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3. Cultural norms that hinder economic development. Different cultures have different
cultural norms, or standards of behavior and thought. In the U.S., individual economic success
is generally seen in a positive light. Most people desire and strive for a higher standard of
living. This economic striving is conducive to economic development.
LDCs often have cultural norms that are hostile to or hinder economic development. Some
cultures are very traditional. The emphasis on maintaining traditional ways hinders the
introduction of new technology. A traditional social structure may limit economic activity and
mobility among certain groups in the population (e.g. females). Some LDCs have cultures that
are very fatalistic. Fatalism is the belief that the course of a person’s life is predetermined.
Fatalism has a negative effect on work effort, educational attainment, investment choices, etc.
4. Counterproductive governmental policies. Historical evidence indicates that certain
governmental policies are a hindrance to economic development. Nations that have followed
these policies have been less successful in achieving economic development than nations that
have avoided these policies. Governments in LDCs often follow some or all of these
counterproductive policies. The counterproductive policies include:
a. Weak private property rights. The importance of strong private property rights to
economic growth was detailed in Chapter 14. Weak private property rights not only
discourage the development of resources by the domestic economy, they also discourage
foreign investment in the domestic economy. Governments of LDCs often weaken private
property rights by;
(1) Failing to enforce private property rights through criminal and civil law. High
rates of crime, corrupt and inefficient court systems, failure to enforce private contracts,
and even government expropriation of private property are common problems in LDCs.
In LDCs, much of the land and capital may lack clear ownership. In India, for example,
about 90 percent of land titles are subject to dispute.
(2) Imposing high tax rates. Many LDCs have marginal tax rates of over 50% on
relatively low levels of income. Such high tax rates decrease the incentive resource
owners have for developing and directing their resources to their most valuable uses.
High tax rates also increase the amount of deadweight loss from taxation (see Chapter
13). Research by economist Alvin Rabushka indicates that LDCs with lower marginal
tax rates achieve higher economic growth rates than LDCs with higher marginal tax
rates.
(3) Imposing excessive government regulations. In many LDCs, the regulatory
requirements to simply begin a new business can take many months to comply with,
involve a large expenditure of money, and may necessitate the payment of bribes to
numerous government officials.
(4) Permitting excessive government corruption. Governments in LDCs are often not
subject to regular, free elections. This makes excessive government corruption more
likely. Research indicates that excessive government corruption is associated with low
or negative economic growth. Counterproductive economic policies (like excessive
government regulations) may be pursued to increase the opportunities for government
graft. A table in an appendix at the end of the chapter illustrates the relationship
between corruption and standard of living for selected countries.
b. Restrictions on competitive markets. In LDCs, large industries are often directly
controlled by the state, or a favored producer is granted a monopoly position. Excessive
regulations may hinder the entry of new firms into markets. Price controls are often
imposed. For more on the importance of competitive markets, see the Appendix on “The
Power of Productivity” at the end of this chapter.
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