Marcro micro econmiy david begg chapter 036

Chapter 36
Problems of developing countries

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
6th Edition, McGraw-Hill, 2000
Power Point presentation by Peter Smith


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
36.2


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.
36.3


Welfare indicators by country group
Infant mortality

Adult illiteracy 1997
50

100

40
%

per
1,000
live
births

30
20
10
0

80
60
40
20
0

LIC
Male

MIC
Female

HIC

LIC

MIC

1980

1997

36.4

HIC


Problems of LDCs (1)
Population growth

Resource scarcity
–

LDCs lack natural
resources

–

or the means to exploit
them

5
4
% p.a.

3

Capital

2

1
0

LIC*

1980-90

MIC

–

few domestic resources
available for investment

–

multinationals may
repatriate profits, rather
than reinvesting.

HIC

1990-98

36.5


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
36.6


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.

36.7


Possible paths to development?
Trade in primary products
Industrialization
Borrowing
Structural adjustment
Aid
36.8


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
36.9


Commodity price stabilization
Price

A buffer stock is an organization aiming to stabilize a
commodity market.
SS1
SS2
If there is a bumper
harvest at SS1,
A B
C
buffer stock buys AB P
Exports are 0Q at price P.
If there is a poor harvest
at SS2, buffer stock sells CA.
Exports are still 0Q at price P.

DD
0

Q
Quantity
The buffer stock stabilizes prices and export earnings
… but requires resources to buy and store.
36.10


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
36.11

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, cooperation is needed from the industrial
countries to avoid over-protectionism
36.12


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 ...
36.13


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
36.14


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
36.15


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
36.16


The distribution of world population
and GNP, 1998
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Population

GNP
LIC

MIC

HIC

36.17