Transcript Principles of Economics, Case and Fair,9e

Economic Growth in
Developing and
Transitional Economies
LECTURE 13
LECTURE OUTLINE
Life in the Developing Nations:
Population and Poverty
Economic Development: Sources and
Strategies
The Sources of Economic Development
Strategies for Economic Development
Growth versus Development: The Policy
Cycle
Two Examples of Development: China
and India
Issues in Economic Development
Population Growth
The Transition to a Market Economy
Six Basic Requirements for Successful
Transition
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Economic Growth in Developing and Transitional Economies
All economic analysis deals with the problem of
making choices under conditions of scarcity, and
the problem of satisfying people’s wants and needs
is as real for Somalia and Haiti as it is for the United
States, Germany, and Japan. The universality of
scarcity is what makes economic analysis relevant
to all nations, regardless of their level of material
well-being or ruling political ideology.
Even though economic problems and the policy
instruments available to tackle them vary across
nations, economic thinking about these problems
can be transferred easily from one setting to
another.
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Life in the Developing Nations: Population and Poverty
TABLE 21.1 Indicators of Economic Development
Country
Group
Low-income
Gross
National
Income per
Capita,
Population,
2006
2006
(dollars)
2.3 billion
510
Infant
Mortality,
2006
(deaths
Literacy Rate
Internet
(percent over before age 5
Users per
per 1,000
15 years
1,000 people,
of age)
births)
2005
29
122.0
30
Lower middleincome
2.4 billion
1,580
75
42.0
47
Upper middleincome
575.9 million
4,770
243
29.7
72
1.0 billion
32,040
2,977
7.0
76
High-income
Source: World Bank, www.worldbank.org
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Life in the Developing Nations: Population and Poverty
While the developed nations account for only about
one quarter of the world’s population, they are
estimated to consume three-quarters of the world’s
output.
This leaves the developing countries with about
three-fourths of the world’s people but only onefourth of the world’s income.
The simple result is that most of our planet’s
population is poor.
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Economic Development: Sources and Strategies
The Sources of Economic Development
Capital Formation
vicious-circle-of-poverty hypothesis Suggests
that poverty is self-perpetuating because poor
nations are unable to save and invest enough to
accumulate the capital stock that would help them
grow.
capital flight The tendency for both human capital
and financial capital to leave developing countries
in search of higher expected rates of return
elsewhere with less risk.
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Economic Development: Sources and Strategies
The Sources of Economic Development
Human Resources and Entrepreneurial Ability
brain drain The tendency for talented people from
developing countries to become educated in a
developed country and remain there after
graduation.
Social Overhead Capital
social overhead capital Basic infrastructure
projects such as roads, power generation, and
irrigation systems.
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Economic Development: Sources and Strategies
The Sources of Economic Development
Social Overhead Capital
Corruption
The following chart shows the
World Bank’s rating of corruption
levels in a number of countries
around the world. The countries are
ranked from those with the
strongest controls on corruption—
Germany and France—to those
with the lowest controls—Pakistan
and Nigeria. Indonesia, as you can
see, is near the bottom of the list.
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Economic Development: Sources and Strategies
Strategies for Economic Development
Agriculture or Industry?
TABLE 21.2 The Structure of Production in Selected Developed and Developing
Economies, 2003
Country
Per-Capita
Gross National Income
(GNI)
Percentage of Gross Domestic Product
375
45
17
Services
37
480
20
28
52
China
2,010
12
47
41
Colombia
2,740
12
34
54
Thailand
2,990
10
46
44
Brazil
4,730
5
31
64
Korea (Rep.)
17,690
2
23
75
Japan
United States
38,410
2
30
68
44,970
2
23
75
Tanzania
Bangladesh
$
Agriculture
Industry
Source: World Bank, World Development Indicators, 2008; Sectoral numbers for U.S. and Japan are for 2003.
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Economic Development: Sources and Strategies
Strategies for Economic Development
Exports or Import Substitution?
import substitution An industrial trade strategy
that favors developing local industries that can
manufacture goods to replace imports.
export promotion A trade policy designed to
encourage exports.
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Economic Development: Sources and Strategies
Strategies for Economic Development
Central Planning or the Market?
International Monetary Fund (IMF) An
international agency whose primary goals are to
stabilize international exchange rates and to lend
money to countries that have problems financing
their international transactions.
World Bank An international agency that lends
money to individual countries for projects that
promote economic development.
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Economic Development: Sources and Strategies
Strategies for Economic Development
Microfinance: A New Idea
In the mid 1970s, Muhammad Yunus, a young
Bangladeshi economist created the Grameen Bank
in Bangladesh.
Microfinance is the practice of lending very small
amounts of money, with no collateral, and accepting
very small savings deposits. It is aimed at
introducing entrepreneurs in the poorest parts of the
developing world to the capital market.
Relative to traditional bank loans, microfinance
loans are much smaller, repayment begins very
quickly, and the vast majority of the loans are made
to women (who, in many cases, have been
underserved by mainstream banks).
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Economic Development: Sources and Strategies
Growth versus Development: The Policy Cycle
structural adjustment A series of programs in
developing nations designed to: (1) reduce the size
of their public sectors through privatization and/or
expenditure reductions, (2) decrease their budget
deficits, (3) control inflation, and (4) encourage
private saving and investment through tax reform.
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Economic Development: Sources and Strategies
Growth versus Development: The Policy Cycle
Cell Phones Increase
Profits for Fishermen in
India
Kerala is a poor state in a region
of India.
Beginning in 1997 and continuing
for the next several years, mobile
phone service was introduced to this region of India.
Once the phones were introduced, waste, which had averaged 5
to 8 percent of the total catch, was virtually eliminated.
In fact, cell phones are improving the way markets in less
developed countries work by providing price and quantity
information so that both producers and consumers can make
better economic decisions.
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Economic Development: Sources and Strategies
Two Examples of Development: China and India
China and India provide two interesting examples of
rapidly developing economies. While low per- capita
incomes still mean that both countries are typically
labeled developing as opposed to developed
countries, many expect that to change in the near
future.
Many commentators expect India and China to
dominate the world economy in the twenty-first
century.
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Issues in Economic Development
Population Growth
The populations of the developing nations are
estimated to be growing at about 1.7 percent per
year.
Concern over world population growth is not new.
The Reverend Thomas Malthus (who became
England’s first professor of political economy)
expressed his fears about the population increases
he observed 200 years ago. Malthus believed that
populations grow geometrically at a constant growth
rate—thus the absolute size of the increase each
year gets larger and larger—but that food supplies
grow more slowly because of the diminishing
marginal productivity of land. These two
phenomena led Malthus to predict the increasing
impoverishment of the world’s people unless
population growth could be slowed.
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Issues in Economic Development
Population Growth
The Consequences of Rapid Population Growth
 FIGURE 21.1 The Growth of
World Population, Projected to A.D.
2020
For thousands of years,
population grew slowly. From A.D.
1 until the mid-1600s, population
grew at about .04 percent per
year. Since the Industrial
Revolution, population growth has
occurred at an unprecedented
rate.
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Issues in Economic Development
Population Growth
Causes of Rapid Population Growth
fertility rate The birth rate. Equal to (the number
of births per year divided by the population) × 100.
mortality rate The death rate. Equal to (the
number of deaths per year divided by the
population) × 100.
natural rate of population increase The
difference between the birth rate and the death rate.
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The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Economists generally agree on six basic
requirements for a successful transition to a marketbased system:
•macroeconomic stabilization,
•deregulation of prices and liberalization of trade,
•privatization of state-owned enterprises and
development of new private industry,
•establishment of market-supporting institutions
such as property and contract laws and accounting
systems,
•a social safety net to deal with unemployment and
poverty, and
•external assistance.
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The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Macroeconomic Stabilization
To achieve a properly functioning market system,
prices must be stabilized.
Deregulation of Prices and Liberalization of Trade
An unregulated price mechanism ensures an
efficient allocation of resources across industries.
Privatization
Private ownership provides a strong incentive for
efficient operation, innovation, and hard work that is
lacking when ownership is centralized and profits
are distributed to the people.
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The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Market-Supporting Institutions
The capital market, which channels private saving
into productive capital investment in developed
capitalist economies, is made up of hundreds of
different institutions.
Social Safety Net
This social safety net might include unemployment
insurance, aid for the poor, and food and housing
assistance.
External Assistance
Very few believe that the transition to a market
system can be achieved without outside support
and some outside financing.
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The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Shock Therapy or Gradualism?
shock therapy The approach to transition from
socialism to market capitalism that advocates rapid
deregulation of prices, liberalization of trade, and
privatization.
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