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Transcript copper prices

Why Do Countries
Face Obstacles To
Development?
Developing countries face TWO
FUNDAMENTAL OBSTACLES to
development:
• Adopting POLICIES that successfully
promote development
• Finding FUNDS to pay for development
SELFSUFFICIENCY


INTERNATIONAL
TRADE
SELF-SUFFICIENCY PATH TO
DEVELOPMENT
KEY ELEMENTS
• Domestic production of goods encouraged
• Foreign ownership of industries and
resources discouraged/prohibited
• Domestic businesses protected from
international competition
SELF-SUFFICIENCY PATH TO
DEVELOPMENT
This model involves erecting BARRIERS
against int’l commerce- especially the
importation of foreign goods:
• Heavy TARIFFS charged (taxes on
imports- prices rise 2-3x)
• Import QUOTAS implemented
• Difficult-to-acquire LICENSES
required to import
SELF-SUFFICIENCY PATH TO
DEVELOPMENT
The SELF-SUFFICIENCY model was widely
pursued in the early-to-mid 20th centuryparticularly by newly independent countries
sick of being tied to a colonial power.
SELF-SUFFICIENCY PATH TO
DEVELOPMENT
The self-sufficiency path often involves
heavy government spending on welfare
programs and other efforts to ‘level the
field’ between haves and have-nots.
SELF-SUFFICIENCY PATH TO
DEVELOPMENT
EXAMPLE: Post- independence INDIA
After India achieved independence from
Britain in 1947, it pursued an insular path
for decades.
During this period in India, the
following policies were implemented:
• Efforts to limit import of goods
(outlined in earlier slide)
• Exports discouraged (business told to
focus on domestic market)
• Indian currency could not be converted
• Unprofitable businesses subsidized
• Gov’t directly owned many industries
and utilities
INTERNATIONAL TRADE PATH
KEY ELEMENTS
• Countries open themselves to foreign
investment/ international markets
• Barriers to trade removed
• Government spending and budgets sharply
reduced
• Social protections removed to reduce
spending and decrease labor costs
INTERNATIONAL TRADE PATH TO
DEVELOPMENT
Driving Force: What resources does a
country have that can be successfully
marketed in other countries?
People, environments, resources…
INTERNATIONAL TRADE PATH TO
DEVELOPMENT
Rostow’s Model, developed in the 1950s,
described 5 stages of development following
this path.
INTERNATIONAL TRADE PATH TO
DEVELOPMENT
The international trade approach gained
traction after midcentury. Two regions
demonstrate the potential successes of this
model:
The ‘ASIAN
TIGERS’
OIL-RICH GULF
STATES
The ASIAN TIGERS
S. Korea, Singapore, Taiwan, Hong Kong
Lacking natural resources, these
countries focused on the production of
export goods using cheap local labor.
The OIL-RICH GULF STATES
Saudi Arabia, UAE, Bahrain, Kuwait, Oman, Qatar
These states used income from sale of
their most valuable natural resource- OILto finance massive development projects.
Issues with SELF-SUFFICIENCY
• INEFFICIENCY
• Subsidized, competition-protected
businesses have little reason to innovate,
improve quality, or expand production
• BUREAUCRACY
• ‘Big government’ requires a massive civil
service > corruption and inefficiency
The INEFFICIENCY of SELF-SUFFICIENCY:
INDIA’S MARUTI MOTORCARS
Near-identical models of the ‘Maruti 800’ were
made for decades with few improvements.
Issues with INTERNATIONAL TRADE
THE ‘RESOURCE GAMBLE’
• Resources may not be worth as much as
hoped on the market
• EX: Zambia has massive copper reservesbut copper prices have long remained low.
FOCUS ON MDC DEMAND
• Production of export commodities rather
than meeting domestic needs
MARKET DECLINE
• Risk of market collapse always present
Low market prices have long kept ZAMBIA
from fully benefitting from its massive
copper reserves.
MARKET DECLINE:
The ASIAN CONTAGION of 1997
The Gulf States are currently being
deeply impacted by the decline of oil
prices from over $100/barrel to below $30.
Despite the risks involved, most countries
shifted to an INTERNATIONAL TRADE
alignment toward the end of the 20th century.
Wealth generated through trade has been
steadily expanding.
IMPACT
of 2008
MARKET
CRISIS
The World Trade Organization
(WTO) promotes this shift toward
export alignment. This organization
fights trade barriers and sets rules for
how trade should be conducted.
On average, self-sufficient
countries’ economies grow 1%
annually, while export-focused
economies grow by 3%.
INDIA shifted to an INT’L TRADE
approach in the 1990s.
Maruti was purchased by Suzuki, and is
now run efficiently.
FINANCING DEVELOPMENT
Because they lack money for development,
LDCs obtain money from MDCs in two
ways:
• Foreign Direct Investment (FDI)
• Loans
FINANCING DEVELOPMENT
FDI is direct investment by foreign
companies into the economy of a country.
Uneven; 3/5 invested in developed
countries- only 2/5 in developing.
FINANCING DEVELOPMENT
LOANS for development come primarily
from two sources:
• The WORLD BANK
• The INT’L MONETARY FUND (IMF)
FINANCING DEVELOPMENT
IMF & WB loans are huge – hundreds of
millions to billions of dollars.
They are intended to provide funds to
improve infrastructure and other
conditions – making a country more
desirable for investment and trade.
FINANCING DEVELOPMENT
More than 50% of the WB’s loans are
considered to be failures, not delivering
the economic boost they promised.
Many countries have obtained
astronomical debts from these loansexceeding yearly GDPs!
DEBT as a proportion of
GNI
FINCANCING DEVELOPMENT
Loan recipients must sign onto
STRUCTURAL ADJUSTMENT PROGRAMS
mandating major changes to the economy.
- Removal of all trade barriers & protections
- Massive reductions in gov’t spending
(including welfare)
SAPs make a country ripe for trade- but
at great social and environmental cost.
With worker and environmental
protections stripped, unemployment
rises, wages drop, and ecosystems are
ravages for resources.
FINANCIAL CHALLENGES IN DEVELOPED COUNTRIES
The 2008 financial crisis hit the developed
world hard, with nearly every country seeing
a sharp decline in GDP.
Countries have been divided as to how to best
respond to this crisis.
FINACNIAL CHALLENGES IN DEVELOPING COUNTRIES
Two responses have emerged for
dealing with financial crises:
STIMULUS – Increase gov’t spending
to prop up economy; provide direct
relief to increase spendable income.
AUSTERITY – Cut ‘wasteful’ gov’t
spending & social programs, use
available money to pay down nat’l
debt.
Deep divisions exist between those
promoting austerity or stimulus.
In the US, Republicans tend to align with
austerity, and Democrats with stimulus.
Divisions are even deeper in Europe, where
many countries have major debt issues.
Wealthy northern countries favor austerity
approaches for indebted countries, while
poorer southern countries believe they
should be provided stimulus relief.
At the heart of recent financial crises has
been the growth/pop of ‘bubbles’- rapid
growth and then decline of prices of a
commodity.
A housing bubble caused the 2008 crisis.
The world’s first bubble occurred in the
Netherlands in 1637, when the price of
TULIPS skyrocketed due to a blight and
rampant speculation.
MAKING PROGRESS
The world has made progress with regard to
several important metrics since 1980.
Infant Mortality Rate has decreased universally.
• From 17 to 6/1,000 in developed world; from
107 to 104 in developing.
Life Expectancy increased, though gaps remain.
• +8 years in developing, +7 years in developed
GNI Per Capita increased but major gaps
remain
• From $20k to $33k developed, from $1k to $5k
developing
RISING GLOBAL HDI SINCE 1980
DECLINING INFANT
MORTALITY SINCE 1980
RISING LIFE EXPECTANCY SINCE
1980
RISING GNI PER CAPITA SINCE 1980
(HIGHLY UNEVEN)
MAKING PROGRESS
UN MILLENIUM DEVELOPMENT
GOALS
To describe the complicated relationship
between the developed/developing world,
WALLERSTEIN created the ‘core/periphery.’
Resources flow primarily from LDCs to MDCs,
leading to UNEVEN DEVELOPMENT.
CORE-PERIPHERY MODEL
FAIR TRADE
In order to combat uneven development, FAIR
TRADE practices have greatly expanded.
FAIR TRADE is commerce where products are
made/traded according to standards which
protect workers and small businesses in the
developing world.
The biggest Fair Trade retailer in the
US is 10 Thousand Villages.
Because fair trade organizations bypass
costly distributors, a greater percentage
of the retail price makes it to producers
in the developing world
2/3 of artisanal products are made by
WOMEN. Fair trade gives them a say in
their livelihood and a voice in their
community.
MICROCREDIT
Another development method improving
lives in the developing world is
MICROCREDIT – the issuance of very
small loans (on average $60).
Microcredit loans have a 99% repayment rate.
The GRAMEEN BANK, based in Bangladesh,
is the world’s largest microcredit organization.
Its smallest loan was just $1, to a woman who
wanted to sell rubber bracelets to tourists.