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Difficulty: HardObstacles to Economic Development in Developing Nations

Match each obstacle to economic development in developing nations listed on the left with its precise macroeconomic mechanism or structural manifestation on the right.

  • Vicious Cycle of Low Capital FormationLow per capita income leads to negligible savings capacity, restricting domestic investment in productive capital assets.
  • High Demographic Dependency RatioA large population of non-working youth forces national income allocation toward immediate consumption and social overheads rather than physical capital accumulation.
  • Structural Economic DualismThe asymmetric coexistence of a technologically advanced, market-oriented urban sector alongside a stagnant, subsistence agrarian sector.
  • Primary Product Export DependenceLong-term deterioration in external terms of trade resulting in chronic foreign exchange shortages and balance of payments vulnerabilities.

Answer

The correct matches associate: (1) Vicious Cycle of Low Capital Formation with low income restricting savings and capital investment; (2) High Demographic Dependency Ratio with resource diversion toward immediate consumption; (3) Structural Economic Dualism with the coexistence of modern urban and traditional rural sectors; and (4) Primary Product Export Dependence with terms-of-trade deterioration and foreign exchange constraints.
Each obstacle is matched to its core economic definition: the vicious cycle of capital formation is driven by low savings capacity; high dependency ratios divert potential savings into consumption; structural dualism reflects the urban-rural sectoral divide; and primary export reliance causes foreign exchange bottlenecks due to unfavorable terms of trade.

Step-by-Step Solution

1
Analyze the financial cycle of poverty and capital scarcity
Identify that low per capita income creates low savings, leading directly to low capital investment.
Ragnar Nurkse's vicious cycle hypothesis demonstrates how supply-side capital formation is constrained by low savings.
2
Evaluate demographic factors impacting national saving
Connect high dependency ratios with heavy consumption burdens.
A high proportion of non-working youth increases the dependency burden, reducing the aggregate savings rate.
3
Examine internal structural inequality in developing economies
Match structural dualism to the coexistence of modern urban enclaves and traditional rural sectors.
Dualistic economy models (such as Arthur Lewis's framework) explain the structural divide between high-tech urban firms and subsistence agriculture.
4
Assess external trade bottlenecks affecting developing nations
Link primary product reliance with declining terms of trade and foreign exchange deficits.
Primary products face inelastic demand and declining terms of trade in international markets compared to manufactured imports.

Key Concept

Obstacles to Economic Development in Developing Nations
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Obstacles to Economic Development in Developing Nations