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Chapter 39W
The Economics
Of Developing
Countries
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 countries
39-2
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 GDP
39-4
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 gap
39-5
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
LOW
PER CAPITA
INCOME
LOW
PRODUCTIVITY
RAPID
POPULATION
GROWTH
LOW LEVEL
OF SAVING
LOW LEVEL
OF DEMAND
LOW LEVELS OF
INVESTMENT IN
PHYSICAL AND
HUMAN CAPITAL
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
0
1
2
3
4
5
6
7
8
9
10
Finland
New Zealand
Canada
United Kingdom
Germany
United States
Uruguay
Taiwan
Italy
Greece
China
India
Mexico
Russia
Myanmar
Somalia
Source: Transparency International
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
0
.20
.40
.60
.80
1.00
Norway
Netherlands
Ireland
France
Germany
Canada
Japan
United States
Source: OECD
39-14
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 exchangerate 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