Challenges of Economic Development in Developing Nations

1. Chapter 20 Economic Growth in Developing Nations

2. Chapter 20section 1 Characteristics of Developing Nations

3. Developed vs. Developing Nations • 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

4. Developed vs. Developing Nations • 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.

5. Economic Characteristics • Very low GDP per capita • Natural and human resources, but not enough capital or knowledge to use those resources to their full potential • Agricultural economies • Most families living at a subsistence level • Subsistence Agriculture: growing just enough food by a family to take care of its own needs

6. Economic Characteristics • Poor health conditions, including shortages of doctors and medical care, and high infant mortality rates • Low literacy rates • A large percentage of people who cannot read or write • Rapid population growth

7. Weak Property Rights • In many developing nations, there are less well-defined, government-protected private property rights. • 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.

8. Chapter 20section 2 The Process of Economic Development

9. Financing Economic Development • A basic problem for many developing nations is how to finance the equipment and training necessary to improve their standard of living. • One source of money capital is domestic savings. • The two major outside sources of capital are: • Investment by foreign businesses • Foreign aid from developed nations

10. Foreign Investment • 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.

11. Foreign Aid • Foreign aid can be given to the developing nation by governments and private organizations in many forms. • Foreign Aid: money, goods, and services given by governments and private organizations to help other nations and their citizens • Forms of foreign aid include: • Economic Assistance • Technical Assistance • Military Assistance

12. Foreign Aid • 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

13. Who Supplies Foreign Aid? • 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 • The U.S. channels a lot of its aid through the Agency for International Development (AID).

14. Who Supplies Foreign Aid? • 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.

15. Reasons for Giving Foreign Aid • 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

16. Reasons for Giving Foreign Aid • 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.

17. Chapter 20section 3 Obstacles to Growth in Developing Nations

18. Four Obstacles to Growth • Attitudes and Beliefs • People don’t trust innovation and technology, they are comfortable with the old way of doing things. • Innovations: new ways of doing things • Continued Rapid Population Growth • The population is growing faster than the nation’s GDP.

19. Four Obstacles to Growth • Misuse of Resources • Corrupt governments and poor allocation of resources (capital flight) • Trade Restrictions • 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

20. Case Study: Indonesia • 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.

21. Case Study: Indonesia • 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 1997-98. • Money alone does not enable a country to experience economic growth. • Governments must loosen their restrictions on the economy.

22. Case Study: Indonesia • 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.

23. Chapter 20section 4 Industrialization and the Future

24. Problems of Rapid Industrialization • Unwise Investments • 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 • People need time to adapt to new patterns of living and working.

25. Problems of Rapid Industrialization • Using Inappropriate Technology • 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 • The economy itself needs time to adapt to the change, build savings, and increase the number of educated and skilled workers.

26. Economic Development • There are many factors that influence economic development. • Trade with the outside world • A government structure that provides for economic incentives, such as reasonable tax rates and private property rights • Natural resources

27. Economic Development • Lack of one of these factors does not necessarily mean the country has fallen into the vicious cycle of poverty. • Vicious Cycle of Poverty: situation in which a less-developed 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.

28. Information Leads to Cooperation • 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.