Chapter 22 W - The Economics of Developing Countries

Chapter 22 The Economies of Developing Countries Note: This chapter is online on our textbook's website: http://highered.mcgraw-hill.com/sites/dl/free/0073365947/628797/Chapter22W.pdf Introduction Nearly half of the world population, 2.6 million people, live on less tha $2 a day and about 1 billion people live on less than $1 a day. The world is often divided into two broad categories of countries: the More Developed Countries (MDCs in white on the map below), Our textbook calls these "Industrially Advanced Countries" or IACs and the Less Developed Countries (LDCs in yellow) Our textbook calls these the "Developing Countries" or DVCs Such a broad regionalization scheme is likely to be overly simplistic, yet it commonly used and it can be quite useful. Often different terms are used to describe each region. Think of other terms that you have heard to describe the MDCs and the LDCs. Here is my list: More Developed Countries (MDC) Less Developed Countries (LDC) Developed Countries Underdeveloped Countries Industrialized Countries Agricultural Countries First World* Third World * Haves Have Nots Rich Countries Poor Countries The North The South Industrially Advanced Countries (IACs) Developing Countries (DVCs) THE GLOBAL NORTH THE GLOBAL SOUTH (This is becoming more popular) High Income Economies (World Bank) Middle and Loow Income Economies (World Bank) One set of terms that is being used less and less is: First World Countries and Third World Countries - Why? Well, what is the Second World? How can you have a first and a third without a second? The Second World used to be the command economy (communist) countries of the Soviet Union, Eastern Europe, China, North Korea, Cuba, Vietnam, and a few other countries. With the collapse of communism in most of these countries the "Second World" no longer exists. Theterm "the global south" is being used more and more often. What criteria is commonly used to divide the world into the MDCs and the LDCs? I have selected some of the most commonly used Measures of Economic Development: GDP per capita Population Growth Occupational Structure of the Labor Force Urbanization Consumption per capita Infrastructure Social Conditions literacy rate life expectancy health care caloric intake infant mortality other Carefully examine the maps of each measure below. Try to get a general idea of how different areas of the world compare in terms of their level of economic development. First try to categorize each area as either More Developed or Less Developed. Then try to rank them from the least developed to the most developed. It should be noted that great disparities exist within an area and within individual countries. Nevertheless, the terms are commonly used and we should be familiar with their meanings AND THEIR GEOGRAPHY. One other thing should be noted. These are INDICATORS or the level of development, not the causes of causes of development. They help us categorize countries as being richer or pooer, but they do not CAUSE a country to be rich or poor. A good source of data, tables, and maps of economic data on the world's countries is http://www.nationmaster.com Measures of Economic Development: GDP per capita or per capita income  The World Bank uses GDP per capita to classify MDCs as "high income economies" and LDCs as either "middle income economies" or "low income economies". This map is a little old. Due to inflation the World Bank raises the income cut-off points each year. high income economies: over $11,115 per captia income middle income economies: $906 to $11,115 low income economies: less than $906 per capita income Map and Bar Graph Population Growth Map and Bar Graph     Occupational Structure of the Labor Force (% of labor force in agriculture) Map and Bar Graph     Urbanization (% of population living in urban areas) Map and Bar Graph     Consumption per capita Energy Consumption Map and Bar Graph Map and Bar Graph (electricity consumption per capita)   Televisions Map and Bar Chart     Infrastructure Map and Bar Graph (paved highways per capita)     Social Conditions literacy rate Map and Bar Graph     life expectancy Map and Bar Graph     health care caloric intake infant mortality Map and Bar Graph     SUMMARY After looking at allof these maps the general pattern that should be apparent is that Africa (especiall Africa south of the Sahra Desert) is the poorest region followed by south Asia, the the rest of Asia then South America, Eastern Europe, and Russia. The richest regions are North America, Europe, Australia and Japan. Remember, not ALL indicators of economic development will support this pattern AND there are pockets of wealth in the poor areas and pockets of poverty inthe rich areas. Definitions of the Measures of Economic Development GDP per capita For the GDP PER CAPITA of individual countries see: Map and Bar Graph GDP is the total market value of all final goods and services produced in a country in one year. It is a measure of economic activity, or how much is produced in a country. The more that a country produces per person , the more "developed" it is assumed to be. BUT, we must use GDP PER CAPITA data when comparing countries. To understand why answer these questions: Which country produces more (has a higher GDP), India or Switzerland? Which is more "developed"? The GDP of India is $336 billion and the GDP of Switzerland is $288 billion. India produces more than does Switzerland, but everybody would agree that Switzerland is more economically advanced. Why? The answer is population. the population of India is 988 million and the population of Switzerland is 7 million. Therefore we must compare GDP PER CAPITA. To calculate GDP per capita (or income per person) we divide the GNP by the population. The GDP per capita of Switzerland is $40,630 and the GDP per capita of India is $ 340. Remember, always use GDP PER CAPITA when comparing the economic conditions of different countries.   Population Growth Map and Bar Graph In general, poorer countries have more rapid rates of population growth. Compare the GDP per capita map with the population growth rate map to verify that this general trend is true. You may have to go back a forth between them several times checking a different region of the world each time. Rapid population growth is a recent phenomenon in the world. I correlates directly with "modern econmic growth".   World population reached: 1 billion in 1804, 2 billion in 1927 (123 years later) 3 billion in 1960 (33 years) 4 billion in 1974 (13 years) 5 billion in 1987 (12 years) 6 billion in 1999 (12 years) 7 billion in 2013 (14 years - projected) 8 billion in 2028 (15 years - projected) 10.7 (high) or 8.9 (middle) or 7.3 (low) billion projected for 2050   Even though population growth rates seem small (1%, 2% 3%, or maybe 4%) they have a big impact. a useful way to see this is by using the "Rule of 70". The rule of 70 is a way to ESTIMATE the number of years it takes for something to DOUBLE if you know the annual percentage growth rate. Therefore, the population of the United States with an annual population growth rate of 1% will double in about 70 years IF THE POPULATION GROWTH RATE REMAINS AT 1%. The population of the country of Mozambique, Southern Africa, with an annual population growth rate of 4% will double in 17.5 years, quadruple in 35 years and increase by a factor of 8 in 70 years IF THE POPULATION GROWTH RATE REMAINS AT 4%. So a small change in the population growth rate results in significant increase in population. You should now examine table I-1 of your textbook and see how well the rule of 70 calculates the population doubling time. (Note: the textbook uses the rate of "Natural Increase" to measure the population growth rate.)   Occupational Structure of the Labor Force Map and Bar Graph Economic geographers divide economic activities into primary activities, secondary activities, and tertiary activities. (Some add quaternary activities and quinary activities, but we will not.) PRIMARY ACTIVITIES are those that directly remove resources from the earth. Generally they include AGRICULTURE, MINING, fishing, and lumbering. SECONDARY ACTIVITIES involve converting resources into finished products. These are the MANUFACTURING activities. TERTIARY ACTIVITIES comprise the SERVICE sector of the economy. The tertiary activities include retailing, transportation, education, banking, etc. As countries develop the occupational structure of the labor force changes. In LDCs most people are engaged in primary activities. In high income countries like the United states most people are involved with the tertiary sector. Urbanization Map and Bar Graph Urbanization is the percentage of a country's population who live in urban areas. Urban areas generally means in towns and cities of 2,500 or more people. Currently just less than half of the worlds population live in urban areas. Generally as countries develop urbanization increases. Note the high urbanization found in the more developed countries AND in South America. Consumption per capita Consumption per person is a good indicator of development. The richer a country is, the more its citizens consume. This map shows the energy consumption patterns for the world. Similar maps could be made for "televisions per capita" or "cars per capita". One consequence of consumption is pollution: Carbon dioxide (CO2) is emitted when fossil fuels are used. Scientists are studying the connection between CO2 build up in the atmosphere ant global warming. this chart shows CO2 emissions for various countries Infrastructure [wwtrans] A country's infrastructure is defined by our author as "the foundations of a society: urban centers, transport networks, communications, energy distribution systems, farms, factories, mines, and such facilities as schools, hospitals, postal services, and police and armed forces." This map shows the state of development of the transportation system as a measure of its length per area of land. The darker the color the more developed is the transportation system and hence, a greater the degree of economic development is assumed. Social Conditions There are many other measures of economic development. Many refer to the social conditions of a country. Here is a short list. literacy rate life expectancy health care caloric intake infant mortality (deaths of children under the age of one per 1000 people in the population) other Human Development Index GNP per capita is the most used indicator of development yet there are some significant problems with it. Therefore, the United Nations Development Program (UNDP) computes a Human Development Index for each country each year. The human development index (HDI), composed of three indicators: life expectancy, education (adult literacy and combined secondary and tertiary school enrollment) and real GDP per capita. (Note: for our purposes, GNP and GDP mean the same thing and they are synonymous with income.) To see the Human Development Index for individual countries go to: http://www.undp.org/hdro/98hdi1.htm LDCs Is it appropriate to divide the world into the More Developed Countries (MDCs) and the Less Developed Countries (LDCs)? Some economists and geographers say "no" since all countries have more developed and less developed areas and because the most commonly used measure of development (GNP per capita) masks the unequal distribution of income within a country. Yet, I believe that it is useful regionalization scheme since it is still used by so many people. We also noted that there are several commonly used synonyms for MDCs and LDCs. Here is the list again. Here is a map showing one view of the less developed world. Note that regions are inventions of geographers and different geographers, using different criteria, may come up with different regions. Generally, most people would classify the following areas as LDC's: Sub-Saharan Africa South Asia Southeast Asia China * North Africa and Southwest Asia Middle America South America the Pacific area The more developed areas generally include: North America Japan * Europe Australia / New Zealand Russia One final note: Is China an LDC or an MDC? China is definitely a less developed country with a GNP per capita of only $620. International Distribution of Income Look at the following: Global.gif http://www.globalpolicy.org/socecon/inequal/inctab.htm 63 % of the world's population has never used a telephone Comments? Why not post your comments on the discussion forum? Where do most of the People Live? Do most of the world's people live in MDCs or LDCs? Check out this map of population densities: World's 10 Most Populous Countries: Rank Country Population 1 China 1,196,980,000 2 India 909,150,000 3 United States 262,530,000 4 Indonesia 193,680,000 5 Brazil 159,690,000 6 Russia 150,500,000 7 Pakistan 129,630,000 8 Japan 125,360,000 9 Bangladesh 119,370,000 10 Nigeria 97,3000,000 TEXTBOOK CHAPTER OUTLINE Chapter 22 - Economic growth and the Less Developed Countries PAY CLOSE ATTENTION TO THE HIGHLIGHTED SECTIONS I. The Rich and the Poor A. Industrially advanced countries (IACs) include the U.S., Canada, Australia, New Zealand, Japan, and most of western Europe. They have developed market economies based on large stocks of capital goods, advanced technologies, and a well-educated labor force. They have a high per capita output, as seen in Figure 22-1. B. Developing countries (DVCs) are 107 unindustrialized nations heavily committed to agriculture. They have low rates of literacy, high unemployment, rapid population growth, and their exports are largely agricultural or raw materials. Capital equipment is scarce, production technologies are primitive, and productivity is low. More than 60 percent of the world’s population lives in these nations, which can be divided into two groups (Figure 22-1). 1. The first group consists of "middle-income" DVCs with an average annual per capita output in 1999 of $2,000, but with a range from $756 to $9,265 per capita. 2. The low-income group is the poorest with average output per capita of only $410 and a range to $755. Dominating this group are India, China, and the sub-Saharan African nations. C. Comparisons highlight income disparities. 1. U.S. 1999 GDP was more than the total output of the poorest 109 countries combined. 2. The U.S. has 5 percent of the population but produces 27 percent of the world’s output. 3. The largest U.S. corporations have sales greater than most DVC nations’ output. General Motors had sales greater than the output value of all but 22 lower-income nations of the world. 4. The assets of the three wealthiest people in the world exceeded the combined GDPs of the 48 poorest nations.   D. Growth, Decline, and Income Gaps 1. DVCs such as China, Malaysia and Thailand have achieved high annual growth rates in their GDPs in recent decades. Several previous DVCs, such as South Korea, Singapore, and Hong Kong have achieved IAC status. But many DVCs, such as those in sub-Saharan Africa, have experienced declining GDPs per capita. 2. The absolute income gap between rich and poor nations has been widening. For example, if per capital income is $400 a year in a DVC, a 2% growth rate means an $8 increase in income. Where per capita income is $20,000 per year in an IAC, the same 2% growth rate translates into a $400 increase in income. E. Human realities are difficult. Implications are great in terms of poverty and the human condition as dramatized by the excerpt from Michael Todaro’s book in the text. Table 22-1 highlights other socioeconomic differences. II. Obstacles to Economic Development A. Natural resources must be used more efficiently and their supplies expanded. Resource distribution is very uneven as is evidenced by the wealth of the OPEC countries. Often ownership of natural resources is an issue if they belong to corporations in industrially advanced countries. However, weak resource bases are not necessarily impossible to overcome, as Switzerland, Israel, and Japan have shown. B. Human resources in DVCs have three characteristics 1. Overpopulation is the rule. An annual population growth of approximately 1.8 percent in these countries means that their populations double approximately every 35 years. This compares to an average 0.7 percent rate of population growth in advanced countries. It means that economic growth must be very rapid to make any gain on population; DVC per capita incomes are lagging behind the IACs (see Table 22-2) a. Population growth accelerates with economic growth as better living conditions extend life. b. Birth rates remain high as medical care and sanitation cut infant mortality. 2. Population growth hinders development because large families create obstacles to development. They reduce the ability of households to save, more investment is required to keep up with increases in the labor force, an overuse of agricultural land may occur, and massive urban problems are generated. 3. Other reasons exist in explaining why expansion hinders development. a. Possible solutions include China’s "one-child" program, but many nations have religious and sociocultural reasons to oppose contraception or birth control. b. Three additional points are worth noting. i. The relationship between population and economic growth is not as clear as it seems. Japan and Hong Kong are densely populated, but wealthy. Did the wealth come before or after population growth rates declined? ii. Population growth rates for the DVCs in general have declined in recent decades. iii. The traditional view is that reduction in population growth leads to economic development. But the "demographic transition" theory maintains that rising incomes lead to slower population growth. Children are viewed more as economic liabilities as the wealth of a country becomes greater. (Key Question 6) 4. High unemployment and underemployment are characteristics of DVCs with rates in the vicinity of 15 to 20 percent. This may become worse as rural populations migrate to cities in the hope of finding jobs that are not there. Underemployment occurs when workers are employed less time than desired or at jobs that do not fully utilize their skills. 5. Low labor productivity occurs because there has not been enough investment in physical or human capital. Furthermore, often there is no entrepreneurial class. Higher education is often oriented toward the humanities rather than technical areas, and some of the best workers have migrated from their home countries, causing what is called the "brain drain." C. Capital accumulation is an important focus. 1. All DVCs suffer from a lack of capital goods—factories, machinery and equipment, public utilities, etc. Better equipped workers would improve productivity. 2. Increasing the stock of capital goods is crucial because of the very limited possibility of increasing the supply of arable land. 3. Once begun, the accumulation of capital may be cumulative if it can raise output faster than the population grows. 4. Domestic capital formation must come as a result of domestic saving. A nation cannot consume everything it produces if it wants to invest in the future. 5. Savings potential is not promising in the poorest countries and may require foreign investment in these countries. 6. Another concern has been capital flight, which occurs when citizens who have been able to save transfer their savings to the IACs for safety and higher returns. This is a quantitatively significant problem. 7. Obstacles to investment include the lack of investors but also the lack of incentive to invest. Education and skilled workers as well as an adequate infrastructure are needed to encourage private investment. 8. One potential bright spot is in-kind or nonfinancial investment in the form of surplus labor working on the improvement of the infrastructure and other capital improvements. D. Technological advance is a somewhat separate process from capital formation. In some cases DVCs are able to transfer new technologies that are capital-saving. Technological borrowing has aided the rapid growth of Pacific Rim region; OPEC nations have benefited in similar ways and the former Soviet bloc countries and republics are seeking western technology. On the other hand, DVCs often require technology appropriate to their resource mixes and must develop their own. E. Sociocultural and institutional factors: One intangible ingredient is the "will to develop." 1. Sociocultural obstacles to growth exist. a. Tribal allegiances may take precedence over national identity. b. Religious beliefs and observances may restrict the length of the productive workday. c. A caste system may allocate labor inefficiently. 2. Institutional obstacles also exist, especially the problem of land reform in these predominantly agricultural countries. III. The Vicious Circle of Poverty A. Poverty makes it difficult to grow. The obstacles to development listed in this chapter seem to arise from poverty. How can a country break the cycle of poverty? B. Increasing the rate of capital accumulation may help, but only if the rate of population growth is somehow slowed at the same time. (Key Question 13) IV. The Role of Government A. A positive role exists for government, according to one perspective. 1. Government provides law and order. 2. The absence of entrepreneurship means that government may have to substitute in spearheading investment. 3. The infrastructure like education, highways, and other government services, depend on adequate public investment in these projects. 4. Forced saving and investment may also require government intervention. a. Increasing taxes is one alternative. b. Government can cause inflation by creating and spending new money on public projects and by selling bonds to banks and spending the proceeds. The resulting inflation is like an arbitrary tax on the economy, but there are objections to creating investment in this way. 5. Social-institutional problems like land ownership and population growth can be alleviated by government policy. B. Public sector problems exist in the DVCs. 1. Entrepreneurial ability is lacking in the public sector, too. 2. Many DVCs have histories of government corruption and poor administration and much of these economies is state-owned or state-controlled. V. Role of the Advanced Nations A. Expanding trade may be the simplest way to benefit DVCs, and IACs can lower trade barriers against DVC products. However, many countries need basic capital and assistance to produce export. NOTE: There is more on the "trade vs. aid" issue at the end of this online lecture. B. Foreign aid can take several forms. 1. Public loans and grants from governments: In the last decade, U.S. aid has averaged about $10 to 14 billion per year, mostly administered by the Agency for International Development (AID). Total IAC has been $40-60 billion per year. (Global Perspective 22.2) 2. The World Bank Group, supported by about 180 member nations including the U.S., lends out capital funds to DVC governments and also sells bonds and guarantees and insures private loans. a. The World Bank is a "last resort" lending agency whose loans are limited to productive projects for which private funds are not available. b. Many World Bank loans are for basic development projects, such as infrastructure that is needed to attract private capital. c. The World Bank also provides technical assistance. d. Two World Bank affiliates supplement the Bank’s activities: The International Finance Corp. invests in private corporations in the DVCs; The International Development Association (IDA) makes "soft loans" to the poorest DVCs on more liberal terms than the World Bank. C. Criticism of foreign aid to DVCs takes several forms. 1. A basic charge is that foreign aid, like welfare programs, creates dependency. 2. The recipients of much foreign aid end up being the bureaucracy and centralized governments of the receiving country. 3. Corruption and misuse characterize too much foreign aid. Many of the beneficiaries are IAC-based consultants and multinational corporations. 4. Foreign aid declined from $58 billion in 1990 to $40 billion in 1999. D. Private capital flows mostly from large corporations, and private banks also enter DVCs, rising from about $50 billion in 1990 to $250 billion in 1999. VI. Where from here? A. DVC policies for promoting growth. (Note the many Structural Adjustment Program Policies.) 1. Establishing and strengthening the rule of law. Clearly defined and enforced property rights bolster economic growth by ensuring that individuals receive and retain the fruits of their labor. 2. Opening economies to international trade. 3. Controlling population growth. 4. Encouraging foreign direct investment. 5. Building human capital, programs which increase basic literacy, education, and labor-market skills help enhance economic growth. 6. Making peace with neighboring countries. 7. Establishing independent central banks. 8. Establishing realistic exchange rate policies. 9. Privatizing many state run industries. B. IAC policies for fostering DVC growth. 1. Directing foreign aid to the poorest DVCs, much of foreign aid from IACs is strongly influenced by potential and military considerations. Only one-fourth of foreign aid goes to those 10 countries whose population constitutes 70 percent of the world’s poorest people. 2. Reducing tariffs and import quotas. There is a TRADE VS. AID debate going on in the development community. which is the best way the more developed countries (IACs) can help the less developed countries (DVCs)? Many believe that FREE TRADE, NOT AID is the best way to help the developing countries. 3. Providing debt relief to DVCs. 4. Admitting temporary workers while discouraging brain drains. 5. Discouraging arms sales to the DVCs. VIII. LAST WORD: Famine in Africa A. Famine is not uncommon and caused about 300,000 deaths of children in Somalia in early 1990s; in 2000 an estimated 12 million people in 10 African countries are threatened by famine. B. Immediate cause of famine is drought, but other causes are a more complex interaction of civil strife, overpopulation, soil erosion, and counterproductive public policies. 1. Civil strife has torn many countries for decades. Somalia is one example. 2. Population growth has outstripped food production; population growth in Africa averages 2.2% per year but only .6% per year in IACs. 3. Ecological degradation has occurred in countries struggling to employ marginal land for crop production. 4. Ill-advised public policies and large international debt are other causes: a. Some governments spend four times as much on arms as they do on agriculture. b. Many African governments have followed the policy of establishing prices of agricultural goods at low levels to provide cheap food, but it diminishes incentives to produce. c. External debt of about $230 billion in 1999 force sub-Saharan countries to cut back on needed domestic programs. The Role of International Aid in Third World Development QUIZ - HOW MUCH DO WE GIVE? What fraction of the U. S. federal government's budget is spent on FOREIGN AID? - See answer below 1% 5% 10% 15% 20% 25% What fraction of the U. S. GDP is spent on FOREIGN AID? - See answer below   ANSWERS What fraction of the U. S. federal government's budget is spent on FOREIGN AID? 1% 5% 10% 15% 20% 25% The US spends about 1 % of its federal government budget on foreign aid. Over half of this aid goes to just two or three countries: Israel, Egypt, and Russia.   What fraction of the U. S. GDP is spent on FOREIGN AID? The US gives about 0.2% of it's GDP in foreign aid.

Macroeconomic Goal: Economic Growth

Introduction

• Read this news article to get an idea of the types of issues we will discuss in this chapter: http://cgi.cnnfn.com/output/pfv/2000/03/30/economy/gdp/
• Macroeconomic Goals
  • 1. Full Employment
  • 2. Low Inflation
  • 3. Economic Growth

Review: What do we already know about Economic Growth?

From the 5Es lesson:

Economic Growth is one of the "5 Es of economics or one of the five ways for a society to reduce scarcity.

Let's define Economic Growth as an increase in the ABILITY to produce goods and services. This is not the way the term is normally defined. Later this semester we'll discuss the various definitions of Economic Growth, but here we'll use this more fundamental definition:

Economic Growth is an increase in the ABILITY to produce goods and services.

This means we are ABLE to produce more, but it doesn't necessarily mean we do produce more. More on this later.

This type of Economic Growth is caused by:

a) more resources
b) better resources
c) better technology

If we only had more resources we could produce more goods and services and satisfy more of our wants. This will reduce scarcity and give us more satisfaction (more good and services). All societies therefore try to achieve economic growth.

From Production Possibilities lesson - Economic Growth

In Macroeconomics we study three main issues:

1. Unemployment (UE)
2. Inflation (IN), and
3. Economic Growth (EG)

We can use the production possibilities model to demonstrate how economic growth can reduce scarcity.

Our multimedia lesson use several definitions of economic growth. let me review them here.

Three Definitions of Economic Growth

(1) Increasing our POTENTIAL OUTPUT

I like to call this increasing our ABILITY to Produce. this is the definition we used in the 5Es lesson. This is the most fundamental definition of economic growth. It is the type of economic growth used on out 5Es diagram.

We can increase our ABILITY to produce goods and services (or increase our POTENTIAL GDP) if we get:

1. more resources
2. better resources, and
3. better technology

Since this increase maximum output that we are able to produce it shifts the PPF outward. On the graph below, economic growth would cause the PPF to move from PP1 to PP2.

This doesn't necessarily mean that the economy IS producing more, just that it CAN produce more. To achieve our new potential levels of output we also need full employment and productive efficiency. It could be possible to have this type of economic growth so that we CAN produce the quantities represented by point E, but if there is unemployment and productive inefficiency we would be at a point beneath this new curve (maybe point C). So we may get new resources or new technology so we CAN produce more (point E on PP2), but if we don't use the new resources (i.e. we have unemployment) or if we don't use the new technology (i.e. we have productive inefficiency) , we may remain on PP1 (point C).

(2) Increasing Output (or ACHIEVING our potential output)

The most commonly used definition of economic growth is simply producing more. (Later we will call this INCREASING REAL GDP.)When an economy increases its output it is often said to have achieved economic growth. But if by producing more we are simply ACHIEVING OUR POTENTIAL, then we could also say that it is REDUCING UNEMPLOYMENT or ACHIEVING PRODUCTIVE EFFICIENCY. On our graph this would be represented by moving from point D to a point on the curve: A, B, or C).

(3) Increasing Real GDP per capita

The definition of economic growth used in our multimedia lesson on economic growth is an increase in GDP per capita. This means increasing output per person. GDP per capita is calculated by dividing output by the population.

From the AS - AD Lesson:

 Economic Growth

What about economic growth? In an earlier lesson we discussed three definitions of economic growth

1. Increasing our POTENTIAL OUTPUT
2. Increasing Output, and
3. Increasing Real GDP per capita

(1) Increasing our POTENTIAL OUTPUT

I like to call this increasing our ABILITY to produce. This is the definition we used in the 5 Es lesson. This is the most fundamental definition of economic growth. It is the type of economic growth used on our 5 Es diagram.

We can increase our ABILITY to produce goods and services (or increase our POTENTIAL GDP) if we get:

1. more resources
2. better resources, and
3. better technology

Since this increases maximum output that we are able to produce it shifts the PPF outward. On the graph below, economic growth would cause the PPF to move from PP1 to PP2.

This doesn't necessarily mean that the economy IS producing more, just that it CAN produce more. To achieve our new potential levels of output we also need full employment and productive efficiency. It could be possible to have this type of economic growth so that we CAN produce the quantities represented by point E, but if there is unemployment and productive inefficiency we would be at a point beneath this new curve (maybe point C). So we may get new resources or new technology so we CAN produce more (point E on PP2), but if we don't use the new resources (i.e. we have unemployment) or if we don't use the new technology (i.e. we have productive inefficiency) , we may remain on PP1 (point C).

In the AS-AD model INCREASING OUR POTENTIAL OUTPUT is represented by in increase in AS.

Notice that when AS increases, the full employment level of output increase from RDO-FE1 to RDO-FE2. this is an increase in our potential level of output.

In the 5 Es lecture we said that economic growth is caused by:

1. more resources
2. better resources, or
3. better technology

An increase in the production possibilities curve is caused by having more resources, better resources, or better technology.

An increase in AS is caused by:

1. a decrease in the price of resources
2. an increase in productivity
3. lower business taxes and government red tape

These are all really the same thing.

(2) Increasing Output (or ACHIEVING out potential)

The most commonly used definition of economic growth is simply producing more. (Later we will call this INCREASING REAL GDP.)When an economy increases its output it is often said to have achieved economic growth. But if by producing more we are simply ACHIEVING OUR POTENTIAL, then we could also say that it is REDUCING UNEMPLOYMENT or ACHIEVING PRODUCTIVE EFFICIENCY. On our graph this would be represented by moving from point D to a point on the curve: A, B, or C).

On our AD-AS model we could illustrate this type of growth (producing more) by an increase in AD.

Notice that output increase from RDO-EQUIL to RDO', but the full employment level of output, which is our potential level of output, does not change (RDO-FE).

If Ad increase so that equilibrium is at the full employment level of output, it is analogous to going from a point inside the production possibilities curve to a point on the curve.

(3) Increasing Real GDP per capita

The definition of economic growth used in our multimedia lesson on economic growth is an increase in GDP per capita. This means increasing output per person. GDP per capita is calculated by dividing output by the population. 

Economic Growth: Three Definitions - REVIEW

1. Increasing our ABILITY to Produce (INCREASING potential output)

a. "economic growth" on the 5Es chart
b. shifting out to a new production possibilities curve
c. ­AS
d. causes:

(1) change in input prices (more resources)
(2) changes in the productivity of resource (better res., better tech.)
(3). legal-institutional environment

2. Increasing output or increasing Real GDP (ACHIEVING our potential)

a. achieving "full employment" and "productive efficiency" (5Es)
b. going from a point inside the PPC to a point closer to the PPC
c. ­AD
d. increasing GDP per capita
e. causes:

(1) producing at a minimum cost to achieve productive efficiency

(a) not using more resources than necessary
(b) using resources where they are best suited
(c) Using the appropriate technology

(2) more spending to ­ AD and achieve full employment

(a) ­C
(b) ­ I
(c) ­ G
(d) ­ Xn

3. GDP per capita: ­ real GDP at a faster rate than the population

IV. Growth in the United States

A. The Facts

• Table 18-1 (real GDP )
• 3.1 % growth annually since 1942
• 2% growth in real GDP per capita since 1942
• currently: http://cgi.cnnfn.com/output/pfv/2000/03/30/economy/gdp/

B. But:

• ALSO improved products and services
• ALSO added leisure
• BUT adverse environmental effects

Web Chapter 16W Economic Growth in the Less Developed Countries (LDCs) Introduction The world is often divided into two broad categories of countries: the More Developed Countries (MDCs in white on the map below), Our textbook calls these IACs "industrially Advanced countries or IACs and the Less Developed Countries (LDCs in yellow) Our textbook calls these the "Developing Countries" or DVCs Such a broad regionalization scheme is likely to be overly simplistic, yet it commonly used and it can be quite useful. Often different terms are used to describe each region. Think of other terms that you have heard to describe the MDCs and the LDCs. Here is my list: More Developed Countries (MDC) Less Developed Countries (LDC) Developed Countries Underdeveloped Countries Industrialized Countries Agricultural Countries First World* Third World * Haves Have Nots Rich Countries Poor Countries The North The South Industrially Advanced Countries (IACs) Less Industrialized Countries One set of terms that is being used less and less is: First World Countries and Third World Countries - Why? Well, what is the Second World? How can you have a first and a third without a second? The Second World used to be the command economy (communist) countries of the Soviet Union, Eastern Europe, China, North Korea, Cuba, Vietnam, and a few other countries. With the collapse of communism in most of these countries the "Second World" no longer exists. What criteria is commonly used to divide the world into the MDCs and the LDCs? I have selected some of the most commonly used Measures of Economic Development: GNP per capita Population Growth Occupational Structure of the Labor Force Urbanization Consumption per capita Infrastructure Social Conditions literacy rate life expectancy health care caloric intake infant mortality other Carefully examine the maps of each measure below. Try to get a general idea of how different areas of the world compare in terms of their level of economic development. First try to categorize each area as either More Developed or Less Developed. Then try to rank them from the least developed to the most developed. It should be noted that great disparities exist within an area and within individual countries. Nevertheless, the terms are commonly used and we should be familiar with their meanings AND THEIR GEOGRAPHY. Measures of Economic Development: GNP per capita   For a list of the GDP per capita of individual countries see: [gnppctab.htm] Population Growth [wrpopgr]   Occupational Structure of the Labor Force [wraglab]   Urbanization [wrurban]   Consumption per capita Energy Consumption [wwenergy]   Televisions[wwtv] Infrastructure [wwtrans]   Social Conditions literacy rate [wwlitrt]   life expectancy [wwlifexp]   health care caloric intake infant mortality [wwinfmrt]   other [top] Definitions of the Measures of Economic Development   GNP per capita For the GNP PER CAPITA of individual countries see: [gnppctab.htm] GNP is the total market value of all final goods and services produced by a country in one year. It is a measure of economic activity, or how much is produced in a country. The more that a country produces per person , the more "developed" it is assumed to be. BUT, we must use GDP PER CAPITA data when comparing countries. To understand why answer these questions: Which country produces more (has a higher GNP), India or Switzerland? Which is more "developed"? The GNP of India is $336 billion and the GNP of Switzerland is $288 billion. India produces more than does Switzerland, but everybody would agree that Switzerland is more economically advanced. Why? The answer is population. the population of India is 988 million and the population of Switzerland is 7 million. Therefore we must compare GNP PER CAPITA. To calculate GNP per capita (or income per person) we divide the GNP by the population. The GNP per capita of Switzerland is $40,630 and the GNP per capita of India is $ 340. Remember, always use GNP PER CAPITA when comparing the economic conditions of different countries.   Population Growth In general, poorer countries have more rapid rates of population growth. Compare the GNP per capita map with the population growth rate map to verify that this general trend is true. You may have to go back a forth between them several times checking a different region of the world each time. After comparing the maps look below for a graph showing population growth rates by area. ("FSU is the Former Soviet Union) Even though population growth rates seem small (1%, 2% 3%, or maybe 4%) they have a big impact. a useful way to see this is by using the "Rule of 70". The rule of 70 is a way to ESTIMATE the number of years it takes for something to DOUBLE if you know the annual percentage growth rate. Therefore, the population of the United States with an annual population growth rate of 1% will double in about 70 years IF THE POPULATION GROWTH RATE REMAINS AT 1%. The population of the country of Mozambique, Southern Africa, with an annual population growth rate of 4% will double in 17.5 years, quadruple in 35 years and increase by a factor of 8 in 70 years IF THE POPULATION GROWTH RATE REMAINS AT 4%. So a small change in the population growth rate results in significant increase in population. You should now examine table I-1 of your textbook and see how well the rule of 70 calculates the population doubling time. (Note: the textbook uses the rate of "Natural Increase" to measure the population growth rate.) OPTIONAL: For more information see: http://geography.about.com/education/geography/library/weekly/aa051800a.htm Occupational Structure of the Labor Force [wraglab] Economic geographers divide economic activities into primary activities, secondary activities, and tertiary activities. (Some add quaternary activities and quinary activities, but we will not.) PRIMARY ACTIVITIES are those that directly remove resources from the earth. Generally they include AGRICULTURE, MINING, fishing, and lumbering. SECONDARY ACTIVITIES involve converting resources into finished products. These are the MANUFACTURING activities. TERTIARY ACTIVITIES comprise the SERVICE sector of the economy. The tertiary activities include retailing, transportation, education, banking, etc. As countries develop the occupational structure of the labor force changes. In LDCs most people are engaged in primary activities. In high income countries like the United states most people are involved with the tertiary sector. Urbanization Urbanization is the percentage of a country's population who live in urban areas. Urban areas generally means in towns and cities of 2,500 or more people. Currently just less than half of the worlds population live in urban areas. Generally as countries develop urbanization increases. Note the high urbanization found in the more developed countries AND in South America. Consumption per capita Consumption per person is a good indicator of development. The richer a country is, the more its citizens consume. This map shows the energy consumption patterns for the world. Similar maps could be made for "televisions per capita" or "cars per capita". One consequence of consumption is pollution: Carbon dioxide (CO2) is emitted when fossil fuels are used. Scientists are studying the connection between CO2 build up in the atmosphere ant global warming. this chart shows CO2 emissions for various countries Infrastructure [wwtrans] A country's infrastructure is defined by our author as "the foundations of a society: urban centers, transport networks, communications, energy distribution systems, farms, factories, mines, and such facilities as schools, hospitals, postal services, and police and armed forces." This map shows the state of development of the transportation system as a measure of its length per area of land. The darker the color the more developed is the transportation system and hence, a greater the degree of economic development is assumed. Social Conditions There are many other measures of economic development. Many refer to the social conditions of a country. Here is a short list. literacy rate life expectancy health care caloric intake infant mortality (deaths of children under the age of one per 1000 people in the population) other Human Development Index GNP per capita is the most used indicator of development yet there are some significant problems with it. Therefore, the United Nations Development Program (UNDP) computes a Human Development Index for each country each year. The human development index (HDI), composed of three indicators: life expectancy, education (adult literacy and combined secondary and tertiary school enrollment) and real GDP per capita. (Note: for our purposes, GNP and GDP mean the same thing and they are synonymous with income.) To see the Human Development Index for individual countries go to: http://www.undp.org/hdro/98hdi1.htm LDCs Is it appropriate to divide the world into the More Developed Countries (MDCs) and the Less Developed Countries (LDCs)? Some economists and geographers say "no" since all countries have more developed and less developed areas and because the most commonly used measure of development (GNP per capita) masks the unequal distribution of income within a country. Yet, I believe that it is useful regionalization scheme since it is still used by so many people. We also noted that there are several commonly used synonyms for MDCs and LDCs. Here is the list again. Here is a map showing one view of the less developed world. Note that regions are inventions of geographers and different geographers, using different criteria, may come up with different regions. Generally, most people would classify the following areas as LDC's: Sub-Saharan Africa South Asia Southeast Asia China * North Africa and Southwest Asia Middle America South America the Pacific area The more developed areas generally include: North America Japan * Europe Australia / New Zealand Russia One final note: Is China an LDC or an MDC? China is definitely a less developed country with a GNP per capita of only $620. International Distribution of Income Look at the following: Global.gif http://www.globalpolicy.org/socecon/inequal/inctab.htm 63 % of the world's population has never used a telephone Comments? Why not post your comments on the discussion forum? Where do most of the People Live? Do most of the world's people live in MDCs or LDCs? Check out this map of population densities: World's 10 Most Populous Countries: Rank Country Population 1 China 1,196,980,000 2 India 909,150,000 3 United States 262,530,000 4 Indonesia 193,680,000 5 Brazil 159,690,000 6 Russia 150,500,000 7 Pakistan 129,630,000 8 Japan 125,360,000 9 Bangladesh 119,370,000 10 Nigeria 97,3000,000 TEXTBOOK CHAPTER OUTLINE Chapter 16W - Economic growth and the Less Developed Countries PAY CLOSE ATTENTION TO THE HIGHLIGHTED SECTIONS I. The Rich and the Poor A. Industrially advanced countries (IACs) include the U.S., Canada, Australia, New Zealand, Japan, and most of western Europe. They have developed market economies based on large stocks of capital goods, advanced technologies, and a well-educated labor force. They have a high per capita output, as seen in Figure 22-1. B. Developing countries (DVCs) are 107 unindustrialized nations heavily committed to agriculture. They have low rates of literacy, high unemployment, rapid population growth, and their exports are largely agricultural or raw materials. Capital equipment is scarce, production technologies are primitive, and productivity is low. More than 60 percent of the world’s population lives in these nations, which can be divided into two groups (Figure 22-1). 1. The first group consists of "middle-income" DVCs with an average annual per capita output in 1999 of $2,000, but with a range from $756 to $9,265 per capita. 2. The low-income group is the poorest with average output per capita of only $410 and a range to $755. Dominating this group are India, China, and the sub-Saharan African nations. C. Comparisons highlight income disparities. 1. U.S. 1999 GDP was more than the total output of the poorest 109 countries combined. 2. The U.S. has 5 percent of the population but produces 27 percent of the world’s output. 3. The largest U.S. corporations have sales greater than most DVC nations’ output. General Motors had sales greater than the output value of all but 22 lower-income nations of the world. 4. The assets of the three wealthiest people in the world exceeded the combined GDPs of the 48 poorest nations.   D. Growth, Decline, and Income Gaps 1. DVCs such as China, Malaysia and Thailand have achieved high annual growth rates in their GDPs in recent decades. Several previous DVCs, such as South Korea, Singapore, and Hong Kong have achieved IAC status. But many DVCs, such as those in sub-Saharan Africa, have experienced declining GDPs per capita. 2. The absolute income gap between rich and poor nations has been widening. For example, if per capital income is $400 a year in a DVC, a 2% growth rate means an $8 increase in income. Where per capita income is $20,000 per year in an IAC, the same 2% growth rate translates into a $400 increase in income. E. Human realities are difficult. Implications are great in terms of poverty and the human condition as dramatized by the excerpt from Michael Todaro’s book in the text. Table 22-1 highlights other socioeconomic differences. II. Obstacles to Economic Development A. Natural resources must be used more efficiently and their supplies expanded. Resource distribution is very uneven as is evidenced by the wealth of the OPEC countries. Often ownership of natural resources is an issue if they belong to corporations in industrially advanced countries. However, weak resource bases are not necessarily impossible to overcome, as Switzerland, Israel, and Japan have shown. B. Human resources in DVCs have three characteristics 1. Overpopulation is the rule. An annual population growth of approximately 1.8 percent in these countries means that their populations double approximately every 35 years. This compares to an average 0.7 percent rate of population growth in advanced countries. It means that economic growth must be very rapid to make any gain on population; DVC per capita incomes are lagging behind the IACs (see Table 22-2) a. Population growth accelerates with economic growth as better living conditions extend life. b. Birth rates remain high as medical care and sanitation cut infant mortality. 2. Population growth hinders development because large families create obstacles to development. They reduce the ability of households to save, more investment is required to keep up with increases in the labor force, an overuse of agricultural land may occur, and massive urban problems are generated. 3. Other reasons exist in explaining why expansion hinders development. a. Possible solutions include China’s "one-child" program, but many nations have religious and sociocultural reasons to oppose contraception or birth control. b. Three additional points are worth noting. i. The relationship between population and economic growth is not as clear as it seems. Japan and Hong Kong are densely populated, but wealthy. Did the wealth come before or after population growth rates declined? ii. Population growth rates for the DVCs in general have declined in recent decades. iii. The traditional view is that reduction in population growth leads to economic development. But the "demographic transition" theory maintains that rising incomes lead to slower population growth. Children are viewed more as economic liabilities as the wealth of a country becomes greater. (Key Question 6) 4. High unemployment and underemployment are characteristics of DVCs with rates in the vicinity of 15 to 20 percent. This may become worse as rural populations migrate to cities in the hope of finding jobs that are not there. Underemployment occurs when workers are employed less time than desired or at jobs that do not fully utilize their skills. 5. Low labor productivity occurs because there has not been enough investment in physical or human capital. Furthermore, often there is no entrepreneurial class. Higher education is often oriented toward the humanities rather than technical areas, and some of the best workers have migrated from their home countries, causing what is called the "brain drain." C. Capital accumulation is an important focus. 1. All DVCs suffer from a lack of capital goods—factories, machinery and equipment, public utilities, etc. Better equipped workers would improve productivity. 2. Increasing the stock of capital goods is crucial because of the very limited possibility of increasing the supply of arable land. 3. Once begun, the accumulation of capital may be cumulative if it can raise output faster than the population grows. 4. Domestic capital formation must come as a result of domestic saving. A nation cannot consume everything it produces if it wants to invest in the future. 5. Savings potential is not promising in the poorest countries and may require foreign investment in these countries. 6. Another concern has been capital flight, which occurs when citizens who have been able to save transfer their savings to the IACs for safety and higher returns. This is a quantitatively significant problem. 7. Obstacles to investment include the lack of investors but also the lack of incentive to invest. Education and skilled workers as well as an adequate infrastructure are needed to encourage private investment. 8. One potential bright spot is in-kind or nonfinancial investment in the form of surplus labor working on the improvement of the infrastructure and other capital improvements. D. Technological advance is a somewhat separate process from capital formation. In some cases DVCs are able to transfer new technologies that are capital-saving. Technological borrowing has aided the rapid growth of Pacific Rim region; OPEC nations have benefited in similar ways and the former Soviet bloc countries and republics are seeking western technology. On the other hand, DVCs often require technology appropriate to their resource mixes and must develop their own. E. Sociocultural and institutional factors: One intangible ingredient is the "will to develop." 1. Sociocultural obstacles to growth exist. a. Tribal allegiances may take precedence over national identity. b. Religious beliefs and observances may restrict the length of the productive workday. c. A caste system may allocate labor inefficiently. 2. Institutional obstacles also exist, especially the problem of land reform in these predominantly agricultural countries. III. The Vicious Circle of Poverty A. Poverty makes it difficult to grow. The obstacles to development listed in this chapter seem to arise from poverty. How can a country break the cycle of poverty? B. Increasing the rate of capital accumulation may help, but only if the rate of population growth is somehow slowed at the same time. (Key Question 13) IV. The Role of Government A. A positive role exists for government, according to one perspective. 1. Government provides law and order. 2. The absence of entrepreneurship means that government may have to substitute in spearheading investment. 3. The infrastructure like education, highways, and other government services, depend on adequate public investment in these projects. 4. Forced saving and investment may also require government intervention. a. Increasing taxes is one alternative. b. Government can cause inflation by creating and spending new money on public projects and by selling bonds to banks and spending the proceeds. The resulting inflation is like an arbitrary tax on the economy, but there are objections to creating investment in this way. 5. Social-institutional problems like land ownership and population growth can be alleviated by government policy. B. Public sector problems exist in the DVCs. 1. Entrepreneurial ability is lacking in the public sector, too. 2. Many DVCs have histories of government corruption and poor administration and much of these economies is state-owned or state-controlled. V. Role of the Advanced Nations A. Expanding trade may be the simplest way to benefit DVCs, and IACs can lower trade barriers against DVC products. However, many countries need basic capital and assistance to produce export. NOTE: There is more on the "trade vs. aid" issue at the end of this online lecture. B. Foreign aid can take several forms. 1. Public loans and grants from governments: In the last decade, U.S. aid has averaged about $10 to 14 billion per year, mostly administered by the Agency for International Development (AID). Total IAC has been $40-60 billion per year. (Global Perspective 22.2) 2. The World Bank Group, supported by about 180 member nations including the U.S., lends out capital funds to DVC governments and also sells bonds and guarantees and insures private loans. a. The World Bank is a "last resort" lending agency whose loans are limited to productive projects for which private funds are not available. b. Many World Bank loans are for basic development projects, such as infrastructure that is needed to attract private capital. c. The World Bank also provides technical assistance. d. Two World Bank affiliates supplement the Bank’s activities: The International Finance Corp. invests in private corporations in the DVCs; The International Development Association (IDA) makes "soft loans" to the poorest DVCs on more liberal terms than the World Bank. C. Criticism of foreign aid to DVCs takes several forms. 1. A basic charge is that foreign aid, like welfare programs, creates dependency. 2. The recipients of much foreign aid end up being the bureaucracy and centralized governments of the receiving country. 3. Corruption and misuse characterize too much foreign aid. Many of the beneficiaries are IAC-based consultants and multinational corporations. 4. Foreign aid declined from $58 billion in 1990 to $40 billion in 1999. D. Private capital flows mostly from large corporations, and private banks also enter DVCs, rising from about $50 billion in 1990 to $250 billion in 1999. VI. Where from here? A. DVC policies for promoting growth. (Note the many Structural Adjustment Program Policies.) 1. Establishing and strengthening the rule of law. Clearly defined and enforced property rights bolster economic growth by ensuring that individuals receive and retain the fruits of their labor. 2. Opening economies to international trade. 3. Controlling population growth. 4. Encouraging foreign direct investment. 5. Building human capital, programs which increase basic literacy, education, and labor-market skills help enhance economic growth. 6. Making peace with neighboring countries. 7. Establishing independent central banks. 8. Establishing realistic exchange rate policies. 9. Privatizing many state run industries. B. IAC policies for fostering DVC growth. 1. Directing foreign aid to the poorest DVCs, much of foreign aid from IACs is strongly influenced by potential and military considerations. Only one-fourth of foreign aid goes to those 10 countries whose population constitutes 70 percent of the world’s poorest people. 2. Reducing tariffs and import quotas. There is a TRADE VS. AID debate going on in the development community. which is the best way the more developed countries (IACs) can help the less developed countries (DVCs)? Many believe that FREE TRADE, NOT AID is the best way to help the developing countries. 3. Providing debt relief to DVCs. 4. Admitting temporary workers while discouraging brain drains. 5. Discouraging arms sales to the DVCs. VIII. LAST WORD: Famine in Africa A. Famine is not uncommon and caused about 300,000 deaths of children in Somalia in early 1990s; in 2000 an estimated 12 million people in 10 African countries are threatened by famine. B. Immediate cause of famine is drought, but other causes are a more complex interaction of civil strife, overpopulation, soil erosion, and counterproductive public policies. 1. Civil strife has torn many countries for decades. Somalia is one example. 2. Population growth has outstripped food production; population growth in Africa averages 2.2% per year but only .6% per year in IACs. 3. Ecological degradation has occurred in countries struggling to employ marginal land for crop production. 4. Ill-advised public policies and large international debt are other causes: a. Some governments spend four times as much on arms as they do on agriculture. b. Many African governments have followed the policy of establishing prices of agricultural goods at low levels to provide cheap food, but it diminishes incentives to produce. c. External debt of about $230 billion in 1999 force sub-Saharan countries to cut back on needed domestic programs. The Role of International Aid in Third World Development QUIZ - HOW MUCH DO WE GIVE? What fraction of the U. S. federal government's budget is spent on FOREIGN AID? - See answer below 1% 5% 10% 15% 20% 25% What fraction of the U. S. GDP is spent on FOREIGN AID? - See answer below   ANSWERS What fraction of the U. S. federal government's budget is spent on FOREIGN AID? 1% 5% 10% 15% 20% 25% The US spends about 1 % of its federal government budget on foreign aid. Over half of this aid goes to just two or three countries: Israel, Egypt, and Russia.   What fraction of the U. S. GDP is spent on FOREIGN AID? The US gives about 0.2% of it's GDP in foreign aid.

Chapter 22
Economic Growth in the Less Developed Countries (LDCs)
For Online Lecture See: http://www.harper.cc.il.us/mhealy/eco212i/lectures/ldc/ldc.htm

I. The Rich and the Poor

A. The Industrially Advanced Countries (IACs)

B. The Less Developed Countries

(I prefer the term "less developed countries" or LDCs. the authors of our textbook use the term "developing countries" or DVCs.)

1. middle income countries
annual per capita output in 2001: $745 to $9,206 per capita (average: of $1,850)

2. low income countries
annual output per capita in 2001: up to $745 (average: $430 )

 

C. International Distribution of Income

• the richest 20 percent of the world’s population receives more than 80 percent of the world’s income;
• the poorest 20 percent receives less than 2 percent.
• The poorest 60 percent receives less than 6 percent of the world’s income.
• 63 % of the world's population has never used a telephone
• http://www.globalpolicy.org/socecon/inequal/inctab.htm

  

  [http://kauai.net/centralscrutinizer/Global.gif]

 

• Comparisons highlight income disparities:
  • U.S. 2001 GDP (almost $10 trillion) was more than the total output of all of the DVCs combined ($6 trillion).
  • The U.S. has 5 percent of the population but produces 31 percent of the world's output.
  • U.S. per capita GDP is almost 250 times greater than that of Sierra Leone, one of the world's poorest nations.
  • The largest U.S. corporations have sales greater than most DVC nations' output. General Motors had sales greater than the output value of all but 21 nations of the world.

   

D. Where do most of the People Live? [wwpopden] [top10pop.htm]

1. over 60% of the world's population live in LDCs

2. WHERE?

 

 

World's 10 Most Populous Countries

 

 

 

 

 

 

Rank	Country	Population
1	China	1,273,111,290 (July 2001 est.)
2	India	1,029,991,145 (July 2001 est.)
3	United States	278,058,881 (July 2001 est.)
4	Indonesia	228,437,870 (July 2001 est.)
5	Brazil	174,468,575
6	Russia	145,470,197 (July 2001 est.)
7	Pakistan	144,616,639 (July 2001 est.)
8	Bangladesh	131,269,860 (July 2001 est.)
9	Japan	126,771,662 (July 2001 est.)
10	Nigeria	126,635,626

 

 

II. Characteristics of the LDCs: Measures of Economic Development: [list]
For a good online review see:
http://www.harper.cc.il.us/~mhealy/g101ilec/intro/eco/ecomea/ecomeafr.htm

The title of chapter 22W is "The Economics of Developing Countries". WHAT are LDCs ?

A. From the textbook: Developing countries (DVCs) are:

• unindustrialized nations heavily committed to agriculture.
• They have low rates of literacy,
• high unemployment,
• rapid population growth,
• and their exports are largely agricultural or raw materials.
• Capital equipment is scarce,
• production technologies are primitive,
• and productivity is low

B. My list: Measures of Economic Development

LDC's have:

1. low GDP per capita [wbgnpmap] [gnppctab.htm] [2002 data]

• This is the most used measure of economic development
• Problems with Using GDPpc as a measure [see chapter 7]
  

2. rapid Population Growth rates[wrpopgr] [hispopgr] [demotran]

3. Occupational Structure of the Labor Force [types] [wraglab]: high % in agriculture

4. Low Urbanization [wrurban]

5. Low Consumption per capita

• [wwenergy]
• [wwtv]
• [pop-nrdc-graph]
• [pop-co2-chart]
  

6. Poorly developed Infrastructure [wwtrans]

7. Poor Social Conditions

• high literacy rates [wwlitrt]
• low life expectancy [wwlifexp]
• lacking health care
• low caloric intake
• high infant mortality [wwinfmrt]
• other

C. Websites with world data:

• http://www.nationmaster.com/

III. Growth, Decline, and Income gaps

A. Growth in some, Decline in others

• Several previous DVCs, such as South Korea, Singapore, and Hong Kong have achieved IAC status.
• DVCs such as China, Malaysia, Chile, and Thailand have achieved high annual growth rates in their GDPs in recent decades.
• But many DVCs, such as those in sub-Saharan Africa, have experienced declining GDPs per capita.

B. Growing Absolute Gap between the rich and the poor
http://www.globalpolicy.org/socecon/inequal/inctab.htm

• The absolute income gap between rich and poor nations has been widening.
• For example,
  • LDC: if per capita income is $400 a year in a DVC, a 2% growth rate means an $8 increase in income.
  • IAC: Where per capita income is $20,000 per year in an IAC, the same 2% growth rate translates into a $400 increase in income.

IV. The Human Realities of Poverty (p. 22W-3)

V. Obstacles to Economic Development

A. Natural Resources

• Natural resources must be used more efficiently and their supplies expanded.
• Resource distribution is very uneven as is evidenced by the wealth of the OPEC countries.
• Often ownership of natural resources is an issue if they belong to corporations in industrially advanced countries.
• However, weak resource bases are not necessarily impossible to overcome, as Switzerland, Israel, and Japan have shown.

B. Human Resources

C. Capital Accumulation

D. Technological Advance

E. Sociocultural and Institutional Factors

VI. The Vicious Circle: They are poor because they are poor!

A. Poverty makes it difficult to grow. The obstacles to development listed in this chapter seem to arise from poverty.

B. How can a country break the cycle of poverty? Increasing the rate of capital accumulation may help, but only if the rate of population growth is somehow slowed at the same time.

 

VII. The Role of Government

A. Positive Role

1. law and order
2. lack of entrepreneurship
3. infrastructure
4. forced saving and investment
5. socio-institutional problems

B. Public Sector Problems

VIII. Role of the IACs

A. Expanding Trade

1. Expanding trade may be the simplest way to benefit DVCs, and IACs can lower trade barriers against DVC products.

2. However, many countries need basic capital and assistance to produce export.

B. Foreign Aid [aidquiz]
C. Private Capital Flows

 

I. Learning objectives - In this chapter students will learn:

A. How the World Bank distinguishes between industrial advanced countries (high-income nations) and developing countries (middle-income and low-income nations).

B. Some of the obstacles to economic development.

C. About the vicious cycle of poverty that afflicts low-income nations.

D. The role of government in promoting economic development within low-income nations.

E. How industrial nations attempt to aid low-income nations.

II. The Rich and the Poor

A. Industrially advanced countries (IACs) include the U.S., Canada, Australia, New Zealand, Japan, and most of Western Europe. They have developed market economies based on large stocks of capital goods, advanced technologies, and a well educated labor force. They have a high per capita output, as seen in Figure 16W.1.

B. Developing countries (DVCs) are unindustrialized nations heavily committed to agriculture. They have low rates of literacy, high unemployment, rapid population growth, and their exports are largely agricultural or raw materials. Capital equipment is scarce, production technologies are primitive, and productivity is low. More than 60 percent of the world's population lives in these nations, which can be divided into two groups (Figure 16W.1).

1. The first group consists of "middle income" DVCs with an average annual per capita output in 2004 of $2,190, but with a range from $826 to $10,065 per capita.

2. The low-income group is the poorest with average output per capita of only $510 and a range to $825. Dominating this group are India, Indonesia, and the sub Saharan African nations.

C. Comparisons highlight income disparities.

1. U.S. 2004 GDP (almost $12 trillion) was more than twice the total output of all of the DVCs combined ($5.5 trillion).

2. The U.S. has 5 percent of the population but produces 31 percent of the world's output.

3. U.S. per capita GDP is 207 times greater than that of Sierra Leone, one of the world's poorest nations.

4. The largest U.S. corporations have sales greater than most DVC nations' output. General Motors had sales greater than the output value of all but 19 nations of the world.

D. Growth, Decline, and Income Gaps

1. DVCs such as China, Malaysia, Chile, and Thailand have achieved high annual growth rates in their GDPs in recent decades. Several previous DVCs, such as South Korea, Singapore, and Hong Kong have achieved IAC status. But many DVCs, such as those in sub-Saharan Africa, have experienced declining GDPs per capita.

2. The absolute income gap between rich and poor nations has been widening. For example, if per capita income is $400 a year in a DVC, a 2% growth rate means an $8 increase in income. Where per capita income is $20,000 per year in an IAC, the same 2% growth rate translates into a $400 increase in income.

E. Human realities are difficult. Implications are great in terms of poverty and the human condition as dramatized by the excerpt from Michael Todaro's book in the text. Table 16W.1 highlights other socioeconomic differences.

III. Obstacles to Economic Development

A. Natural resources must be used more efficiently and their supplies expanded. Resource distribution is very uneven as is evidenced by the wealth of the OPEC countries. Often ownership of natural resources is an issue if they belong to corporations in industrially advanced countries. However, weak resource bases are not necessarily impossible to overcome, as Switzerland, Israel, and Japan have shown.

B. Human resources in DVCs have three characteristics

1. Overpopulation is the rule. An annual population growth of approximately 1.3 percent in these countries means that their populations double approximately every 54 years. This compares to an average 0.7 percent rate of population growth in advanced countries. It means that economic growth must be very rapid to make any gain on population; DVC per capita incomes are lagging behind the IACs (see Table 16W.2).

a. Population growth accelerates with economic growth as better living conditions extend life.

b. Birth rates remain high as medical care and sanitation cut infant mortality.

c. Population growth hinders development because large families create obstacles to development. They reduce the ability of households to save, more investment is required to keep up with increases in the labor force, an overuse of agricultural land may occur, and massive urban problems are generated.

d. Other reasons exist in explaining why expansion hinders development.

e. Possible solutions include China's "one child" program, but many nations have religious and socio-cultural reasons to oppose contraception or birth control.

f. Three additional points are worth noting.

i. The relationship between population and economic growth is not as clear as it seems. Japan and Hong Kong are densely populated, but wealthy. Did the wealth come before or after population growth rates declined?

ii. Population growth rates for the DVCs in general have declined in recent decades.

iii. The traditional view is that reduction in population growth leads to economic development. But the "demographic transition" theory maintains that rising incomes lead to slower population growth. Children are viewed more as economic liabilities as country becomes wealthier. (Key Question 5)

2. High unemployment and underemployment are characteristics of DVCs with rates in the vicinity of 15 to 20 percent. This may become worse as rural populations migrate to cities in the hope of finding jobs that are not there. Underemployment occurs when workers are employed less time than desired or at jobs that do not fully utilize their skills.

3. Low labor productivity occurs because there has not been enough investment in physical or human capital. Furthermore, often there is no entrepreneurial class. Higher education is often oriented toward the humanities rather than technical areas, and some of the best workers have migrated from their home countries, causing what is called the "brain drain."

C. Capital accumulation is an important focus.

1. All DVCs suffer from a lack of capital goods-factories, machinery and equipment, public utilities, etc. Better equipped workers would improve productivity.

2. Increasing the stock of capital goods is crucial because of the very limited possibility of increasing the supply of arable land.

3. Once begun, the accumulation of capital may be cumulative if it can raise output faster than the population grows.

4. Domestic capital formation must come as a result of domestic saving. A nation cannot consume everything it produces if it wants to invest in the future.

5. Savings potential is not promising in the poorest countries and may require foreign investment in these countries.

6. Another concern has been capital flight, which occurs when citizens who have been able to save transfer their savings to the IACs for safety and higher returns. This is a quantitatively significant problem.

7. Obstacles to investment include the lack of investors but also the lack of incentive to invest. Education and skilled workers as well as an adequate infrastructure are needed to encourage private investment.

8. One potential bright spot is in kind or nonfinancial investment in the form of surplus labor working on the improvement of the infrastructure and other capital improvements.

D. Technological advance is a somewhat separate process from capital formation. In some cases DVCs are able to transfer new technologies that are capital-saving. Technological borrowing has aided the rapid growth of Pacific Rim region; OPEC nations have benefited in similar ways and the former Soviet bloc countries and republics are seeking western technology. On the other hand, DVCs often require technology appropriate to their resource mixes and must develop their own.

E. Socio-cultural and institutional factors: One intangible ingredient is the "will to develop."

1. Socio-cultural obstacles to growth exist.

a. Tribal allegiances may take precedence over national identity.

b. Religious beliefs and observances may restrict the length of the productive workday. The "capricious universe view" may keep some from productive activity as it is seen as pointless in the end.

c. A caste system may allocate labor inefficiently.

2. Institutional obstacles also exist, especially the problem of land reform in these predominantly agricultural countries.

IV. The Vicious Circle of Poverty (Figure 16W.3)

A. Poverty makes it difficult to grow. The obstacles to development listed in this chapter seem to arise from poverty. How can a country break the cycle of poverty?

B. Increasing the rate of capital accumulation may help, but only if the rate of population growth is somehow slowed at the same time. (Key Question 12)

V. The Role of Government

A. A positive role exists for government, according to one perspective.

1. Government provides law and order.

2. The absence of entrepreneurship means that government may have to substitute in spearheading investment.

3. The infrastructure like education, highways, and other government services, depend on adequate public investment in these projects.

4. Forced saving and investment may also require government intervention.

a. Increasing taxes is one alternative.

b. Government can cause inflation by creating and spending new money on public projects and by selling bonds to banks and spending the proceeds. The resulting inflation is like an arbitrary tax on the economy, but there are objections to creating investment in this way.

5. Social institutional problems like land ownership and population growth can be alleviated by government policy.

B. Public sector problems exist in the DVCs.

1. Entrepreneurial ability is lacking in the public sector, too.

2. Many DVCs have histories of government corruption and poor administration and much of these economies is state-owned or state-controlled. (Global Perspective 16W.1)

VI. Role of the Advanced Nations

A. Expanding trade may be the simplest way to benefit DVCs, and IACs can lower trade barriers against DVC products. However, many countries need basic capital and assistance to produce export.

B. Foreign aid can take several forms.

1. Public loans and grants from governments: In the last decade, U.S. aid has averaged about $10 to 16 billion per year, mostly administered by the Agency for International Development (AID). Total IAC aid in 2003 was $69 billion. (Global Perspective 16W.2)

2. The World Bank Group, supported by about 184 member nations including the U.S., lends out capital funds to DVC governments and also sells bonds and guarantees and insures private loans.

a. The World Bank is a "last-resort" lending agency whose loans are limited to productive projects for which private funds are not available.

b. Many World Bank loans are for basic development projects, such as infrastructure that is needed to attract private capital.

c. The World Bank also provides technical assistance.

d. Two World Bank affiliates supplement the Bank's activities: The International Finance Corp. invests in private corporations in the DVCs; The International Development Association (IDA) makes "soft loans" to the poorest DVCs on more liberal terms than the World Bank.

C. Criticism of foreign aid to DVCs takes several forms.

1. A basic charge is that foreign aid, like welfare programs, creates dependency.

2. The recipients of much foreign aid end up being the bureaucracy and centralized governments of the receiving country.

3. Corruption and misuse characterize too much foreign aid. Many of the beneficiaries are IAC-based consultants and multinational corporations.

4. Foreign aid declined from $68 billion in 1995 to $61 billion in 2000, in part because of the end of the Cold War.

D. Private capital flows mostly from large corporations, and private banks also enter DVCs, rising from about $44 billion in 1990 to $199 billion in 2003.

VII. Where from here?

A. DVC policies for promoting growth.

1. Establishing and strengthening the rule of law. Clearly defined and enforced property rights bolster economic growth by ensuring that individuals receive and retain the fruits of their labor.

2. Opening economies to international trade.

3. Controlling population growth.

4. Encouraging foreign direct investment.

5. Building human capital, programs which increase basic literacy, education, and labor-market skills help enhance economic growth.

6. Making peace with neighboring countries.

7. Establishing independent central banks.

8. Establishing realistic exchange rate policies.

9. Privatizing many state-run industries.

B. IAC policies for fostering DVC growth.

1. Directing foreign aid to the poorest DVCs, much of foreign aid from IACs is strongly influenced by potential and military considerations. Only one-fourth of foreign aid goes to those 10 countries whose population constitutes 70 percent of the world's poorest people.

2. Reducing tariffs and import quotas.

3. Providing debt forgiveness to the poorest DVCs.

4. Admitting temporary workers while discouraging brain drains.

5. Discouraging arms sales to the DVCs.

VIII. LAST WORD: Famine in Africa

A. Famine is not uncommon and caused about 300,000 deaths of children in Somalia in early 1990s; in 2003 an estimated 10 million people in several African countries are threatened by famine.

B. Immediate cause of famine is drought, but other causes are a more complex interaction of civil strife, overpopulation, soil erosion, and counterproductive public policies.

1. Civil strife has torn many countries for decades. Somalia is one example.

2. Population growth has outstripped food production; population growth in Africa is projected to be 2% annually, versus only .3% per year in IACs.

3. Ecological degradation has occurred in countries struggling to employ marginal land for crop production.

4. Ill advised public policies and large international debt are other causes:

a. Some governments spend four times as much on arms as they do on agriculture.

b. Many African governments have followed the policy of establishing prices of agricultural goods at low levels to provide cheap food, but it diminishes incentives to produce.

5. External debt of about $218 billion in 2003 forced sub-Saharan countries to cut back on needed domestic programs.