Ch. 9 Key Issue 4

1. Ch. 9 Key Issue 4 Why Do LDCs Face Obstacles to Development?

2. The difference in per capita GDP between the more developed and less developed regions is • A) widening. • B) remaining constant. • C) decreasing. • D) zero. • E) cycling up and down.

3. Even though a higher percentage of GDP is spent on education in less developed countries, • A) more women than men have access to education in LDCs. • B) LDCs spend less per pupil than MDCs. • C) LDCs have smaller average class sizes than MDCs. • D) literacy rates are higher in urban areas of LDCs than many MDCs.

4. The North American region is the world's leading provider of all but which of the following? • A) food • B) petroleum (oil) • C) financial and management services • D) entertainment • E) sports

5. How to Develop? • LDCs must develop faster to reduce disparity between MDCs • Need to increase GDP so they have $ to spend • LDCs face two problems: • 1. Which development policy (model) should we adopt? • 2. Where do we find the funds for development?

7. Models for Development • Development can be achieved through: • Self-sufficiency approach • International Trade approach • Rostow’s Development Model (5 stages) • Dependency Theory • We will discuss pros and cons of each

8. Self–sufficiency Model • Popular in first part of 20th century; India • Depending on themselves, not other countries • Limiting imports and exports with barriers (tariffs, quotas, licenses) to protect domestic businesses • “Balanced growth” • Funds equally distributed to all sectors of the economy and in all regions • Only modest gains made in development, but it was equal across country (no islands)

9. Problems with S-S Approach • Inefficient businesses • Little incentive to improve business since they sell at high government-set prices (the gov’t guarantees demand); lack of competition stalled innovations • Large bureaucracy needed • Many agencies needed toregulate businesses • Entrepreneurs learned how to get around barriers and sell illegal imported products on black market

10. International Trade Approach* • What animal, vegetable, or mineral resource does the country have in abundance that other countries are willing to buy? • What product can we manufacture and distribute at a higher quality and lower cost than any other countries?

11. International Trade Approach • Allows for a country to specialize in relatively few local industries (oil, food, etc = commodities) to sell to the rest of the world • Money brought in from sales goes toward improving development • Trade with the international market for all other needs • Cheap labor is exploited (China)

12. Rostow’s Development Model (1950’s) With decolonization of Asia and Africa, he looked at how currently developed countries developed- what “stages” did they go through? Assumes that each country will follow the same path to “development” – is this possible? • The traditional economy • The preconditions for takeoff • The takeoff • The drive to maturity • The age of mass consumption Each country is in one of these 5 stages

13. Success in International Trade • These countries employed Rostow’s model • 4 Asian Dragons • S.K., Taiwan, Singapore, Hong Kong • Manufactured goods and sold them on world market • Low labor costs- cheap goods for MDCs • Petroleum-rich Arabian Peninsula • Booming oil market led to increased wealth; will this money spur development?

14. Problems with I.T Approach • Uneven resource distribution • Not all countries have commodities that other countries want to buy or prices/demand have decreased • Increased dependence on MDCs • Since resources go to developing goods to sell to MDCs, money is diverted away from domestic needs (clothes, food) Funds from selling commodities may be used to buy these needs back from MDCs • Market decline • Slow growth in MDCs = no new customers for LDCs

15. I.T. Approach Triumphs • Most popular model by second half of 20th century; India removes barriers • World Trade Organization (WTO) • Established to promote the IT model • Foreign Direct Investment (FDI) • Transnational corporations

17. Dependency Theory • Created by structuralists- countries face different problems that won’t allow for Rostow’s theory • Poor countries are dependent on wealthier ones • Poor countries today are experiencing neo(new)-colonialism: wealthy countries controlling economies of poorer ones • Dollarization in LA • MDCs remain dominant, LDCs remain dependent

18. Wallerstein and Development • World is one system- no country is independent of another • World systems theory: three tier structure - core, periphery, semi-periphery • Makes power relationships explicit- periphery dependent upon the core • *Not all tadpoles can survive into toads • Capitalist’s drive for profit = domination • Capitalists will move production around the world to enhance profits, places that lose production facilities suffer

19. Wallerstein’s World-Systems Theory • Core countries • Higher education, salaries, technology = more wealth in world economy • Periphery countries • Lower levels than in core countries = less wealth • Semi-periphery counties • Processes of both are occurring; buffer zone

21. Wallerstein’s World-Systems Theory • Leads to a capitalist world economy where: • The world is “one big market” • Global division of labor between the 3 tiers • Capitalism (trade goods/services for profit; find cheap labor) • Commodification (buying/selling/trading everything)

22. Capitalist World Economy • Created by colonialism- intertwining the economies of the world; taking resources and put them in a position of subservience • Is composed of “dots” (individual countries) but we must also understand the “whole.” (the world) = scale • Sunday Afternoon on the Island of La Grande Jatte

24. Barriers to Economic Development • The World economy works to the disadvantage of the periphery, but other obstacles exists: • Social conditions • ½ population in periphery is 15 or younger = low dependency ratio • Low life expectancy and high infant mortality due to inadequate nutrition- calories and protein deficiency • Access to education is often gendered (skewed in favor of one gender) • Trafficking- immigrants fleeing poverty are deceived and bullied into working in conditions they would not choose- domestic servants

25. Barriers to Economic Development • Foreign debt • Banks lent out large sums of money with strings attached- Structured adjustment loans • Countries spend large part of GDP on repaying debts • May default- will cause problems of getting future loans; multiple countries defaulting at same time could cause economic crisis • Disease • Lack of adequate healthcare • Malaria

26. Barriers to Economic Development • Political Corruption and Instability • Disenfranchisement of poor by rich for control of government • Democracies in the core • Decolonized countries left with political hierarchies from colonial period • Economic and political stability closely linked • “poverty helps the Taliban” • Afraid to rise up against tyrants • Cut off aid to country

27. Costs to Economic Development • Industrialization • Export processing zones (EPZ)- favorable tax and trade arrangements for foreign firms • Maquilladoras- border of Mexico and US • Special Economic Zones of China- Hong Kong • North American Free Trade Agreement (NAFTA)- encourage trade and cooperation between US and Mexico

28. Costs to Economic Development • Agriculture • Outdates, inefficient equipment • Small, fragmented plots of land • Cannot afford fertilizers • Desertification- overuse of land due to livestock grazing- Africa on the edge of the Sahara and in semi-arid regions • Tourism • One of the major industries of world, passed oil for economic value • Negative effects on culture and environment • Hotels instead of housing, not owned by host country • Income is not re-invested in country • Wealthier visitors to poor countries • Local culture has to adapt to suit visitors tastes

29. Costs to Economic Development • Tourism • One of the major industries of world, passed oil for economic value • Negative effects on culture and environment- harsh contrasts on landscape • Hotels instead of housing, not owned by host country • Income is not re-invested in country • Wealthier visitors to poor countries • Local culture has to adapt to suit visitors tastes • Behave in ways that contradict own culture • Vulnerable economy- no tourists if nobody has money or if disaster destroys your attractions- 2004 tsunami in Southeast Asia

30. Questions • Why is the International Trade approach better for development than the Self-Sufficiency approach? Do the benefits outweigh the costs? • What were the two reasons why Rostow’s model was expected to work? • How do the WTO and FDI promote the development of LDCs? What are their drawbacks?

31. Importance of Development • LDCs must develop faster to reduce disparity between MDCs • Need to increase GDP so they have $ to spend • LDCs face two problems: • 1. Which development policy (model) should we adopt? • 2. Where do we find the funds for development?

32. Financing Development • LDCs lack money for development, so they get funds from MDCs in two primary ways: • Loans from banks and International organizations • Direct Investment from transnational corporations

33. World Bank • Loans money for reforming public and legal institutions, strengthen financial institutions and implement social service programs. • IBRD loans- money load from the sale of bonds to private investors Primarily in Europe and Latin America. • IDA loans- money from government contributions. Given to poor countries considered too risky for IBRD. Primarily in Asia and Africa.

34. International Monetary Fund (IMF) Does not lend money for specific projects, rather deals with preventing obstruction of world trade • Stabilize currency, help pay for imports Funding IMF is based on each member country’s size in the World Economy

35. Creating Funding Programs • World Bank and IMF were created by UN to promote stability and development after WWII and to avoid another Great Depression • Idea is that LDCs will take money to improve their infrastructure (schools, roads, public services/goods) which will attract more foreign businesses to open or domestic business to expand • LDCs can then repay the loans through taxes collected for supplying pubic services/goods

36. Problems with Funding LDCs • Most LDCs have been unable to repay loans, especially in Africa. • Reasons for failure include: • Bad engineering on projects • Aid is wasted, stolen or used on armaments • New businesses are not attracted to country • The failure to repay loans causes: • MDCs to refuse to make further loans • Jeopardizes the financial stability of banks in the MDCs

37. Fair Trade • Proposed to counter the I.T. approach • Intended to protect small business and workers in LDCs • Cut out exploitive middle men who want to maximize profits. Work directly with the producers and workers so more profits can be returned to them. • Producer standards • Worker standards