© The McGraw-Hill Companies, 2008 Chapter 36 Problems of developing countries David Begg, Stanley...
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©The McGraw-Hill Companies, 2008 Chapter 36 Problems of developing countries David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward
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Transcript of © The McGraw-Hill Companies, 2008 Chapter 36 Problems of developing countries David Begg, Stanley...
©The McGraw-Hill Companies, 2008
Chapter 36Problems of developing
countries
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008
PowerPoint presentation by Alex Tackie and Damian Ward
©The McGraw-Hill Companies, 2008
Some key issues
• Less-developed countries (LDCs)– countries with low levels of per capita output
• Why have LDCs remained poor?
• The potential roles of:– comparative advantage
– industrialisation
– international debt
– structural adjustment
– aid
©The McGraw-Hill Companies, 2008
The distribution of world population and GNP, 2006
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Population GNP
LIC MIC HIC
©The McGraw-Hill Companies, 2008
Welfare indicators by country group
0
20
40
60
80per
1,000 live
births
LIC MIC HIC
Life expectancy at birth
1965 2005
0
10
20
30
40
%
LIC MIC HIC
Adult illiteracy 2005
Adult illiteracy (%)
©The McGraw-Hill Companies, 2008
Problems of LDCs
• Resource scarcity– LDCs lack natural
resources
– or the means to exploit them
• Capital– few domestic resources
available for investment
– multinationals may repatriate profits, rather than reinvesting.
0
1
2
3
4
5
% p.a.
LIC* MIC HIC
Population growth
1980-90 1995-05
©The McGraw-Hill Companies, 2008
Life Expectancy at Birth (2000-2010)
©The McGraw-Hill Companies, 2008
Illetarcy rate in Turkey (%) (2007-2011)
©The McGraw-Hill Companies, 2008
Population Growth Rate in Turkey (%) (1992-2011)
©The McGraw-Hill Companies, 2008
• Social investment in infrastructure– LDCs may not be able to achieve scale
economies in• power generation• roads• telephone systems• urban housing
• Customs and ideology– in SOME cases, traditional attitudes may inhibit
development– but this argument is often over-stated
Problems of LDCs (2)
©The McGraw-Hill Companies, 2008
• Human capital– LDCs lack resources to invest in
• health
• nutrition
• education
• industrial training
– so workers in LDCs tend to be less productive than workers using the same technology in HICs.
• Low productivity agriculture– Many LDCs have a high proportion of their labour force
engaged in low productivity agriculture.
Problems of LDCs (3)
©The McGraw-Hill Companies, 2008
Possible paths to development?
• Trade in primary products
• Industrialisation
• Borrowing
• Structural adjustment
• Aid
©The McGraw-Hill Companies, 2008
Development:through trade in primary products?
• Primary products are agricultural goods and minerals.
• Comparative advantage suggests that LDCs should specialise in primary production, BUT:– some evidence suggests the terms of trade have been
moving against primary products and towards manufactures
– prices of primary products tend to be volatile
– export concentration can be destabilising
©The McGraw-Hill Companies, 2008
Commodity Prices
©The McGraw-Hill Companies, 2008
• Import substitution is a policy of replacing imports by domestic production– under the protection of high tariffs or import
quotas– in the short run this involves inefficient use of
resources– in the long run, domestic market may not be large
enough to allow scale economies– and it fosters an inward-looking attitude– and promotes activities in which the country begins
with a comparative disadvantage
Development:through import substitution?
©The McGraw-Hill Companies, 2008
• Export-led growth stresses production and income growth through exports rather than the displacement of imports.
• The most successful economies of the last 3 decades have followed this route– especially countries in South East Asia.
• But for other countries to follow, co-operation is needed from the industrial countries to avoid over-protectionism.
Development:through export promotion?
©The McGraw-Hill Companies, 2008
Export Promotion
©The McGraw-Hill Companies, 2008
• LDCs have traditionally been borrowers in world markets– funds used to import capital goods to
supplement domestic investment
– borrowing finances a current account deficit
• Borrowing increased after the first OPEC oil-price shock of 1973/74– notably borrowing by non-oil developing
countries
Development: through borrowing?
©The McGraw-Hill Companies, 2008
• Countries were reluctant to borrow from the IMF under stringent conditions
• so borrowed from commercial sources– often at variable interest rates
• high real interest rates in the early 1980s created debt-servicing problems for many borrowers
• raising the possibility of default• the HIPC initiative of the late 1990s attempted
to tackle the debt burden which many LDCs found unsustainable
Development: through borrowing? (2)
©The McGraw-Hill Companies, 2008
Debt
©The McGraw-Hill Companies, 2008
• Structural adjustment programmes– the pursuit of supply-side policies aimed at
increasing potential output by increasing efficiency, e.g.:
• reductions in government subsidies to industry• privatisation• trade liberalisation• price reforms• monetary and fiscal discipline
Development:through structural adjustment?
©The McGraw-Hill Companies, 2008
Development: through aid?
• Aid is an international transfer payment from rich countries to poor countries.– takes many forms:
• subsidised loans• gifts of food or machinery• technical help
– justified on grounds of equity?– but may create dependency– allowing freer trade is an alternative
©The McGraw-Hill Companies, 2008
Globalisation
• A threat to developed and developing economies
• Electronic communication a threat to high-end professional services
©The McGraw-Hill Companies, 2008
Are income gaps widening?
