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Barriers: Barriers prevent of restrict development in some countries.
Development: Development is defined as the improvement of a country's economic situation, measured by GDP, improvements of factors of production, HDI, and etc

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Y2/IB 14) Barriers to Trade and Development

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A2/IB 14) Barriers to Trade and Development - A look at the big reasons why international trade may not foster development

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developing economies suffer from corruption in many different sectors of their economies. Corruption comes in many forms, including the theft of public funds by politicians and government employees, and the theft and misuse of overseas aid. Bribery is also alleged to be a persistent threat, and tends to involve the issuing of government contracts. In some developing economies, bribery is the norm, and this seriously weakens the operation of the price mechanism.

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In the case of public sector funding, spare public funds are often used to repay previous debts, so there are less available funds for capital investment by government. This is often called the problem of debt overhang. The recent sovereign debt crisis has highlighted the problems faced by countries with large public debts, and how such debts limit the ability of government to inject spending into a developing economy.

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One significant constraint on the economic prosperity of less developed countries is the protectionism adopted by some developed one. Developed counties can impose tariffs, quotas, and other protectionist measures individually, or more commonly as a member of a trading bloc.

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Finally, there is an absence of credit markets in many developing economies, and this discourages both lenders and borrowers. Credit markets often fail to form because of the extremely high risks associated with lending in developing countries. This is one reason for the importance of micro-finance initiatives commonly found across India, Pakistan and some parts of Africa.

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In addition, because many developing economies have large public sectors, private investment may be crowded out by public sector borrowing. This means that a government may borrow from local capital markets, if indeed they exist, which causes a relative shortage of capital and raises interest rates.

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A general lack of savings is often seen as the key reason why financial capital is in short supply.  High interest rates to encourage saving will, of course, deter investment.

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Growth is not sufficient to allow scarce financial resources to be freed up for non-current expenditure.

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Many developing economies do not have sufficient financial capital to engage in public or private investment. There are several reasons for this, including the following:

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Population can be a restraining factor a a development of a country, whether that is a lack of population or too much population. Thus, sexual education is a key component in maintaining a adequate level of population, as people are educated to utilize sexual protection. Moreover, it reduces a government's welfare cost as less money is expended for sexual diseases.

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Missing markets usually arise because of information failure. Because of asymmetric information lenders in credit markets may not be aware of the full creditworthiness of borrowers. This pushes up interest rates for all borrowers, even those with a good credit prospect. Low risk individuals and firms are deterred from borrowing, and a lemons problem arises, with only high risk individuals and firms choosing to borrow. Thus, the credit market in developing economies is under-developed or completely missing, with few wishing to borrow, and with those who wish to lend expecting high loan defaults and hence charging very high interest rates.

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Not all sectors of an economy are capable of growth. For some developing economies, too many scarce resources may be allocated to sectors with little growth potential. This is especially the case with the production of agriculture and commodities. In these sectors, there is little opportunity for economic growth because the impact of real and human capital development is small, and marginal factor productivity is very low. Failure to allocate scarce resources to where they are most productive can impose a limit on development.

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Social inefficiency exists when social costs do not equate with social benefits. This can arise when externalities are not taken into account. For example, under-spending on education creates social inefficiency. Some of these inefficiencies are the result of the economy not allowing market forces to operate, while others are the result of market failures. Negative externalities like pollution are often largely uncontrolled in less developed parts of the world, and this imposes a constraint on the sustainability of development.

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When developing economies remain closed to competition, when they are dominated by local monopolies, or when production is in the hands of the state, prices might not reflect the marginal cost of production. Opening up the economy to free trade, and privatization of industry may help promote a more competitive environment, and reduce allocatively inefficiency.

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In many developing economies there is an absence of a developed or appropriate legal system in the following areas:

Property rights are not protected

The right to start a business is limited to a small section or a favoured elite

Consumer rights are not protected

Employment rights do not exist

Competition law is limited or absent

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Producers in less developed countries may not be able to produce at the lowest possible average cost. This may be because of the failure to apply technology to production, or because of the inability to achieve economies of scale. Opening up the economy to free trade may help reduce this type of inefficiency, and encourage technology transfer.

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X inefficiency can arise when there is a lack of competition in a market. It is primarily associated with inefficient management, where average cost is above its minimum. Competition is limited in many developing economies, and resources are often allocated by government. This means that inefficient management is common.