Chapter 36 Problems of developing countries

1. Chapter 36Problems of developing countries David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith

2. Some key issues • Less-developed countries (LDCs) • countries with low levels of per capita output • Why have LDCs remained poor? • The potential roles of: • comparative advantage • industrialization • international debt • structural adjustment • aid

3. The world distribution of income • In 1998 there were 3.5 billion people living in low-income countries • with average annual income of about £313 per person. • In 1998, there were 0.9 billion people living in high-income countries • with average annual income of about £15,367 per person.

4. Welfare indicators by country group

5. Problems of LDCs (1) • Resource scarcity • LDCs lack natural resources • or the means to exploit them • Capital • few domestic resources available for investment • multinationals may repatriate profits, rather than reinvesting.

6. Problems of LDCs (2) • Social investment in infrastructure • LDCs may not be able to achieve scale economies in • power generation • roads • telephone systems • urban housing • Customs and ideology • in SOME cases, traditional attitudes may inhibit development • but this argument is often over-stated

7. Problems of LDCs (3) • Human capital • LDCs lack resources to invest in • health • nutrition • education • industrial training • so workers in LDCs tend to be less productive than workers using the same technology in HICs. • Low productivity agriculture • Many LDCs have a high proportion of their labour force engaged in low productivity agriculture.

8. Possible paths to development? • Trade in primary products • Industrialization • Borrowing • Structural adjustment • Aid

9. Development:through trade in primary products? • Primary products are agricultural goods and minerals. • Comparative advantage suggests that LDCs should specialize in primary production, BUT: • some evidence suggests the terms of trade have been moving against primary products and towards manufactures • prices of primary products tend to be volatile • export concentration can be destabilizing

10. SS1 SS2 If there is a bumper harvest at SS1, A C B buffer stock buys AB P Exports are 0Q at price P. If there is a poor harvest at SS2, buffer stock sells CA. Q Commodity price stabilization A buffer stock is an organization aiming to stabilize a commodity market. Price DD Exports are still 0Q at price P. 0 Quantity The buffer stock stabilizes prices and export earnings … but requires resources to buy and store.

11. Development:through import substitution? • Import substitution is a policy of replacing imports by domestic production • under the protection of high tariffs or import quotas • in the short run this involves inefficient use of resources • in the long run, domestic market may not be large enough to allow scale economies • and it fosters an inward-looking attitude • and promotes activities in which the country begins with a comparative disadvantage

12. Development:through export promotion? • Export-led growth stresses production and income growth through exports rather than the displacement of imports • The most successful economies of the last 3 decades have followed this route • especially countries in South East Asia • But for other countries to follow, co-operation is needed from the industrial countries to avoid over-protectionism

13. Development:through borrowing? • LDCs have traditionally been borrowers in world markets • funds used to import capital goods to supplement domestic investment • borrowing finances a current account deficit • Borrowing increased after the first OPEC oil-price shock of 1973/74 • notably borrowing by non-oil developing countries ...

14. Development:through borrowing? (2) • Countries were reluctant to borrow from the IMF under stringent conditions • so borrowed from commercial sources • often at variable interest rates • high real interest rates in the early 1980s created debt servicing problems for many borrowers • raising the possibility of default • the HIPC initiative of the late 1990s attempted to tackle the debt burden which many LDCs found unsustainable

15. Development:through structural adjustment? • Structural adjustment programmes • the pursuit of supply-side policies aimed at increasing potential output by increasing efficiency, e.g.: • reductions in government subsidies to industry • privatization • trade liberalization • price reforms • monetary and fiscal discipline

16. Development:through aid? • Aid is an international transfer payment from rich countries to poor countries. • takes many forms: • subsidized loans • gifts of food or machinery • technical help • justified on grounds of equity? • but may create dependency • allowing freer trade is an alternative

17. The distribution of world population and GNP, 1998