and freedom. One barrier can hurt growth more than development, or the reverse.
• Poverty cycle (the loop) against poverty trap (the situation that is hard to leave).
• Humanitarian aid (emergencies) against development aid (long-term).
• World Bank (development lending and projects) against IMF (lending for balance of payments problems, with advice).
• Import substitution (replace imports) against export promotion (sell abroad).
• Market-based policy (liberalise, privatise, deregulate) against interventionist policy (taxes, transfers, merit goods).
• Symptom against root cause: corruption can be a symptom of weak institutions.

Quick self-test

1. State two political barriers to development.
2. Halvern exports 8.0 billion; mining is 5.0 billion. Mining prices fall 20%, volume unchanged. Find the fall in total export earnings as a percentage.
3. A country has debt service of 1.2 billion and exports of 4.0 billion. Calculate the debt service ratio.
4. Define Official Development Assistance.
5. Explain one way capital flight lowers growth.
6. Distinguish import substitution from export promotion.
7. State one strength and one limitation of privatisation.
8. Explain why a landlocked country may face higher trade costs.
9. Give two examples of infrastructure named in the guide.
10. State one limitation of foreign aid.
11. A firm in the informal sector makes 6 billion of output in an economy of 24 billion. Find the informal share.
12. Explain how secure land rights might promote development.

Answers

1. Any two: weak institutional framework, gender inequality, lack of good governance or corruption, unequal political power and status.
2. Mining share is 5.0/8.0 = 62.5%. Fall in earnings is 62.5% x 20% = 12.5%. (Check: 5.0 x 0.8 = 4.0, total becomes 7.0, a fall of 1.0/8.0 = 12.5%.)
3. 1.2/4.0 = 30%.
4. Government aid flows to developing countries to promote their development.
5. Savings leave, so domestic investment falls, capital stock grows slowly and productivity and income grow slowly.
6. Import substitution protects and supports domestic producers so they replace imports; export promotion supports firms that sell abroad to earn foreign exchange.
7. Strength: efficiency gains. Limitation: private monopoly or job losses.
8. Goods must cross neighbours’ territory, with delay, fees and dependence on their ports and roads.
9. Any two of energy, transport, telecommunications, clean water, sanitation.
10. It may be tied to donor goods, create dependence or be lost to corruption.
11. 6/24 = 25%.
12. Owners can use land as collateral for loans and gain reason to invest, raising output and incomes.

Where marks are usually lost

• Naming a barrier without explaining the chain to lower growth or development.
• A poverty cycle drawn as a list of factors with no arrows or explanations.
• Mixing up the debt service ratio with total debt.
• Leaving a calculation without working, or without a stated unit or percentage.
• Treating aid, FDI or privatisation as simply good or simply bad.
• Offering strategies in part (b) of an extended answer with no judgement of which works best and under what conditions.
• Writing a real-world example without explaining how it relates to the question.
• Forgetting to link a strategy to the barrier it addresses.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020). These notes cover sub-topics 4.9 and 4.10.