Transcript Development Traps

Chapter 33
THE ECONOMIC
PROBLEMS OF LESSDEVELOPED ECONOMIES
© 2013 Cengage Learning
Gottheil — Principles of Economics, 7e
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Economic Principles
Poverty in the less-developed
countries (LDCs)
Development traps
The big-push strategy for
economic development
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Gottheil — Principles of Economics, 7e
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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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Less-Developed Countries (LDCs)
Less-developed countries (LDCs)
• The economies of Asia, Africa, and Latin
America.
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The Economic Problems of
Less-Developed Economies
Who are the “the bottom billion”?
• By 2000, the world’s population had increased to 6
billion—1 billion in the developed world and 4 billion
in the rapidly growing economies of most LDCs.
• The bottom billion are those people living in failed
LDCs. For them the future remains bleak.
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EXHIBIT 1 REGIONAL AVERAGE GDP PER CAPITA AS
A RATIO OF OECD ECONOMIES
Note: High-income OECD excludes OECD members classified as developing countries and those in Eastern Europe and the CIS.
Source: Human Development Report Office calculations based on World Bank 2001g.
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Exhibit 1: Regional Average GDP per
capita as a Ratio of OECD Economies
What is the “good-news, bad-news” about
LDCs shown in Exhibit 1.
• It shows, for 1960–1998, regional convergence toward
or divergence away from a moving target: the average
annual per capita GDP for high-income economies in
Western Europe and North America.
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Exhibit 1: Regional Average GDP per
capita as a Ratio of OECD Economies
Which regions shown in Exhibit 1 have
shown the most progress?
a. Canada
b. Caribbean and South America
c. All of the above
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Exhibit 1: Regional Average GDP per
capita as a Ratio of OECD Economies
Which regions shown in Exhibit 1 have
shown the most progress?
a. Canada
b. Caribbean and South America
c. All of the above
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The Economic Problems of
Less-Developed Economies
What are the “Asian Tigers”?
• The East Asian and Pacific shown in Exhibit 1.
• This region drew to within one-sixth of OECD’s
1998 level.
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EXHIBIT 2 GDP (1975–2005) PER CAPITA, ANNUAL
GROWTH RATES, AND YEAR OF HIGHEST
VALUE FOR SELECTED REGIONS
AND COUNTRIES
Source: Human Development Report 2007/2008, Palgrave McMillan, New York, 2007, pp. 278–280.
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Exhibit 2: GDP per Capita, Annual
Growth Rates, and Year of
Highest Value for Selected Regions
and Countries (1975–2005)
What LDCs are the most depressed?
• Those confined to triple-digit GDP per capita, where
the average income per year does not even exceed
$1,000.
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Exhibit 2: GDP per Capita, Annual
Growth Rates, and Year of
Highest Value for Selected Regions
and Countries (1975–2005)
What region is geographically the largest
zone of LDCs in Exhibit 2?
a. Sub-Saharan Africa
b. The former Soviet Union
c. Central America
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Exhibit 2: GDP per Capita, Annual
Growth Rates, and Year of
Highest Value for Selected Regions
and Countries (1975–2005)
What region is geographically the largest
zone of LDCs in Exhibit 2?
a. Sub-Saharan Africa
b. The former Soviet Union
c. Central America
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Development Traps
For the bottom billion in their LDCs, a set of
development traps have been in place to
frustrate their attempts at breaking free:
• The demographic trap
• The political instability trap
• The natural resource trap
• The absence of infrastructure trap
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Development Traps
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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Development Traps
The rate of population growth is
written as:
Birth rate – Death rate/100
When birth rates exceed death rates
population increases.
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Development Traps
The rate of population growth is written
as
Birth rate – death rate/100.
When birth rates exceed death rates
population increases.
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EXHIBIT 3 ANNUAL POPULATION GROWTH RATE AND
PERCENT OF POPULATION UNDER AGE 15:
1975–2005 and 2005
Source: Human Development Report 2007/2008, Palgrave McMillan, New York, 2007.
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Exhibit 3: Annual Population Growth
Rate and Percent of Population
under Age 15: 1975–2005 and 2005
1. Do countries with low population
growth rates have a particular
age distribution?
• Yes. A preponderance of older people.
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Exhibit 3: Annual Population Growth
Rate and Percent of Population
under Age 15: 1975–2005 and 2005
The U.S., Germany, France, the
Netherlands, and other OECD
countries have less than 25 percent
of their population under 15 years
of age.
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Exhibit 3: Annual Population Growth
Rate and Percent of Population
under Age 15: 1975–2005 and 2005
In contrast, countries with high
population growth rates, such as
Nigeria and Kenya, typically have
more than 40 percent of their
populations under 15 years of age.
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Development Traps
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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Development Traps
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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Development Traps
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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Development Traps
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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Development Traps
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.
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EXHIBIT 4 THE VICIOUS CIRCLE OF POVERTY
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Exhibit 4: 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 percapita incomes in the future.
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EXHIBIT 5 CIVIL WARS IN SUB-SAHARA AFRICA
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Exhibit 5: Civil Wars
in Sub-Sahara Africa
Political instability in the form of civil
war, as shown in Exhibit 5, can
measurably reduce economic growth.
• On average, these civil wars decrease by 2.2
percent the economies’ annual growth rates
during periods of conflict.
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Development Traps
Which components of infrastructure are less
reliable under politically unstable regimes?
a. Banks
b. Legal systems
c. Monetary systems
d. Free markets
e. All of the above
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Development Traps
Which components of infrastructure are less
reliable under politically unstable regimes?
a. Banks
b. Legal systems
c. Monetary systems
d. Free markets
e. All of the above
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Development Traps
What is it about civil wars that make them not
only characteristic of the political instability
trap, but the demographic trap too?
• The high proportion of young, uneducated men
recruited to fight them.
• Imbalances between ethnic groups.
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Development Traps
What is the “Dutch Disease”?
• It is an example of the natural resources trap.
• ‘‘Dutch Disease’’ came of the discovery and
export of natural gas in the Netherlands.
• Economist believe it was responsible for the
erosion of its manufacturing base.
• The export of a natural resource provided the
foreign currencies needed to import goods.
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Development Traps
Resource-poor economies such as Mexico
and the Asian Tigers pursue what kind of
developmental strategy?
• They focus on labor-intensive manufacturing,
which catapulted them from low-level LDC
performers into high income-generating
economies.
• They focus on people as their springboard
to economic development.
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Infrastructure
Infrastructure
• The basic institutions and public facilities
upon which an economy’s development
depends.
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Development Traps
Which of the following a trap in the sense
of not having an economy?
• The political instability trap
• The natural resource trap
• The absence of infrastructure trap
• The demographic trap
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Development Traps
Which of the following a trap in the sense
of not having an economy?
• The political instability trap
• The absence of infrastructure trap
• The demographic trap
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Development Traps
What is not infrastructure?:
a. Markets
b. Roads
c. People (i.e., skilled workers)
d. Banks
e. Coal
f. The Web
g. None of the above
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Development Traps
What is not infrastructure?:
a. Markets
b. Roads
c. People (i.e., skilled workers)
d. Banks
e. Coal
f. The Web
g. None of the above
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Development Traps
Which of the following is an “economic”
trap?:
• The political instability trap
• The absence of infrastructure trap
• The demographic trap
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The Big Push Strategy
Big push
• The development strategy that relies on an
integrated network of government-sponsored
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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