(Any two of the following)
(a) Political instability.Successful development under any strategy requires political stability as a necessary condition.The framework of rules (law, property rights, commercial legal institutions) established by government provides the foundation for development.When there is no political stability, this framework keeps changing (or is never established).Development requires investment, and investment looks to the future for its payoff.Political instability discourages foreign investment, as well as internal investment (those few citizens of an unstable country who might have resources to invest may, in particular, fear the consequences of a change in government, and keep their wealth outside the country).
(b) Corruption.Some form of what would be regarded as bribery in developed countries is deeply ingrained in the culture of many developing countries.This is very difficult to eradicate, both because cultural attitudes and expectations are different, and because it has become established in the economy.People make calculations on the basis of the expectation of giving and receiving bribes.Low pay of many jobs (particularly in the public sector) is offset by the opportunity to receive bribes.But this is a great obstacle for development.Much of the costs of any business investment will be in this form.It is very difficult to calculate or estimate these costs.A great deal depends on familiarity with local conditions, and local contacts.For an outsider, such as a foreign investor, this is unfamiliar and risky terrain.
(c) Lack of appropriate institutions.Successful functioning of markets requires institutions that are appropriate to them.For example, property rights must be established, and legal institutions must exist to enforce them.Cultural aspects of human behavior, such as the value of punctuality and responsibility, are critical to how well a market economy can function.If "deadlines" are seen as demeaning, and "it happens when it happens" is a cultural norm, this will inhibit the effectiveness of a market economy.
(d) Lack of investment.The most critical ingredient for development is investment.Investors, both within and without the country, will weigh their investment opportunities carefully.Developing countries must compete with the rest of the world for investment.With the threat of political instability and the lack of developed financial institutions, they are often at a severe disadvantage.Of course, they may have some offsetting advantages, such as inexpensive labor and untapped natural resources.But competition among developing nations often produces "focal points," where a slight lead in the competition for investment allows a country to exploit its gains, and become still more attractive for further investment.This results in a sharp bifurcation between winners and losers in the competition for investment.
(e) Inappropriate education.Inappropriate education is often an obstacle to development.The education most important for development is widespread basic skills.In developing countries, education is often skewed toward the education of small elites, whose education is comparable to that of educated persons in developed nations.This contributes to the "dual economy" problem, skews income distributions, and leaves persons making up the potential work force without basic skills.
(f) Overpopulation.This has proven to be a particularly difficult obstacle to development.Public health measures have reduced infant mortality, and in many rural agricultural economies, an extra child is a useful source of labor.When population is growing rapidly, it is very difficult for real output to grow fast enough to keep up; so per capita income may stagnate or even fall.
(g) Poor health and diseases.In many developing countries, large portions of the population are undernourished or sick with diseases.These diseases make it difficult for people there to work, or even care for their kids, thus creating a vicious circle.
Short Answer Questions
The balance of payments constraint consists of limitations on expansionary domestic macro policy due to a shortage of international reserves.To meet both domestic goals and international balance of payments constraints, many developing countries turn to the International Monetary Fund (IMF).
The traditional sector is often outside the market economy.Policy makers want to be sure that the entire economy moves toward a market economy.This would mean, however, different policies for each sector.In the traditional sector, policy makers would want to push toward privatization and use of a market (away from barter) from within.The internationally oriented modern market sector could be used to attract foreign investment.