4.9.3 Political and social barriers Notes

Apart from the economic barriers preventing economic growth and/or development, there are also other political barriers. Among these are:

1. Weak institutional framework:
   1. Legal system.
   2. Ineffective taxation structure.
   3. Banking system.
   4. Property rights.
2. Gender inequality.
3. Lack of good governance / corruption.
4. Unequal political power and status.

Weak institutional framework

The success of economic growth and/or development heavily depends on the strength of a country's institutions and social structures:

Parts of the institutional framework of an economy are:

1. The legal system.
2. The taxation structure.
3. The banking system.
4. The property rights.

Legal system

A strong legal system is essential for economic stability, investment, and business confidence. Contrarily, a weak legal system creates uncertainty and reduces incentives for economic activity because:

1. Unclear or poorly enforced contract laws discourage business investments
   1. Businesses hesitate to engage in long-term contracts if legal enforcement is weak.
   2. Investors may avoid countries with unreliable contract enforcement due to high risks of losses.
2. Slow court systems make it difficult to resolve commercial disputes
   1. Lengthy legal procedures create delays in resolving business conflicts, reducing efficiency.
   2. Businesses may prefer informal settlements, which can be unpredictable and unfair.
3. Limited access to legal services prevents many from protecting their rights
   1. Low-income individuals and small businesses often struggle to afford legal representation.
   2. This results in weaker property protections and reduced ability to fight unfair business practices.

Ineffective taxation structure

Taxation is a key source of government revenue, essential for funding public services and infrastructure. However, weak tax systems can lead to economic inefficiencies and unfair burdens on certain groups because:

1. Heavy reliance on indirect taxes burdens poorer citizens disproportionately
   1. Indirect taxes (VAT, custom duties...) apply equally to all, meaning low-income individuals pay a higher proportion of their earnings in taxes than the wealthy.
   2. This worsens income inequality and limits access to essential goods.
2. Complex bureaucratic procedures encourage tax evasion
   1. Businesses and individuals may avoid paying taxes due to excessive red tape and unclear regulations.
   2. Corruption and bribery often emerge in countries with complex tax codes, further weakening the system.
3. Weak collection systems result in low government revenues
   1. Inefficiencies in tax administration lead to lower-than-expected collections.
   2. This reduces public funds for healthcare, education, and infrastructure.
4. Wealthy groups often influence tax policies for their benefit
   1. Lobbying by high-income groups can lead to tax loopholes and policies that favour the rich while placing a heavier tax burden on the middle and lower classes.
   2. This can increase income and wealth inequalities, as well as poverty, hindering economic development.

Banking system

A strong banking system is critical for financial stability, investment, and economic growth. A weak banking system limits access to credit investments, discourages business expansion, and slows economic activity:

1. Limited access to credit prevents business growth
   1. Small and medium-sized enterprises (SMEs) struggle to secure funding for expansion, limiting job creation and innovation.
   2. Individuals without credit histories or collateral may be excluded from financial opportunities.
2. State-owned banks often make politically-motivated lending decisions
   1. Government-controlled banks may prioritize loans based on political connections rather than economic viability.
   2. This results in inefficient allocation of resources and unprofitable projects.
3. Poor people and small businesses struggle to get loans
   1. High interest rates, collateral requirements, and lack of financial literacy prevent disadvantaged groups from accessing financial services.
   2. Without access to credit, economic mobility and entrepreneurship suffer.
4. Excessive bureaucracy makes banking services difficult to access
   1. Lengthy paperwork, complex regulations, and high transaction costs deter businesses and individuals from using formal banking systems.
   2. Many turn to informal financial services, which may be inefficient, costly, and exploitative.

Property Rights

Secure property rights encourage investment, economic stability, and wealth accumulation. Weak property rights create uncertainty, discourage development, and lead to inefficient disputes. This is because:

1. Unclear land ownership discourages long-term investments
   1. If land ownership is uncertain, businesses and individuals are less likely to invest in improving properties.
   2. Farmers may hesitate to invest in agricultural land if they fear losing ownership.
2. Lack of formal titles makes it hard to use property as collateral
   1. Without official land titles, individuals and businesses cannot use property as loan collateral, limiting access to credit.