Transcript Principles of Economics Third Edition by Fred Gottheil

Chapter 33
The Economic Problems of
Less-Developed Economies
© 2005 Thomson
Economic Principles
Poverty in the less-developed
countries (LDCs)
Economic dualism
The big-push strategy for
economic development
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Economic Principles
The unbalanced growth strategy
for economic development
Foreign investment in the LDCs.
Economic aid to the LDCs.
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Confronting National Poverty
Beginning in the 1950s economists
began seeing the economies of Asia,
Africa, and Latin America as
something more than trading posts
for our raw materials.
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Confronting National Poverty
Complete the sentence:
In the 1960s economists dropped
the terms _____ and _____ in favor
of newly developing countries or
less-developed countries.
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Confronting National Poverty
Complete the sentence:
In the 1960s economists dropped
the terms backwardness and
underdevelopment in favor of
newly developing countries or
less-developed countries.
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Confronting National Poverty
“Backwardness” and “underdevelopment” were seen as being
much too prejudicial.
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Less-Developed Countries (LDCs)
Less-developed countries (LDCs)
• The economies of Asia, Africa, and Latin
America.
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Less-Developed Countries (LDCs)
True or false: Decade after decade,
the economies of LDCs have been
stalled, generating at best only
subsistence-level incomes.
• False. The economies of some LDCs have
grown and modernized, while others have
languished.
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EXHIBIT 1 PER CAPITA INCOME, PER CAPITA INCOME
GROWTH RATE, AND POPULATION GROWTH
RATE IN SELECTED LDCs: 1990–2001
Source: The World Bank, World Bank Atlas, 2003 (Washington, D.C.: World Bank, 2003).
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Exhibit 1: Per Capita Income, Per Capita
Income Growth Rate, and Population
Growth Rate in Selected LDCs: 1990-2001
1. Which of the following upper-middleincome LDCs has experienced the most
rapid growth in per capita income
between 1990 and 2001?
a. Algeria
b. Venezuela
c. Brazil
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Exhibit 1: Per Capita Income, Per Capita
Income Growth Rate, and Population
Growth Rate in Selected LDCs: 1990-2001
1. Which of the following upper-middleincome LDCs has experienced the most
rapid growth in per capita income
between 1990 and 2001?
a. Algeria
b. Venezuela
c. Brazil
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Exhibit 1: Per Capita Income, Per Capita
Income Growth Rate, and Population
Growth Rate in Selected LDCs: 1990-2001
2. Which of the following LDCs had
the lowest per capita income growth
rate between 1990 and 2001?
a. Democratic Republic of the Congo
b. Ghana
c. Syria
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Exhibit 1: Per Capita Income, Per Capita
Income Growth Rate, and Population
Growth Rate in Selected LDCs: 1990-98
2. Which of the following LDCs had
the lowest per capita income growth
rate between 1990 and 2001?
a. Democratic Republic of the Congo
b. Ghana
c. Syria
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EXHIBIT 2 PERCENTAGE OF POPULATION UNDER
15 YEARS OF AGE FOR SELECTED
COUNTRIES: 2001
Source: Statistical Abstract of the United States, 2002 (Washington, D.C.: U.S. Department of Commerce, 2002), p. 827.
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Exhibit 2: Percentage of Population
Under 15 Years of Age for Selected
Countries: 2001
1. Which of the following countries had
the highest percentage of its population
under 15 years of age in 2001?
a. Ethiopia
b. Philippines
c. Germany
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Exhibit 2: Percentage of Population
Under 15 Years of Age for Selected
Countries: 2001
1. Which of the following countries had
the highest percentage of its population
under 15 years of age in 2001?
a. Ethiopia
b. Philippines
c. Germany
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Exhibit 2: Percentage of Population
Under 15 Years of Age for Selected
Countries: 2001
2. Do countries with low population growth
rates tend to have a high percentage of their
population under 15 years of age?
• No.
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Exhibit 2: Percentage of Population
Under 15 Years of Age for Selected
Countries: 2001
2. Do countries with low population growth
rates tend to have a high percentage of their
population under 15 years of age?
• In countries with low population growth rates,
such as Germany, France, and the Netherlands,
typically less than 25 percent of the population is
under 15 years of age.
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Exhibit 2: Percentage of Population
Under 15 Years of Age for Selected
Countries: 1997
2. Do countries with low population growth
rates tend to have a high percentage of their
population under 15 years of age?
• In contrast, in countries with high population
growth rates, such as Nigeria and Kenya,
typically more than 40 percent of the population
is under 15 years of age.
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LDC Per Capita Incomes
1. How is per capita income growth
related to income growth and
population growth?
• Per capita income growth is equal to income
growth divided by population growth.
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LDC Per Capita Incomes
2. What happens to per capita
income if population grows faster
than income?
• Since per capita income growth is equal
to income growth divided by population
growth, if population grows faster than
income, then per capita income must fall.
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LDC Per Capita Incomes
3. What is the vicious cycle of
poverty?
• People are poor because they can’t invest
in capital goods, and they can’t invest in
capital goods because they are poor.
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LDC Per Capita Incomes
4. Why is the vicious cycle of poverty
more likely to occur in countries that
have a large percentage of their
population under 15 years of age?
• Most people under age 15, and particularly
those under 10, are unable to produce enough
to meet their own consumption needs.
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LDC Per Capita Incomes
4. Why is the vicious cycle of poverty
more likely to occur in countries that
have a large percentage of their
population under 15 years of age?
• If almost one-half of a country’s population
consumes more than it produces, there are
few resources that can be shifted from
producing consumer goods to producing
capital goods. Gottheil - Principles of Economics, 4e
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EXHIBIT 3 THE VICIOUS CIRCLE OF POVERTY
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Exhibit 3: The Vicious Cycle
of Poverty
What is the consequence of
Ethiopia producing at point a
rather than point b in Exhibit 3?
• Slower economic growth rates and lower
per-capita incomes in the future.
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Human Capital
Human capital
• The investment in workers’ health and
knowledge, acquired through education,
training, and/or experience that enhances
their productivity.
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Other Indicators of the LDCs’
Lack of Economic Well-Being
1. True or false: The capital investments
that yield the highest payoffs in an
economy are those made in machinery
and factories.
• False
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Other Indicators of the LDCs’
Lack of Economic Well-Being
1. True or false: The capital investments
that yield the highest payoffs in an
economy are those made in machinery
and factories.
• Investments in human capital—in the form
of education and health care—rank among
the most important of the capital goods
contributing to national economic growth.
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Other Indicators of the LDCs’
Lack of Economic Well-Being
2. Which of the following best describes
the timeframe between investment in
human capital and the realization of
payoffs in the form of improvements in
a person’s working efficiency?
a. Immediate
b. Brief
c. Relatively long
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Other Indicators of the LDCs’
Lack of Economic Well-Being
2. Which of the following best describes
the timeframe between investment in
human capital and the realization of
payoffs in the form of improvements in
a person’s working efficiency?
a. Immediate
b. Brief
c. Relatively long
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EXHIBIT 4 LIFE EXPECTANCY, INFANT MORTALITY, PEOPLE
PER PHYSICIAN, PERCENTAGE OF CHILDREN IN
SCHOOL, AND PERCENTAGE OF PEOPLE WITH
SAFE WATER FOR SELECTED COUNTRIES: 2001 OR
LATEST YEAR AVAILABLE
Source: Ruth Leger Sivard, World Military and Social Expenditures, 1966 (Washington, D.C.: World Priorities, 1966), pp. 30–
52, and The World Bank, World Bank Atlas, 2003 (Washington, D.C.: World Bank, 2003).
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Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician . . .
1. What is the relationship between
per capita income and life
expectancy?
• Life expectancy tends to be directly
related to per capita income.
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Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician, . . .
2. Do low-income LDCs tend to
have more people per physician
than higher-income LDCs?
• Yes. With a few exceptions, there are
usually many thousands of people per
physician in low-income LDCs.
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Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician, . . .
3. Based on the percentage of children in
school, how well is Ethiopia doing at
investing in human capital when
compared to Botswana and South Africa?
• Very poorly.
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Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician, . . .
3. Based on the percentage of children in
school, how well is Ethiopia doing at
investing in human capital when
compared to Botswana and South Africa?
• Fewer than one-half of the children in Ethiopia
is receiving a school education, while this figure
exceeds 90 percent in Botswana and South
Africa.
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Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician, . . .
4. Are people in low-income LDCs very
much more likely to risk exposure to
waterborne diseases such as dysentery
and cholera than in higher-income LDCs?
• In general as per capita income rises, the
percentage of people with access to safe water
also rises.
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Economic Dualism
True or false: While conditions in lowincome LDCs are poor, there is a high
degree of equality in these societies, and
all people bear a roughly equal share of
the burden of poor living conditions.
• False.
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Economic Dualism
True or false: While conditions in lowincome LDCs are poor, there is a high
degree of equality in these societies, and
all people bear a roughly equal share of
the burden of poor living conditions.
• Many LDC doctors, lawyers, merchants,
accountants, and exporters and importers,
among others, have access to safe water,
hospitals, education, and decent housing.
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Economic Dualism
Economic dualism
• The coexistence of two separate and
distinct economies within an LDC; one
modern, primarily urban, and exportdriven, the other traditional, agricultural,
and self-sustaining.
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EXHIBIT 5 ECONOMIC DUALISM
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Exhibit 5: Economic Dualism
1. What are the characteristics of
the labor market in the traditional
sector of an LDC economy?
• The labor market for the traditional
sector is shown in panel a.
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Exhibit 5: Economic Dualism
1. What are the characteristics of
the labor market in the traditional
sector of an LDC economy?
• The labor market in the traditional
sector features a relatively low and flat
demand curve.
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Exhibit 5: Economic Dualism
1. What are the characteristics of
the labor market in the traditional
sector of an LDC economy?
• The relatively low opportunity costs
associated with traditional labor produce a
relatively flat supply curve for labor.
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Exhibit 5: Economic Dualism
1. What are the characteristics of
the labor market in the traditional
sector of an LDC economy?
• As a result, the labor market in the
traditional sector of an LDC economy
yields low wages.
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Exhibit 5: Economic Dualism
2. What are the characteristics of
the labor market in the modern
sector of an LDC economy?
• The labor market for the modern sector
is shown in panel b.
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Exhibit 5: Economic Dualism
2. What are the characteristics of
the labor market in the modern
sector of an LDC economy?
• The labor market in the modern sector
features a higher and steeper demand.
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Exhibit 5: Economic Dualism
2. What are the characteristics of
the labor market in the modern
sector of an LDC economy?
• The higher opportunity costs associated
with skilled workers in this sector
generates a steeper supply curve.
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Exhibit 5: Economic Dualism
2. What are the characteristics of
the labor market in the modern
sector of an LDC economy?
• As a result, the equilibrium wage rate in
the modern sector is considerably higher
than in the traditional sector.
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Exhibit 5: Economic Dualism
3. What factors might cause
economic dualism to persist?
• The vicious cycle of poverty prevents the
parents of children living in poverty from
investing in their children’s human capital.
These children forego an education and
begin working at an early age.
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Exhibit 5: Economic Dualism
3. What factors might cause
economic dualism to persist?
• In contrast, people earning a high income
in the modern sector can afford tutors,
private education, health care, and
adequate food for their children.
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Exhibit 5: Economic Dualism
3. What factors might cause
economic dualism to persist?
• When they become adults, the children of
the elite can prosper and succeed in the
modern sector. The children of workers in
the traditional sector may never get the
education necessary to enter the labor
force in the modern sector.
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The Absence of Basic
Prerequisites
1. In what way is political stability
important to the proper functioning
of an economy?
• Laws become meaningless when
governments that displace each other too
frequently and by force are inclined to set
aside past government commitments
and, at times, even basic property rights.
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The Absence of Basic
Prerequisites
1. In what way is political stability
important to the proper functioning
of an economy?
• Such political discontinuities interfere
with routine economic decision making.
For example, businesses will be more
hesitant to make new capital investments.
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The Absence of Basic
Prerequisites
2. How might economic development be
inhibited by the psychological, religious,
and cultural character of LDCs?
• Cultural traditionalism can inhibit economic
development by promoting large families,
inhibiting the use of new technologies, and
denying women access to education
and work outside the home.
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The Absence of Basic
Prerequisites
3. Are there difficulties transplanting
modern production technologies and
facilities in an LDC?
• Modern production requires an extensive
support system.
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The Absence of Basic
Prerequisites
3. Are there difficulties transplanting
modern production technologies and
facilities in an LDC?
• This support system includes workforce
training, sources of credit, and networks of
telecommunications, power, and
transportation.
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Infrastructure
Infrastructure
• The basic institutions and public facilities
upon which an economy’s development
depends.
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The Big Push Strategy
Big push
• The development strategy that relies on
an integrated network of governmentsponsored and financed investments
introduced into the economy all at once.
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The Big Push Strategy
1. What is the argument in favor of
the big push strategy?
• Each potential investment’s success
depends upon there being a market for its
output.
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The Big Push Strategy
1. What is the argument in favor of
the big push strategy?
• For example, in order for an automobile
plant to succeed, there must be input
producers, a road system, and gasoline
stations, as well as people with sufficient
income to purchase the cars.
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The Big Push Strategy
1. What is the argument in favor of
the big push strategy?
• Therefore the big push strategy builds
everything at once so that all necessary
infrastructure and markets are in place.
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The Big Push Strategy
2. What are some possible problems
with the big push strategy?
• Skills and materials may get spread
too thinly, and the tax burden needed to
finance the big push may be
destabilizing.
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The Unbalanced
Development Strategy
What is the basic idea underlying
the unbalanced development
strategy?
• Government triggers the process by
funding and putting into place key
infrastructure investments.
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The Unbalanced
Development Strategy
What is the basic idea underlying
the unbalanced development
strategy?
• Private entrepreneurs initiate investments
that are funded from the entrepreneur’s
own savings or from the private banking
system.
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Forward Linkages
Forward linkages
• Investments in one industry that create
opportunities for profitable investments in
other industries, using the goods produced
in the first as inputs.
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Backward Linkages
Backward linkages
• Investments in one industry that create
demands for inputs, inducing investment in
other industries to produce those inputs.
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EXHIBIT 6 PRODUCTION POSSIBILITIES CURVE WITH
FOREIGN INVESTMENT
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Exhibit 6: Production Possibilities
Curve with Foreign Investment
How does foreign investment
affect the production possibilities
curve for consumption and
capital goods?
• It shifts out the production possibilities
curve.
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EXHIBIT 7 U.S. FOREIGN ECONOMIC AID: 1970–2000
($ MILLIONS)
Source: Statistical Abstract of the United States, 2002 (Washington, D.C.: U.S. Department of Commerce, 2002), p. 791.
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Exhibit 7: U.S. Foreign Economic
Aid: 1970-2000 ($ millions)
What accounts for the increase in
total U.S. foreign economic aid?
• Most of the increase can be attributed to
an increase in grants.
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EXHIBIT 8 OFFICIAL DEVELOPMENT ASSISTANCE: 2000
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Exhibit 8: Official Development
Assistance: 2000
Although the U.S. gives the most
aid, what is the other story that
donor nations tell?
• Given as a percent of GNP, other countries
could be said to be more generous.
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