1 LECTURE 13 Life in the Developing Nations: Population and Poverty Economic Development: Sources and Strategies The Sources of Economic Development Strategies.

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LECTURE 13

Life in the Developing Nations: Population and Poverty

Economic Development: Sources andStrategies

The Sources of Economic DevelopmentStrategies for Economic DevelopmentGrowth versus Development: The Policy

CycleTwo Examples of Development: China

and India

Issues in Economic DevelopmentPopulation Growth

The Transition to a Market EconomySix Basic Requirements for Successful

Transition

LECTURE OUTLINE

Economic Growth inDeveloping and

Transitional Economies

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Economic Growth in Developing and Transitional Economies

All economic analysis deals with the problem of making choices under conditions of scarcity, and the problem of satisfying people’s wants and needs is as real for Somalia and Haiti as it is for the United States, Germany, and Japan. The universality of scarcity is what makes economic analysis relevant to all nations, regardless of their level of material well-being or ruling political ideology.

Even though economic problems and the policy instruments available to tackle them vary across nations, economic thinking about these problems can be transferred easily from one setting to another.

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TABLE 21.1 Indicators of Economic Development

Country Group

Population,2006

Gross National Income

per Capita,2006

(dollars)

Literacy Rate(percent over

15 yearsof age)

Infant Mortality,

2006 (deaths

before age 5 per 1,000

births)

InternetUsers per

1,000 people,2005

Low-income 2.3 billion 510 29 122.0 30

Lower middle-income

2.4 billion 1,580 75 42.0 47

Upper middle-income

575.9 million 4,770 243 29.7 72

High-income 1.0 billion 32,040 2,977 7.0 76Source: World Bank, www.worldbank.org

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While the developed nations account for only about one quarter of the world’s population, they are estimated to consume three-quarters of the world’s output.

This leaves the developing countries with about three-fourths of the world’s people but only one-fourth of the world’s income.

The simple result is that most of our planet’s population is poor.

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Economic Development: Sources and Strategies

The Sources of Economic Development

Capital Formation

vicious-circle-of-poverty hypothesis Suggests that poverty is self-perpetuating because poor nations are unable to save and invest enough to accumulate the capital stock that would help them grow.

capital flight The tendency for both human capital and financial capital to leave developing countries in search of higher expected rates of return elsewhere with less risk.

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Human Resources and Entrepreneurial Ability

brain drain The tendency for talented people from developing countries to become educated in a developed country and remain there after graduation.

Social Overhead Capital

social overhead capital Basic infrastructure projects such as roads, power generation, and irrigation systems.

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Social Overhead Capital

Corruption

The following chart shows the World Bank’s rating of corruption levels in a number of countries around the world. The countries are ranked from those with the strongest controls on corruption—Germany and France—to those with the lowest controls—Pakistan and Nigeria. Indonesia, as you can see, is near the bottom of the list.

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Strategies for Economic Development

Agriculture or Industry?

TABLE 21.2 The Structure of Production in Selected Developed and Developing Economies, 2003

Country

Per-CapitaGross National Income (GNI)

Percentage of Gross Domestic Product

Agriculture Industry Services

Tanzania $ 375 45 17 37

Bangladesh 480 20 28 52

China 2,010 12 47 41

Colombia 2,740 12 34 54

Thailand 2,990 10 46 44

Brazil 4,730 5 31 64

Korea (Rep.) 17,690 2 23 75

Japan 38,410 2 30 68

United States 44,970 2 23 75

Source: World Bank, World Development Indicators, 2008; Sectoral numbers for U.S. and Japan are for 2003.

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Exports or Import Substitution?

import substitution An industrial trade strategy that favors developing local industries that can manufacture goods to replace imports.

export promotion A trade policy designed to encourage exports.

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Central Planning or the Market?

International Monetary Fund (IMF) An international agency whose primary goals are to stabilize international exchange rates and to lend money to countries that have problems financing their international transactions.

World Bank An international agency that lends money to individual countries for projects that promote economic development.

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Microfinance: A New Idea

In the mid 1970s, Muhammad Yunus, a young Bangladeshi economist created the Grameen Bank in Bangladesh.

Microfinance is the practice of lending very small amounts of money, with no collateral, and accepting very small savings deposits. It is aimed at introducing entrepreneurs in the poorest parts of the developing world to the capital market.

Relative to traditional bank loans, microfinance loans are much smaller, repayment begins very quickly, and the vast majority of the loans are made to women (who, in many cases, have been underserved by mainstream banks).

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Growth versus Development: The Policy Cycle

structural adjustment A series of programs in developing nations designed to: (1) reduce the size of their public sectors through privatization and/or expenditure reductions, (2) decrease their budget deficits, (3) control inflation, and (4) encourage private saving and investment through tax reform.

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Growth versus Development: The Policy Cycle

Cell Phones Increase Profits for Fishermen in IndiaKerala is a poor state in a regionof India.

Beginning in 1997 and continuingfor the next several years, mobilephone service was introduced to this region of India.

Once the phones were introduced, waste, which had averaged 5 to 8 percent of the total catch, was virtually eliminated.

In fact, cell phones are improving the way markets in less developed countries work by providing price and quantity information so that both producers and consumers can make better economic decisions.

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Two Examples of Development: China and India

China and India provide two interesting examples of rapidly developing economies. While low per- capita incomes still mean that both countries are typically labeled developing as opposed to developed countries, many expect that to change in the near future.

Many commentators expect India and China to dominate the world economy in the twenty-first century.

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Issues in Economic Development

Population Growth

The populations of the developing nations are estimated to be growing at about 1.7 percent per year.

Concern over world population growth is not new. The Reverend Thomas Malthus (who became England’s first professor of political economy) expressed his fears about the population increases he observed 200 years ago. Malthus believed that populations grow geometrically at a constant growth rate—thus the absolute size of the increase each year gets larger and larger—but that food supplies grow more slowly because of the diminishing marginal productivity of land. These two phenomena led Malthus to predict the increasing impoverishment of the world’s people unless population growth could be slowed.

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Population Growth

The Consequences of Rapid Population Growth

FIGURE 21.1 The Growth of World Population, Projected to A.D. 2020

For thousands of years, population grew slowly. From A.D. 1 until the mid-1600s, population grew at about .04 percent per year. Since the Industrial Revolution, population growth has occurred at an unprecedented rate.

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Population Growth

Causes of Rapid Population Growth

fertility rate The birth rate. Equal to (the number of births per year divided by the population) × 100.

mortality rate The death rate. Equal to (the number of deaths per year divided by the population) × 100.

natural rate of population increase The difference between the birth rate and the death rate.

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The Transition to a Market Economy

Six Basic Requirements for Successful Transition

Economists generally agree on six basic requirements for a successful transition to a market-based system:

•macroeconomic stabilization,•deregulation of prices and liberalization of trade,•privatization of state-owned enterprises and development of new private industry,•establishment of market-supporting institutions such as property and contract laws and accounting systems,•a social safety net to deal with unemployment and poverty, and•external assistance.

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Macroeconomic Stabilization

To achieve a properly functioning market system, prices must be stabilized.

Deregulation of Prices and Liberalization of Trade

An unregulated price mechanism ensures an efficient allocation of resources across industries.

Privatization

Private ownership provides a strong incentive for efficient operation, innovation, and hard work that is lacking when ownership is centralized and profits are distributed to the people.

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Market-Supporting Institutions

The capital market, which channels private saving into productive capital investment in developed capitalist economies, is made up of hundreds of different institutions.

Social Safety Net

This social safety net might include unemployment insurance, aid for the poor, and food and housing assistance.

External Assistance

Very few believe that the transition to a market system can be achieved without outside support and some outside financing.

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Shock Therapy or Gradualism?

shock therapy The approach to transition from socialism to market capitalism that advocates rapid deregulation of prices, liberalization of trade, and privatization.

1 LECTURE 13 Life in the Developing Nations: Population and Poverty Economic Development: Sources and Strategies The Sources of Economic Development Strategies.

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