ECON 330 Lecture 9 Notes From Professor

7/30/2019 ECON 330 Lecture 9 Notes From Professor

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Less Developed Countries

Obstacles to and Strategies for

Economic Growth in Less DevelopedCountries of the World


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I. Environmental, Cultural, Institutional

Obstacles to Economic Growth in LDCs1. Environmental Obstacles to Economic Growth:

(i) Average LDC must use each square kilometer of it s arable land to feedmore than 3 times as many people as the average industrialized Country.So land man ratio in LDCs very small (ii) Most LDCs located in a bandaround the equator that stretches from the tropic of Capricorn to tropicof cancer. Most of this region receives rainfall all year (within 1000 milesof the equator) and or heavy monsoon rains for half of the year and norain for rest of the year. (1000-1500 miles from the equator) . (iii) Exceptin high altitude areas temperatures range from hot to very hot (strain onhuman body, work animals, electronic equipment and vehicle radiators).(iv) The region that is not covered by Jungle, desert, volcanic and alluvialsoil , excessive heat has burned away the organic matter of the soil and

excessive rain has washed away its nutrients. (v) Tropical climate andpoor sanitation favor the reproduction of insects pests and parasitesthat attack, people, plants and animals.


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Cultural and Institutional Factors

2. Cultural Factors

(i)Except for Japan, all rich countries in recent history, Christian (ii) Protestantcountries richer than Catholic SA poor NA rich(iii) Almost all Islamiccountries, except those with rich natural resources, are poor (iv) Hinduculture, caste system places limits on labor mobility income inequality. Nowork incentives, (ones fate in this life is a reward or punishment for actions

from a previous life , a fatalistic acceptance of status quo).(v) ConfuciusHeritage: High growth in Japan and the Asian tigers and now China may bebecause of the Confucius work ethics (emphasis on education, hard work,savings/frugality)

3. Institutional Factors:

(i)Land Tenure System, (a) feudalism, common ownership (right of use

rotated among families) family has little incentive or opportunity to engage inlong term projects to irrigate and improve land (b) Muslim system ofinheritance, small and inefficient plots. (c) In LA Latifundio (too big) andminifundio (too small), the share cropper have no incentive to improve land.


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Institutional Factors

(ii) Market Structure : (a) Market mechanism primitive with limited ability tocoordinate and guide the development of the economy (Barter) (b) marketsdisconnected from farms, from each other and from the outside world due to poortransportation and communication.(c) state monopolies and price controls

(iii) Labor markets: Wide gulf between modern sector (K intensive industrialproduction in cities ) and traditional sector (labor intensive agricultural production inrural areas). Thus a dual labor market. Wage of urban workers 2-3 times larger thanrural wages. Urban workers unionized , work for nationalized companies and haveminimum wage laws . Also to maintain a stable labor force firms in modern sectorwilling to pay relatively high wages. The dual wage system promotes incomeinequality and attracts large number of people to large cities contributing to urbanunemployment, crowded cities and inequality

(iv) Financial markets : Limited quantity and quality of financial intervention, creditorganized around a few heavily regulated banks. No stock or bond markets , difficult

To raise money through issue of bonds /stocks, no savings. Money lenders chargeusury interests.


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II. Vicious Circle of PovertyII. Vicious Circle of Poverty:

1.Savings and Investment: Poor, no savings, no investment, no growth, poor.2. Health and education: poor. Cannot afford health and education, productivity down, poor ( Poverty begets

disease, illiteracy and low productivity which cause continuation of poverty)

3. Market size: low incomes , restricted market demand , for any good with limited demand difficult to increase

efficiency through mass production. /Income down, demand down, no economies of scale

4. Political Instability: Political instability: no foreign investment, no growth, poverty. (Instability and coups

and short and unsecure tenure in office encourages rulers to undertake short sighted economic policies such as

inflationary creation of money . Instability also discourages foreign investment and encourages capital flight).5. Population growth: Population growth rates twice as high as in middle income countries and 3 times as high

as in low income countries of Asia and 4 times as high in Africa. Because of their rural life styles, early

marriages, inability or unwillingness to practice birth control . Rapid population growth makes it difficult to

expand and maintain sufficient stock , housing, KS, education, health and other social infrastructure .

6. The poorest countries also have the highest dependency ratios: increase in consumption and less available

for savings and investment

7. Income Inequality: Kuznets pattern: Efforts to promote economic growth may cause inequality to growworse (in the beginning inequality than equality). Growth accompanied by increasing inequality may

contribute to political instability which may put an end to economic growth.


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III. Imperialism and Dependency

III. Imperialism and Dependency: (i) Marxists and others do not accept environmental and vicious circle explanations

of poverty. (ii) They say that the MDCS have employed a number of methods to extract LDC investible surpluses . (iii)

the rich have got richer by causing the poor to remain poor. (iv) Most LDCs exploited during colonial era. (v) Now that

colonialism a thing of the past the MDCs have continued their exploitation through foreign trade and investment .

1. Investment: (i) MNCs extract excessive profits from investment(ii) introduce inappropriate products

and technologies (iii) Shift high skilled labor elsewhere (iv) Encourage corruption(vi) encourage

policies favorable to them detrimental to own countries.(vii) Create a local elite more loyal to MNCS

than own countries (viii) MNCs borrow local money crowd out local investors.

2. Trade: (i) MDCs manipulated patterns of trade to their advantage and to the detriment of peripheral

countries. (ii) MDC buy LDC products at low prices, and sell their own products to LDCS at higher prices. (ii) Poor

countries produce primary goods rich countries produce manufactured goods. (iii) Poor countries forced to exchange

their primary good unequally for high priced manufactured/industrial goods (iv) LDCs victimized by specialization in

primary goods production. (v) Engels theory : Income elasticity of demand (%change in Q demanded/%change in

income) for manufactured goods(luxuries) is >1 elastic and for agricultural/primary goods/necessities is


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Development Strategies1.Adam Smith: Growth is natural, it cannot be stopped and it cannot be promoted by the government.

2. Ricardo: (i) Too much surplus labor in agriculture and labor productivity is low. (ii) Allow free trade

based on comparative advantage (iii) Repeal corn laws, food prices will go down, labor wages and land rents will go

down, labor will move from low productivity agriculture to high productivity industry (in agriculture MPL=0) (iii)

productivity will increase, production will exceed subsistence needs, so investment and economic growth.

3. Arthur Lewis 1954 : (i) Govt. action needed to move surplus labor from agriculture to industry. (ii) LDCS have within

themselves all that is required for growth. (iii) Remove less productive labor from agriculture into the industry, where

productivity is high (iv) surpluses, investment and economic growth.

4. Rosenstein-Rodan Nurske: Unbalanced Growth:: (i) For self sustaining growth a critical ground speed before

takeoff. A minimum size of investment. (ii) No single industry can go it alone because of Says law. (Demand for one

good is generated by production of other goods).

5. Rostow-Hirschman; Balanced Growth: (i) Development can be initiated by launching a few leading sectors,

US/European history (Textiles UK, Railways USA) (ii) Stages of growth: (a) Preconditions for take off (change in

attitudes/savings) (b) Take-off stage investment increases for 1-2 leading sectors (Textiles, railways/locomotive or

other industries) (c) Technological maturity (d) mass consumption (e) Search for quality.


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Development Strategies6. Import Substitution: (i) Nurske said that one of the dangers of unbalanced growth strategy is that

the domestic market will not be able to provide sufficient demand for the output of an isolated

industry. One way to overcome this problem is through a policy of import substitution. (ii) If anindustrial product is being imported then a domestic demand for that product obviously exists. Allthat needs to be done is to develop an indigenous industry and protect it from foreigncompetition.(iii) Positives ((a)no vulnerability to international price fluctuations, (b)no BOPproblems, , more advanced lines of production). Negatives: (i)distorts resource allocation (ii)reduces gains from comparative advantage and specialization. (iii) demand for imports down,demand for foreign currency down, local currency increases in value , so X down. difficult to sellexports as currency appreciates (iv)corruption in government, (v) retaliation

7. Export Promotion: Washington Consensus (i)Import substitution failed. (ii) East Asian tigers basedtheir growth on export promotion. (iii) a country should base its development on a few leadingsectors (iii) government should support emerging X industry with an appropriate legal andregulatory environment , education, training, infrastructure development, and tax relief(iv) keepcountry open to foreign tradeand competition(v) derive benefits from international specializationand economies of scale (v) (ensure and Maintain high quality and standards (vi) resist inflationand currency appreciation (vii) X promotion accomplished through positive incentives, so nobureaucratic control and corruption (viii) privatize nationalized industries (ix)no price controls/ER controls, interest rate controls (x) no excess monetary growth (xi)enact laws that encourage

competition and foreign investment.(xii) no foreign debt (xiii) no deficits

ECON 330 Lecture 9 Notes From Professor

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