Factors limiting the Multiplier Process in Developing Countries
- High degree of income inequalities. In developing countries, there are few rich people with high marginal propensity to save and low marginal propensity to consume. The majority of the people are low income earners. This reduces the aggregate demand hence low levels of investment.
- Limited resources for investment. In developing countries, there is limited capital and other resources like raw materials necessary for investment and this limits the multiplier process.
- High population growth rates. This results in high dependence burdens and low savings hence low levels investment in developing countries.
- Limited credit facilities for investment. In developing countries, there are few financial institutions and they are concentrated in urban areas. Most people do not have collateral security and therefore cannot access loans from the banks. This leads to low levels of investment.
- Limited entrepreneur skills. In developing countries, there is a limited number of entrepreneurs with the required skills to take on risks and increase investments. This limits the multiplier process.
- Poor social and economic infrastructure. Existence of poor social and economic infrastructure in form of poor roads, poor health facilities and poor communication networks discourage investments.in developing countries.
- Limited domestic and foreign markets. In developing countries; there is limited market for goods and services which discourages investment hence limiting the multiplier process.
- High levels of corruption and mismanagement of funds. The resources meant for investment are used for personal gains and some are mismanaged due to limited skilled personnel. This limits investment and the multiplier process in developing countries.
- Overdependence on imported technology. The use of inappropriate technology imported from developed countries in form of capital intensive technology leads to high levels of unemployment. This limits the number of people involved in production activities hence low levels of investment
- High levels of liquidity preference. Most people in developing countries prefer to keep their wealth in cash or near cash form instead of investing them in income generating activities. This limits the multiplier process.
- Existence of the large subsistence sector in developing countries. There are a limited number of economic activities and this leads to low incomes which cannot support meaningful investments. This limits the multiplier process in developing countries.
- High levels of political instabilities. These create a poor investment climate which discourages the potential investors hence limiting the multiplier process.
- Unfavorable government policies in form of high taxation. These together with other bureaucratic processes which are not clear discourage investments hence limiting the multiplier process.
- Poor land tenure systems. The system of ownership and use of land is mainly based on individuals and makes it difficult for the government to allocate land to potential investors. This limits investments and the multiplier process in general.
- Unreliable natural factors such as pests and animal disease, drought etc. directly affect agricultural export and increase unemployment hence affecting investment multiplier process
- Protectionism by most developed countries that limit the countries export leading to low foreign exchange earnings
CATEGORIES Economics
TAGS Dr. Bbosa Science
