Economic Development and Transition

1. Economic Development and Transition Chapter 18

2. Levels of Development • Half the world’s population lives in extreme poverty (less than $1 a day) • Measure well being of country on development (process that nation meets economic, social and political needs of people) • Developed nations (MDC’s)- above average level of material well being • Less Developed Countries (LDC’s) worlds poorest countries • Developing Countries- not poorest but not high standard of living of MDC’s • Development is how well a nation provides food, education, shelter, and levels of economic production

3. Developed, Developing and Least Developed Nations

4. Measuring Development • Primary measure of development is GDP (total market value of all goods and services produced in a year) • Per Capita GDP is GDP divided by total population • Does not account for distribution of wealth, in many LDC’s gap between rich and poor very wide • Energy consumption- amounts of energy used are an indication of industrialization (extensive organization of an economy for manufacturing) • Low levels of energy consumption are a sign of little industry, development

5. Worldwide Energy Consumption Per Capita

6. Measuring Development • Labor Force- LDC’s most labor force devoted to agriculture, little opportunity for workers to specialize • Unable to produce specialized goods for sale, unable to generate cash income • Consumer goods- large number of consumer goods means people have disposable income • Literacy- higher in more developed countries • Higher levels of education mean population is more productive • Life Expectancy- well nourished, well housed population has longer life expectancy • Infant mortality rate- number of deaths in first year of life per 1,000 births

7. Characteristics of Developed Nations • Have high per capita GDPs • Higher degree of economic, political freedom • Agricultural output high, but few farmers (mechanization, industrialization of agriculture) • Most of labor force in service industry or manufacturing • High energy usage • Use of technology increases productivity • Infant mortality low, life expectancy high • Most of population urbanized • Solid infrastructure (services needed to keep economy healthy- roads, communication systems, financial institutions)

8. Characteristics of Less Developed Countries • Low per capita GDP • Low energy usage • Most of population in agriculture (subsistence farming) • Unemployment rates high • Education system inadequate, children needed to work on farms; literacy rates low • Most of population is rural (not always) • Poor diet, access to health care lead to high infant mortality and lower life expectancy

9. Levels of Development • Economic development occurs in the following stages • Primitive equilibrium- no economic system exists, based on tradition • Transition- traditions crumble, new ways adopted • Takeoff- new industries grow and profits reinvested • Semi-developed- economy expands, enters international market • Highly developed- basic needs easily met, economy focused on consumer goods, public sector

10. Issues in Development

11. Rapid Population Growth • Quality of life depends on productive population, LDCs can’t meet needs of rapidly growing population • Many LDCs are experiencing increase in life expectancy and no decrease in birth rates, leading to rapid population growth • Double population means need for more employment opportunities, schoolrooms, agricultural production, industrial output

12. Factors of Production • Physical geography makes development difficult • Uneven distributions of resources, arable land • Sometimes problem is how to utilize resources, technology and capital to extract resources absent in many LCDs

13. Physical and Human Capital • Lack of human made resources to create goods and services • Subsistence agriculture does not give families opportunity to save or produce anything more than food • Means large portion of population who don’t produce are supported by others • Health, nutrition, education important to develop human capital • Keeps investors away because they don’t see profit if country lacks a skilled, healthy workforce

14. Health and Education • Health- Performance and productivity depend on good nutrition, less developed countries suffer from chronic food shortages • Education- To use technology and move beyond subsistence educated workforce is necessary • LDCs have low rates of literacy and limited access to education • Ideas about gender keep women out of education and the workforce • Brain drain- best educated citizens leave many LDCs for education opportunities, attracted to opportunities of developed countries

15. Political Factors • Limited or reduced development in LDCs • Colonial legacy • Many were former colonies with economies based on extraction of raw materials • Shipped to colonizers, where they were turned into finished products • Many had to rely on colonies for manufactured goods • After WWII many became independent and tried to modernize their economies • At first they turned to central planning, many are now turning to free enterprise • Corruption in government • Policies and political decisions to only benefit a small minority, leaving many with needs unmet • Civil wars and social unrest have plagued many countries • Military leaders spend huge sums of money at the expense of other societal needs

16. Debt • 1970’s and 1980’s many LDCs acquired debt from foreign governments and private banks • Worldwide economic crises hindered countries from paying back loans (Oil Crisis 1973 value of dollar increased and made paying loans back more difficult) • Some countries foreign debt is greater than annual GDP

17. Financing Development

18. Investment • Building infrastructure, developing education, healthcare and creating industry require large sums of money • Two methods to finance development: • Internal financing from the countries citizens • Underdeveloped nations do not have much money to invest • Those with money keep it in foreign banks and overseas investments, many LDCs turn to foreign investment • Foreign investment money from other countries

19. Investment • Foreign direct investment- business established in country by foreign firm • Often formed by Multi-National Corporations (MNCs) • MNCs are large corporations that produce and sell goods across the globe • Attracted to LDCs for profit, take advantage of cheap labor and natural resources • Money not reinvested in country, goes to foreign owners • Potential for unethical treatment (low wages for workers) • Positive effects provide jobs, introduce technology, opportunity for related services to develop • Foreign portfolio investment- foreigners purchase stocks and bonds in countries markets, funds lead indirectly to increases in production

20. Foreign Aid • Foreign governments give money and other forms of aid to LDCs to aid development • Build schools, develop infrastructure • Reasons- humanitarian, military, economic, social • Examples- aid to Western Europe after WWII, more recently aid to Middle Eastern countries friendly to American democracy • These countries can provide new markets for American goods

21. International Institutions • International institutions promote development • Most prominent are the World Bank, United Nations Development Program, International Monetary Fund • World Bank- largest provider of development assistance, raises money in financial markets and takes contributions from member nations • UN Development Program- elimination of poverty through development, provides grants for economic and social development, funded by voluntary contributions from UN members

22. World Bank Income Groups Blue – high Income Green- uppermiddle income Purple- lower middle income Red -poor

23. International Institutions • International Monetary Fund (IMF)- facilitates development through policy advice, technical assistance • Often viewed as the last resort for struggling LDCs • Uses debt rescheduling ( giving more time, forgiving, dismissing borrowed money); stabilization programs (IMF tries to help change economic policies of debtor nation) • Stabilization programs have negative impact on poor; cuts in government services, cutting wages while prices rise • Cause decrease in domestic consumption while country tries to export more to make money

24. Transition to Free Enterprise

25. Toward a Market Economy • LDCs began to see limitations of centrally planned economies • Many have begun to replace them with market based systems • Some are modifying their centrally planned economies to incorporate some free market practices • Huge adjustment for economy and nation • One of the first steps is privatization (sale or transfer of government owned business to private individuals) • Can sell business to one owner • Sell shares in business • Privatization means only profitable business will continue to operate • Means secure life long employment for some is over because competition weeds out the weak

26. Other Issues in Transition • The Legal System and Government • Establishment of a legal system protecting property rights • Laws that ensure the transfer of property • Law and order prevent criminals and government from interfering with the day to day business of the economy • Laws need to provide a framework of regulation • Workers need to develop a different work ethic based on incentive to influence labor

27. Russia in Transition • USSR Once dominant communist nation, late 1980’s lagging economy brought social and economic reform • Most land, labor and capital devoted to heavy industry and the military, little left to produce consumer goods • 1980’s new leader Mikhail Gorbachev began series of economic reforms (perestroika) to gradually change over to a free market economy • Workers, factory managers had more control over production • Introduced a more open government policy (glasnost)where citizens could do what they wish without government reprisal • Policy changes led to collapse of communism in 1991

28. Russia in Transition • By 1992 government lifted price controls, prices tripled • Wealth was unevenly distributed and organized crime and corruption infiltrated society and the economy • Financial aid from the World Bank and the IMF was mismanaged and not used efficiently • Recently Russia has started to tap into their vast oil, natural gas and mineral resources to sell on the world market