Chapter 19

1. Chapter 19 Economic Growth in Developing Nations

2. Characteristics of Developing Nations • Currently, even the poorest families in the US have an income far above the average income in much of the rest of the world • About one half of the world’s population lives at or close to subsistence with just enough to survive • This Chapter will focus on the characteristics of those developing countries

3. Developed and Developing Nations • Developed nations – nations with relatively high standards of living and economies based more on industry than on agriculture • Examples are United States, All of Europe, Canada, Japan, Australia and New Zealand • Of the 190 nations in the world only 35 are developed

4. Per Capita GDP around the world

5. Developing Nations con’t • Developing Nations – nations with little industrial development and relatively low standards of living • Developing nations vary greatly • For example, the average income of a person in Mexico is only about 24% of those in the US but Mexico is much more developed and prosperous than almost all other developing nations • Religion influences economic development in some developing countries

6. Economic Characteristics • Developing nations usually have these characteristics: • Low GDP • Per capita GDP of US and other developed countries is around $25,000 - $40,000 • Developing countries may have natural and human resources but they lack equipment, financing and knowledge to pull those resources together • Emphasis in agriculture • Agriculture is central to economies of developing countries • Subsistence agriculture – growing just enough food by a family to take care of its own needs, no crops are available to export or feed an industrial workforce

7. Economic Characteristics con’t • Poor health conditions • High death rates due to malnutrition or illness due to lack of food • Developing nations can suffer from a shortage of modern doctors, hospitals and medicines • Many have low infant mortality rates, meaning the death rate if children who die within the first year of life is high • Low Literacy rate • 25% have a low adult literacy rate, which is the percent of people who can read and write • There are few schools and many children miss school to work • Lack of educated workers makes it difficult to train the population for needed technical and engineering jobs

8. Economic Characteristics con’t • Rapid Population Growth • The source of most of the other problems like lack of food and housing • The US grows at a rate of 1% per year • The growth rate of many developing nations is 3 to 4 times that amount

9. Economic and Social Conditions for Selected Nations

10. Weak Property Rights • Generally governments of developing countries do not support a system of well-defined property rights. • For example in Peru only 20% of the land is legally owned so no large scale farming can occur.

11. The Process of Economic Development • 3 Stages of Economic Development • Agriculture stage • Manufacturing stage • Workers shift into service sector • A basic problem of developing nations is how to finance the equipment and training necessary to improve their standard of living • Most nations must look to outside sources for investment capital

12. 2 Outside sources of capital • Foreign Investment • Attractions • Low wages, few regulations, and raw materials • Investments can include factories, branch offices, new companies or buying companies that are already established • Risks • Unstable governments, terrorist groups and confiscations which is when the government takes over the company and removes the owners • Often citizens complain about the economic control that foreign companies have over their resources

13. 2 Outside sources of capital con’t • Foreign Aid – funds, goods and services given by governments and private organizations to help other nations and their citizens • Types of foreign aid include: • Economic Assistance – loans and outright grants of funds or equipment to other nations • Technical Assistance – aid in the form of engineers, teachers, and technicians to teach skills to individuals in other nations • Military Assistance – aid given to a nation’s armed forces • Emergency assistance – given during disasters is also considered foreign aid but it is not directed at economic development

14. Who supplies aid? • The US devotes a very small portion of its GDP to foreign compared to many other countries • After WWII most US aid was used to rebuild Europe. • Today most aid is sent to developing nations in the Middle East and Southeast Asia • Many other industrial nations also give Foreign Aid

15. Leading Suppliers of Foreign Aid

16. Channels of Aid • U.S. Agency for International Development (USAID) is where most aid is channeled • Some also goes through the U.N. and its World Bank • Recently, the International Monetary Fund (IMF) has also become a major foreign aid agency • However, many aid agencies have become alarmed at the number of developing countries that cannot repay their foreign debts • In 1990, 40 of the most heavily indebted countries owed more than $127 billion, in 1999 some of the debt was cancelled by major industrial nations

17. Reasons for giving Foreign Aid • Humanitarianism • Foreign aid expands and provides new opportunities for private investment • Politics – to enhance the appeal of democracy and stop communism • Protect security – aid can often be a down payment on military alliance which allows you to build military and posts

18. Obstacles to Growth in Developing Nations • 4 obstacles to Growth • Attitudes and Beliefs • Innovation is viewed as suspicious • Misuse of Resources • For example, government spending on military could be directed at Agricultural development or training • Continued Rapid Population Growth • Even if the Economy is growing the per capita GDP will decrease if the economy is growing at a slower rate • Trade Restrictions • To protect developing domestic businesses quotas and tariffs are used which prevent consumers from purchasing cheaper foreign substitutes

19. Economic Development in China • Five Year Plans – Centralized planning system that used to be the basis for China’s Economic System; eventually was transformed to a regional planning system leading to limited free enterprise • In 1953, Chinese Communism was started based on 5 year plans • In 1957, the system was reformed to give more control to local government but no capitalism was allowed • In 1978, In order to motivate workers, the government allowed to rent land for up to 15 years and allowed farmers to keep any excess produced beyond what was required by the state • During the 2000’s, several hundred rural residents moved to cities to work in factories and offices. Overseas investment began to poor in sometimes with the government as partner • Today economic growth is 7 – 10% per year. It is predicted that China’s Economy will become the biggest in the world

20. Transition towards a mixed economy • Today China still owns large parts of the economy and only allows land leases and takes portions of what is produced by farmers, this lack of ownership prevents large growth in the agriculture economy of China • Establishing a rule of law – Without specific property rights an unavoidable result is corruption. The government workers extract bribes to allow access to resources • Dealing with increasing pollution – Today china is the 2nd biggest producer of undesirable gas emissions; Acid rain affects 1/3 of the country; also 70% of China’s rivers and lakes are polluted so most must boil water before drinking it or drink bottled water

21. Prospects for China’s Economic Future • Today, China has McDonald’s, Levi’s Jeans and 7up products everywhere • In 2000 China was allowed to join the WTO (chapter 18) this brought in much more foreign investment anxious to sell to China’s 1.3 billion people

22. Karl Marx – father of communism • Although often associated with Soviet Russia, Marx never actually stepped foot in Russia • He earned a doctorate in 1841 and moved to Paris where he began to study communism • As a result of his advocacy for revolution he is expelled from France and later from Brussels and Prussia. He finally immigrated to England where he spent the rest of his life living in poverty and illness. • He wrote 50 volumes on social and economic subjects the most of which is the Communist Manifesto

23. Karl Marx – con’t • He believed that capitalism would die out and pure communism would eventually replace it, the 4 steps below explain his theory • Step 1 – Capitalism would have extreme recessions and depressions that would harm workers. A few rich capitalist would have all the power. • Step 2 – The wide gap between the rich and poor would cause workers to unite and overthrow capitalism • Workers would then establish a new socialist system. Workers, through the state, would own the means of production. • The system would evolve into pure communism. Workers would contribute to society to their full abilities and in return take only what they needed.

24. Adam Smith • Born in Scotland , in 1723 • He studied at Glasgow University and went Oxford in 1740 • He was influenced by many during his university years • Wrote “An Inquiry into the Nature and Causes of the Wealth of Nations” • Described an economic system in which the government had little to do with the nation’s economic activity as he believed that was counter-productive.

25. Adam Smith con’t • Believed individuals would work for their own self interest in doing so they would be guided by “an invisible hand” and would use resources efficiently and thus achieve the maximum good for the society • This system was called capitalism which is another name for a market system • Smith’s ideas influenced the founding fathers of the US who limited governments role to national defense and keeping the peace • He is considered the founder of classical economics