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 P ri c e DD 0 A buffer stock is an organization aiming to stabilize a commodity market. SS1 If there is a bumper harvest at SS1, 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 Bbuffer stock buys AB C SS2 If there is a poor harvest at SS2, buffer stock sells CA. 36.10  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? 36.11  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? 36.12  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? 36.13  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) 36.14  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 Development: through structural adjustment? 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 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Population GNP LIC MIC HIC