Readers Question: What are the constraints on economic growth and development when depending on only primary production by developing countries?
Definition of Primary products.
Primary products are goods that are available from cultivating raw materials without a manufacturing process. Significant primary product industries include, agriculture, fishing, mining, and forestry.
Examples of Primary products
- oil, water, fish, fruit, crops, wood.
Often developing countries have a comparative advantage in producing primary products. This is because many developing countries (e.g. in Africa are rich in resources, but poor in capital and education). Therefore, they can mine and export primary products to gain revenue.
However, in the long term, these present constraints to growth:
Low Income elasticity of demand. As income increases, demand for many food stuffs, doesn’t really increase. As incomes increases, demand for tea, coffee and sugar don’t increase that much. Therefore, countries who rely on primary products may have lower income growth than countries producing manufactured goods, with a higher income elasticity of demand.
Finite Resources. Primary products like metals, oil and gas are finite resources. Therefore, there is always a danger that when these resources are exhausted, the economy will lose its main export revenue.
Price Volatility. The price of primary products tend to be much more volatile. e.g. they can be influenced by weather and speculation. These prices changes can be damaging to countries. If prices fall and demand is price inelatic, then producers can go out of business and the country loses its main form of export revenue.
Lack of investment in education. Production of primary products is generally unskilled labour (mining, agriculture). Therefore an economy that specialises in primary products may fail to have enough incentives to invest in labour productivity which helps the long term performance of the economy.