The role of domestic factors in the process of development

Education and health

Labour productivity is defined as output per worker, or the quantity of goods and services a worker can produce per hour of work. It critically depends on the education, skills, and training of workers as well as on the type of capital they use in the production process. Growth in productivity is the key to long-term growth which in turn is a prerequisite for development

Investments in human capital formation are necessary to achieve higher labour productivity, faster long-term growth and improved living standards. Better health and education increase labour productivity and allow individuals to have more, better, and higher-paid employment opportunities. Better education and health are also responsible for number external benefits (both are the most important examples of merit goods). Remember too that achieving better health and education are themselves development goals.

Appropriate technology

Growth is necessary for any long-term progress in development but not all types of growth do lead to development. The technology employed determines whether any acceleration in growth will translate into human development gains or not.

In general, technologies can be distinguished into capital intensive or labour-intensive. Capital-intensive production process rely mostly on the use of physical capital (on machines) whereas labour-intensive production processes rely mostly on the use of labour (on workers). Remember that in many production process there is no choice: you cannot construct a labour-intensive oil refinery.

Since in most developing countries labour is the relatively abundant factor of production, it follows that appropriate technologies are labour-intensive. A labour-intensive technology translates to increased employment and income generation for the population of the country and an exit from poverty. On the other hand, capital-intensive technologies lead to what is referred to as jobless growth, which is a type of growth that does not lead to improved living standards.

Credit and microcredit

The importance of credit and micro-credit institutions lies in the simple fact that typically, if you cannot borrow, you cannot make any investment in physical, natural, or human capital. It follows that a functional credit system is vital in breaking the poverty cycle explained earlier.

Credit institutions induce people to save, as they offer not only safety for whatever income people do not spend but also a rate of return. Banks allow people to borrow money that can be used to increase their human capital or to start a small business, which may enable them to break the poverty cycle. Unfortunately, a functional credit system is not enough as very often it is also the absence of well-defined property rights that prevents poor people from borrowing from commercial banks.

Microcredit, on the other hand, focuses on making available very small loans to the very poor, helping them to start a small business or expand an existing one or meet an emergency arising from disease, theft, or bad weather. The pioneer of microfinance is Bangladeshi economist Muhammad Yunus who created the Grameen Bank several decades ago. Yunus won the Nobel Peace prize for his efforts in 2006. The Nobel Committee adopted the view that reducing the gap between the rich and the poor is necessary to crease conflict in the world.

Many microfinance loans have been offered to women who have not only shows that they spend the money carefully and productively but also that they are more likely to pay the loans back. Lending money to women has helped them in their empowerment. Their participation in such programmes gives them greater bargaining power and enables them to take part in family decision making whilst it also increases their mobility.

Microfinance has been considered to play a significant but rather limited role in the development process of nations. Microcredit has lately come under attack:

...most borrowers do not appear to be climbing out of poverty, and a sizable minority is getting trapped in a spiral of debt, according to studies and analysts

—New York Times, 2011

Women and their empowerment

Policies that aim at improving gender equity have been found to improve human development. Not only will deprived girls and women benefit from such policies but also the growth and development process will accelerate:

Human development if not engedered, is endagered.

—Mahbub-ul Haq

There are numerous routes through which this can be accomplished. Educating girls is considered one of the most is significant investments for a developing country as it results in even greater, gender-specific benefits. An educated mother will enjoy higher earning ability outside the home for each extra year of schooling. She will have fewer children so will create conditions for capital deepening (which means more capital will be available per worker), resulting in even higher long-term productivity and output gains. Her children will be healthier and she will make sure that her children are also educated, creating a virtuous circle. Educating women decreases mortality in children younger than five years old, decreasing the costs of health-care intervention.

Lastly, better and more educated women can lead to higher women's participation in the labour force as well as in politics, allowing them to influence policy.

The distribution of income

High and rising income inequality is considered a major barrier to economic development. It follows that policies aiming at reducing income inequality and making growth inclusive will encourage development. Poverty reduction depends not only on income growth but also on how income is distributed: poverty is reduced and development is achieved if there is growth accompanied by narrowing income inequality.

A more equitable distribution of income will make it easier to reach a consensus among different population groups. This is a necessary condition for a government to be willing and able to undertake successfully the required institutional and economic reforms that accelerate growth. Lower income inequality decreases the prevalence of corruption in a country and corruption is considered a major obstacle to the development process as it increases the costs of doing business and it destroys efficiency. Trust between economic agents increase, also decreasing the cost and increasing the likelihood of doing business, another necessary condition for growth to accelerate. A more equitable distribution of income will decrease the number of the very poor so that more people will have access to education and health resources and so become more productive members of society. The probability of civil unrest will be lower, decreasing the risks for investors and leading to more domestic and foreign investment spending in the country. Lower income inequality may accelerate savings and result in more investment and greater demand for locally produced goods and services, which may increase income and further decrease inequality.