Transcript ECON_CH18_Issues of Economic Development

Issues of Economic Development
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Chapter 18: Issues of Economic Development
KEY CONCEPT
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A transitional economy is a country that has moved (or is moving)
from a command economy to a market economy.
WHY THE CONCEPT MATTERS
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Promoting development also promotes good government and
economic opportunity in less developed countries. When a nation’s
government is democratic and stable and its citizens are prosperous,
the benefits reach the world community.
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Definitions of Development
Levels of Development
KEY CONCEPTS
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Economists gather data to compare economies of nations
– also compare impact of economies on people’s standard of living
Have defined three major levels of economic development
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Levels of Development
Developed Nations
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Developed nations have market economies with high standard of
living
– high GDP, industrialization, property ownership, stable
governments
– U.S., Canada, West Europe, Australia, New Zealand, Japan,
South Korea
Most people healthy, educated, with comfortable lives, urban jobs
Few agricultural workers produce food surplus through technology
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Levels of Development
Transitional Economies
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Transitional economy—country moving from command to market
economy
– China, Russia, various Eastern European countries
Example of Poland:
– democracy and economic freedom improving economy and quality
of life
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Levels of Development
Less Developed Countries
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Less developed country—lower GDP, less industry, lower living
standard
– often ineffective or corrupt governments do not protect property
rights
Middle-income Brazil, Thailand; low-income Mozambique, Cambodia
Low-income lack infrastructure—basic support systems of an
economy
– people have little education, poor sanitation, little political freedom
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Standards of Economic Development
KEY CONCEPTS
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Economists weigh various factors to evaluate a nations standard of
living
– example: television ownership not equally valued in all cultures
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Standards of Economic Development
Per Capita Gross Domestic Product
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Per capita gross domestic product—GDP divided by total population
– most popular measure of economic development
– to compare nations, figures adjusted for difference in cost of
products
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Standards of Economic Development
Health
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Health and health care statistics help determine level of development
Infant mortality rate—babies who die in first year per 1,000 births
– low rate is result of good sanitation, health care, nutrition
Life expectancy—number of years person likely to live
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Standards of Economic Development
Education
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Literacy rate—percent of people over 15 who can read and write
Percentage of school-age children actually enrolled an important
statistic
Human development index (HDI)—combines various measures
– real GDP per capita, life expectancy, literacy rate, student
enrollment
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Standards of Economic Development
Consumption of Goods and Services
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How people spend income after food and shelter indicates
development
Increasing consumption of big-ticket items shows economy growing
– also rising living standards
Less developed nations have more growth potential for consumer
consumption
Today North America, Western Europe: 12 percent population, 60
percent consumption
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Standards of Economic Development
Energy Use
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Electricity, energy contribute to economic development
Average global electricity consumption 2,744 kilowatt-hours per
capita per year
– developed nations use over 7,000; less developed use 750
Energy used for commerce correlates to technology use, other
measures
Projection to 2025: LDC energy use will rise far more than developed
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Standards of Economic Development
Labor Force
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All economically active people between 15 and 65, employed or not
More developed nations have
– fewer agricultural workers, more manufacturing and service
workers
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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developed nations and less developed countries
human development index and infant mortality rate
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A Framework for Economic
Development Objectives
Resources
KEY CONCEPTS
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Fertile farmland and appropriate climate help development
Natural resources help
Also must invest in human and physical capital for economic
expansion
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Resources
High Levels of Human Capital
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People most valuable resource in a market economy
Commitment to education major element of growing market economy
Educated citizens can make informed decisions for themselves and
children
– get health care, vote, take part in civic affairs, avoid poverty
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Resources
High Levels of Physical Capital
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Physical capital, including technology, makes people more productive
Technology always being refined in developed nations
– LDCs can copy or import
Copying requires trained people; importing requires foreign
investment
– investors prefer LDC with human capital
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Stability
KEY CONCEPTS
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Governmental, economic environments must be stable to support
growth
– human and economic capital can then be put to best use
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Stability
Effective Government Institutions
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Rule of law—made public, applied fairly, used to resolve disputes
– bureaucracy and judges not corrupt
Rule of law means predictability, reduces economic risks of business
Democratic nations have higher rate of economic growth than others
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Stability
Stable Prices
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Stable prices, sound fiscal and monetary policies lead to growth
– investors can make long-term plans in nation without dramatic
changes
Investors avoid nations with high inflation, volatile interest rates
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Stability
Protected Property Rights
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Guaranteed property rights stimulate entrepreneurship
– businesses assured of reaping rewards if successful
Businesses avoid places where government interferes with
operations
– due to corruption, decision to redistribute land to poor
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Opportunity
KEY CONCEPTS
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Government can create economic opportunity by
– opening international trade
– promoting social mobility
– controlling corruption
– limiting regulations
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Opportunity
Open International Trade
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Fewer restrictions on free trade promote specialization, trade
LDCs often impose tariffs and other protectionist measures
– justify as short-term
– costs: higher prices, inefficiency, dependence on barriers
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Opportunity
Increase Social and Economic Mobility
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Strongest growth happens when opportunity opens to whole
population
– U.S. studies: as people seek personal economic reward, economy
grows
Some cultures restrict women—half of labor force—economically
In cultures with fixed class structure, rich keep control of economy
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Opportunity
Control Corruption
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Corruption is abuse of public office for private gain
Corrupt countries fail to develop, poor especially pay the price
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Opportunity
Limit Regulation
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Reasonable tax levels and regulations create economic opportunity
– investors attracted to nations with little “red tape”
Many LDCs have significantly high number of regulations
– businesses get around them by paying off government officials
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Financing Development
KEY CONCEPTS
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Four sources available for financing economic development:
– internal investment
– foreign investment
– foreign government aid
– international agencies
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Financing Development
Internal Investment
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Banks within a nation invest in infrastructure
– very poor nations: personal savings low, banks have little to invest
Wealthy citizens sometimes want safer, more productive investment
– result is capital flight: sources of capital are sent abroad
Government may provide funds or seek foreign investment
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Financing Development
Foreign Investment
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Foreign portfolio investment—participation in financial markets
Foreign direct investment—establishing business in foreign country
– multinationals provide jobs and training, benefit from cheap labor
Foreign investment has grown dramatically since 1990
– LDCs have tried to create more attractive business climate
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Financing Development
Loans and Aid
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External debt—money borrowed from foreign banks or governments
– has become problem in some countries in South America, Africa
Default—nations inability to pay interest or principle on a loan
Nations may also seek foreign aid—money from other nations
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Financing Development
International Help Agencies
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World Bank—provides loans, policy advice, technical assistance
United Nations Development Program (UNDP)—fights poverty
– in 2006 had active programs in 174 nations
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Financing Development
International Help Agencies
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International Monetary Fund (IMF)—international organization
– promotes monetary cooperation, fosters economic growth
– also gives temporary assistance to ease balance of payments
adjustment
Helps with debt restructuring—altering debt agreements for
advantage
Stabilization programs—reforms required of economy likely to default
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Anne Krueger: Reforming IMF Development
Policy
A New Role for IMF
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As First Deputy Director, Krueger proposed new role for IMF
– oversee restructuring of LDC debt rather than provide bailout
funds
– let creditor supermajority overrule creditor wanting more pay than
able
Opposed forgiving debt, says debtors do not spend funds helping
poor
Agreed to forgive 18 nations’ debt that created development policies
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Reviewing Key Concepts
Explain the relationship between these terms:
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International Monetary Fund and stabilization program
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Transition to a Market Economy
New Challenges
KEY CONCEPTS
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China, former Soviet Union, Eastern Europe adopting market
economy
Government, individuals, businesses must find new answers to
problems
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New Challenges
Challenge 1: Poor Infrastructure
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Market economy needs good infrastructure for production, distribution
Command economies had poor infrastructure
– lack of competition meant little incentive to be efficient
Transitional economies need to modernize infrastructure
– to support and spread goods and services produced
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New Challenges
Challenge 2: Privatization
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Privatization—transferring state-owned property, businesses to
people
Three basic methods
– auction, leaves little savings so few people have needed funds
– selling shares of businesses through vehicle like the stock market
– giving vouchers to people to purchase shares of a business
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New Challenges
Challenge 3: Rise in Prices
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In command economy, some goods have artificially low prices
Price controls must be removed for market to operate
In 1990, Poland began shock therapy
– abrupt shift from command to market economy
– in first month inflation was 78 percent, then slowly eased
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Economic Change in the Former Soviet Bloc
KEY CONCEPTS
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In 1980s, Mikhail Gorbachev introduced perestroika:
– gradually incorporate markets into Soviet Union’s economy
People called for political freedom; Soviet Union dissolved in 1991
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Economic Change in the Former Soviet Bloc
Example 1: Russia
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Shock therapy led to high inflation—lack of goods, many bankruptcies
Government could not perform many functions, such as tax collection
Privatization program favored politically well-connected people
President Putin reluctant to adopt democratic reforms, market
economy
– combined with corruption and organized crime undermines
development
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Economic Change in the Former Soviet Bloc
Example 2: Former Soviet Republics
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Latvia, Lithuania, Estonia did better than others, had less inflation
Baltic republics Armenia, Belarus, Kazakhstan have increased output
Higher quality goods and services produced in many nations
In other nations, economic growth stifled by
– poor infrastructure, bureaucracy, corruption, undeveloped property
laws
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Economic Change in the Former Soviet Bloc
Example 3: Eastern Europe
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Eastern European nations have had varying degrees of success
Czech Republic, Hungary, Poland joined EU, progress apparent
Problems all face include
– outdated infrastructure; costly phone and internet services
– confusing business laws; high unemployment
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China Moves Toward a Market Economy
KEY CONCEPTS
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China became Communist in 1949
Began transition to free market economy in 1978
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China Moves Toward a Market Economy
Example: Rapid but Uneven Growth
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In 1958, began building collective farms, steel industry; much poverty
Late 1970s, agricultural reforms enacted; 1980s industrial reforms
Special economic zones—areas with different economic laws
– goal to increase foreign investment
SEZs have developed rapidly; western rural areas still poor
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Reviewing Key Concepts
Explain the difference between these terms:
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shock therapy and perestroika
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China’s Campaign for Economic Power
Background
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In 1978, Deng Xiaoping began the “four modernizations” (agriculture,
industry, science and technology, and defense).
China established several special economic zones, opened 14 coastal cities
to foreign investment in 1984, and joined the World Trade Organization in
2001.
What’s the Issue
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What accounts for China’s successful transition to a market economy?
Thinking Economically
1. What key element of financing development does document A cite as a
component of China’s success in international trade?
2. The documents show that the rest of the world is uneasy with China’s
economic growth and that China has problems at home.
3. Discuss these fears and problems in the context of what you’ve learned
throughout Chapter 18.
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