Transcript Chapter 20- Economic Growth in Developing Nations

Economic Growth in
Developing Nations
Characteristics of
Developing Nations
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Developed Nations: nations with relatively high
standards of living and economies based more
on industry than on agriculture
Developing Nations: nations with little industrial
development and relatively low standards of
living
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Only 35 of the more than 192 world nations are
considered developed nations.
The rest are developing nations.
The only common factors of developing
nations are that they have less industrial
development and a relatively low standard of
living.
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Very low GDP per capita
Natural and human resources, but not enough
capital or knowledge to use those resources to
their full potential
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Agricultural economies
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Most families living at a subsistence level
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Subsistence Agriculture: growing just enough food by a
family to take care of its own needs
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Poor health conditions, including shortages of
doctors and medical care, and high infant
mortality rates
Low literacy rates
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A large percentage of people who cannot read or
write
Rapid population growth
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In many developing nations, there are less
well-defined, government-protected private
property rights.
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Peru is one such country, with 80 percent of the land
having no private owner.
No large-scale farming occurs because
individual farmers cannot buy and sell land.
The peasant farmers have little incentive to
improve the value of the property.
The Process of Economic
Development
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A basic problem for many developing nations is
how to finance the equipment and training
necessary to improve their standard of living.
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One source of money capital is domestic savings.
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The two major outside sources of capital are:
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Investment by foreign businesses
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Foreign aid from developed nations
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Foreign corporations set up branch offices or
companies in the developing nation due to low
wage rates.
However the foreign investor takes a risk
because there may be political instability in the
country.
Citizens of the developing nation lose
economic control when foreigners control their
resources.
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Foreign aid can be given to the developing
nation by governments and private
organizations in many forms.
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Foreign Aid: money, goods, and services given by
governments and private organizations to help other
nations and their citizens
Forms of foreign aid include:
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Economic Assistance
Technical Assistance
Military Assistance
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Economic assistance: providing loans and
money/capital donations
Technical assistance: providing professionals to
train and teach skills to local population
Military assistance: Providing the nation’s
armed forces with money or people who teach
and train
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While the U.S. gives a large dollar amount in
aid, it is a low percentage of its GDP when
compared to other countries.
$23 Billion in foreign aid
 $14 Billion in foreign military assistance
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The U.S. channels a lot of its aid through the
Agency for International Development (AID).
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The United Nations has agencies that distribute
funds to developing nations.
The International Monetary Fund (IMF) has
recently become a major foreign aid agency.
Many developing nations are unable to repay
the loans they have received in foreign aid.
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Humanitarianism is the desire to relieve
human suffering, and a major goal of private
aid organizations.
It is in the best economic interest of developed
nations to help because it will create more
trading partners and investment opportunities.
Political objectives, such as creating allies
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To help develop a military alliance, a
developed nation will give economic aid.
If the developing nation’s government changes
hands, the new government may be hostile to
the developed nation, and use its military
equipment against them.
Obstacles to Growth in
Developing Nations
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Attitudes and Beliefs
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People don’t trust innovation and technology, they
are comfortable with the old way of doing things.
 Innovations: new ways of doing things
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Continued Rapid Population Growth
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The population is growing faster than the nation’s
GDP.
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Misuse of Resources
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Corrupt governments and poor allocation of
resources (capital flight)
Trade Restrictions
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Trade restrictions in developed nations make it
difficult or impossible to increase exports.
 Trade Restrictions: quotas or tariffs that prevent
consumers from purchasing cheaper foreign substitutes
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Indonesia had a large population and a variety of
rich natural resources.
The country received $2 billion in foreign aid, but
still the economy was a disaster.
The people did not have a national identity and
were divided by nationality, religion, and politics.
The economy under the leadership of Sukarno was
a disaster.
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General Suharto brought improvements, but
relied too heavily on oil so that the economy
was hit hard by the oil crisis in 1980s, and
further suffered from economic crisis of 199798.
Money alone does not enable a country to
experience economic growth.
Governments must loosen their restrictions on
the economy.
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Foreign aid, domestic savings, foreign
investment, and government policies must all
work together.
Depending upon only one or two products
leads to only a temporary economic growth.
Industrialization and the
Future
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Unwise Investments
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Some developing nations have invested in industries
in which they do not have a comparative advantage.
For example, India steel mills produced steel 2-3
times more expensively than what it would cost to
import the steel.
Not Adapting to Change
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People need time to adapt to new patterns of living
and working.
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Using Inappropriate Technology
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Countries need to use technology that is best suited
for its culture.
Instead of buying tractors, countries could use steel
plows because the benefits could be more widely
distributed.
Rushing Through the Stages of Development
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The economy itself needs time to adapt to the
change, build savings, and increase the number of
educated and skilled workers.
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There are many factors that influence economic
development.
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Trade with the outside world
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A government structure that provides for economic
incentives, such as reasonable tax rates and private
property rights
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Natural resources
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Lack of one of these factors does not
necessarily mean the country has fallen into the
vicious cycle of poverty.
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Vicious Cycle of Poverty: situation in which a lessdeveloped county with low per capita incomes
cannot save and invest enough to achieve acceptable
rates of economic growth and thus is trapped
Economic development can also depend on
entrepreneurship and private property rights.
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Media and the Internet transport information to
developing nations.
Developing nations can then see the benefits of
working together.
Alone, one developing nation has little power or
impact in the world market, but as a group they
can have influence.
Developing nations now partner with developed
nations.