Marcro micro econmiy david begg chapter 036

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 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 Infant mortality Adult illiteracy 1997 50 100 40 % per 1,000 live births 30 20 10 80 60 40 20 LIC Male MIC Female HIC LIC MIC 1980 1997 36.4 HIC Problems of LDCs (1) Population growth Resource scarcity – LDCs lack natural resources – or the means to exploit them % p.a Capital LIC* 1980-90 MIC – few domestic resources available for investment – multinationals may repatriate profits, rather than reinvesting HIC 1990-98 36.5 Problems of LDCs (2) 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 36.6 Problems of LDCs (3) 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 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 Price A buffer stock is an organization aiming to stabilize a commodity market SS1 SS2 If there is a bumper harvest at SS1, A B C buffer stock buys AB P Exports are 0Q at price P If there is a poor harvest at SS2, buffer stock sells CA Exports are still 0Q at price P DD Q Quantity The buffer stock stabilizes prices and export earnings … but requires resources to buy and store 36.10 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 attitude and promotes activities in which the country begins with a comparative disadvantage 36.11 Development: through export promotion? Export-led growth stresses production and income growth through exports rather than the displacement of imports The most successful economies of the last 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 36.12 Development: through borrowing? 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 36.13 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 the HIPC initiative of the late 1990s attempted to tackle the debt burden which many LDCs found unsustainable 36.14 Development: through structural adjustment? 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 privatization trade liberalization price reforms monetary and fiscal discipline 36.15 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 36.16 The distribution of world population and GNP, 1998 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Population GNP LIC MIC HIC 36.17