The EconomicsOf DevelopingCountries

Chapter 39W

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives

• Distinguishing between industrial advanced countries and developing countries

• Obstacles to economic development • The vicious circle of poverty • The role of government in promoting

economic development• Industrial nation’s attempts to aid

low-income countries39-2

Country Classifications

• Industrially advanced countries–High income nations–Well-developed market economies–Per capita income $36,608 in 2006

• Developing countries–Middle income nations –Low income nations–Wide variation in income per capita

39-3

2006 Comparisons

• U.S. GDP $13.2 trillion• Combined GDP of developing

countries $11.7 trillion• U.S. has 5% of population but

produces 27% of world’s output• U.S. per capita GDP 186 times that

of Sierra Leone• Wal-Mart’s annual revenue greater

than all but 19 nation’s GDP39-4

The Rich and the Poor

• Some developing countries have grown considerably–China, Malaysia, Chile, Thailand

• Some developing countries have become high-income–Singapore, Greece, Hong Kong

• Income gap has widened–Developing countries must grow

faster to narrow the gap39-5

Obstacles to Development

• The path to economic development–Use existing resources more

efficiently–Expand available supplies of

resources

• Simple generalizations are not possible

39-6

Obstacles to Development

• Lack of natural resources• Overpopulation

–9 out of 10 people born in a DVC–Reduced standard of living–Less saving and investment–Lower productivity–Resource overuse–Urban problems–Qualifications 39-7

Obstacles to Development

• Unemployment• Underemployment• Low labor productivity• Brain drain• Capital accumulation is key

–Domestic capital formation–Savings potential–Capital flight

39-8

Obstacles to Development

• Investment obstacles–Lack of infrastructure

• Technological advance–Borrowed technology

• Sociocultural obstacles

• Institutional obstacles–Land reform

39-9

The Vicious Circle of Poverty

RAPIDPOPULATION

GROWTH

LOW LEVELOF DEMAND

LOW LEVELOF SAVING

LOWPRODUCTIVITY

LOW LEVELS OFINVESTMENT INPHYSICAL AND

HUMAN CAPITAL

LOWPER CAPITA

INCOME

39-10

Role of Government

• A positive role–Law and order–Lack of entrepreneurship–Infrastructure–Forced saving and investment–Social-institutional problems

• Public sector problems–Corruption

39-11

Corruption

The Corruption Perception Index, 2007

Source: Transparency International

FinlandNew Zealand

CanadaUnited Kingdom

GermanyUnited States

UruguayTaiwan

ItalyGreece

ChinaIndia

MexicoRussia

MyanmarSomalia

0 1 2 3 4 5 6 7 8 9 10

39-12

Role of Advanced Nations

• Expanding trade• Foreign aid

–Direct aid–The World Bank group

• Foreign harm–Dependency and incentives–Bureaucracy–Corruption and misuse• Flows of private capital

39-13

Role of Advanced Nations

Development Assistance as a Percentage of GDP, 2007

Source: OECD

0 .20 .40 .60 .80 1.00

Norway

Netherlands

Ireland

France

Germany

Canada

Japan

United States39-14

Policies for Promoting Growth

• Establishing and implementing the rule of law

• Opening economies to international trade

• Controlling population growth• Encouraging foreign direct

investment• Building human capital

39-15

Policies for Promoting Growth

• Making peace with neighbors• Establishing independent central

banks• Establishing realistic exchange-

rate policies• Privatizing state industries

39-16

Policies for Industrial Countries

• Direct foreign aid to the poorest countries

• Reduce tariffs, import quotas, and farm subsidies

• Provide debt forgiveness to the poorest countries

• Admit temporary workers and discourage brain drains

• Discourage arms sales 39-17

Famine in Africa

• Root causes – natural and human • Droughts

– Lack of rainfall• Civil strife

– Rebellions and civil wars• Population growth• Ecological degradation• Public policies• External debt

39-18

Key Terms

• industrially advanced countries (IACs)

• developing countries (DVCs)

• demographic transition view

• underemployment• brain drain• capital flight• infrastructure• capital-saving technology

• capital-using technology• the will to develop• capricious universe view• land reform• vicious circle of poverty• corruption• World Bank• direct foreign investment

39-19