problems of developing countries

Chapter 36 Problems of developing countries David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 36.1 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 – industrialization – international debt – structural adjustment – aid 36.2 The world distribution of income  In 1998 there were 3.5 billion people living in low-income countries  with average annual income of about £313 per person.  In 1998, there were 0.9 billion people living in high-income countries  with average annual income of about £15,367 per person. 36.3 Welfare indicators by country group 0 20 40 60 80 100 per 1,000 live births LIC MIC HIC Infant mortality 1980 1997 0 10 20 30 40 50 % LIC MIC HIC Adult illiteracy 1997 Male Female 36.4 Problems of LDCs (1)  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 1990-98 36.5  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) 36.6  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) 36.7 Possible paths to development?  Trade in primary products  Industrialization  Borrowing  Structural adjustment  Aid 36.8 Development: through trade in primary products?  Primary products are agricultural goods and minerals.  Comparative advantage suggests that LDCs should specialize 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 destabilizing 36.9 Commodity price stabilization Quantity Price DD 0 A buffer stock is an organization aiming to stabilize a commodity market. SS 1 If there is a bumper harvest at SS 1 , P Q Exports are 0Q at price P. Exports are still 0Q at price P. The buffer stock stabilizes prices and export earnings … but requires resources to buy and store. A B buffer stock buys AB C SS 2 If there is a poor harvest at SS 2 , buffer stock sells CA. [...]... oil-price shock of 1973/74 – notably borrowing by non-oil developing countries 36.12 Development: through borrowing? (2)   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... 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, cooperation is needed from the industrial countries to avoid over-protectionism 36.11 Development: through borrowing?  LDCs have traditionally... 36.14 Development: through aid?  Aid is an international transfer payment from rich countries to poor countries – takes many forms:  subsidized loans  gifts of food or machinery  technical help – – – justified on grounds of equity? but may create dependency allowing freer trade is an alternative 36.15 The distribution of world population and GNP, 1998 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Population...Development: through import substitution?  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... 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 36.13 Development: through structural adjustment?  Structural adjustment programmes – – – – – – the pursuit of supply-side policies aimed at increasing potential output by increasing efficiency, e.g.: reductions . Chapter 36 Problems of developing countries David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition,. Smith 36.1 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 – industrialization –. 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,