ch 19 economic development macro econ4

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Chapter 21 ECON4 William A. McEachern

1

Economic

Development





Worlds Apart

• Standard of living

– Output per capita

– Gross national income (GNI)

– PPP adjusted

• High-income economies

• Middle-income economies

• Low-income economies

2



Exhibit 1

3

Share of World Population and World Output From High-,

Middle-, and Low-Income Economies as of 2011





Developing & Industrial Economies

• Developing countries

– Low- and middle-income economies

– Higher illiteracy rate

– Higher unemployment

– Faster population growth

– Exports of primary products

• Agricultural products

• Raw materials

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– Half of the labor force works in

agriculture

– Low productivity

– 84% of the world’s population in 2009

– Produce 28% of the world’s output

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• Industrial market countries

– High-income economies

– Economically advanced capitalist

countries of

• Western Europe, North America,

• Australia, New Zealand, and Japan

– Developed countries

– 3% of the labor force works in agriculture

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Exhibit 2

7

Per Capita Income for Selected Countries in 2011





Health and Nutrition


– Poor health

• Malnutrition - Half the calories

• Disease

– Epidemics, AIDS

– Lower life expectancy at birth

– Greater child mortality rated

– Higher infant mortality

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Exhibit 3

9

Child Mortality Rates per 1,000 Live Births as of 2009





High Birth Rates


– High birth rates

• 80 million (out of 90 million born this year) –

in developing countries

– High fertility rates - Larger families

• Source of farm labor

• No social security system

– Population growth rates > growth rate in

total production

10



Exhibit 4

11

Average Number of Births During a Woman’s Lifetime as of 2011





Women in Developing Countries

• Greater poverty

– Households headed by women

• Work in home and in labor market

• Less educated than men

• Fewer employment opportunities

• Lower wages than men

• Less access to other resources

12





Productivity: Key to Development

• Labor productivity

– Output per worker

• Low labor productivity

– Quality of labor

– Amount of capital, natural resources,

other inputs

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• To increase labor productivity

– Invest in human and physical capital

• Domestic savings

• Foreign funds

• Poorest countries

– Low income per capita

– Low investment in human and physical

capital

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• Technology and education

– Better use for available resources

– More receptive to new ideas

• Inefficient use of labor

– Unemployment

• Can’t find jobs

– Underemployment

• Employed in lower-skill jobs

• Work part-time

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• The cycle of poverty

– Low productivity results in low income

– Low income can affect worker

productivity

• Less saving

• Less investment in human and physical

capital

• Poor nutrition and insufficient health care

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• Natural resources

– Abundant natural resource (oil)

• Not enough to create industrial economy

• Financial institutions

– Low savings

– High inflation

– Small investment

– Fewer credits provided by banks

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• Capital infrastructure

– Transport

– Communication

– Sanitation

– Electricity


– Serious deficiencies in their physical

infrastructures

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Exhibit 5

19

Fixed and Mobile Phone Lines per 1,000 People for 2009



Exhibit 6

20

Internet Users as Percent of Population for 2009






• Entrepreneurship

– Entrepreneurs who are able to bring

together resources and take the risk of

profit or loss

• Sources of entrepreneurial experience in

developing countries

– McDonald’s

– Other international franchises

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• Rules of the game

– Formal and informal institutions

• Laws, Customs, Conventions

– Stable political environment

– Well-define property rights

– Social capital

• Shared values and trust

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• Rules of the game, capitalism

– Private ownership of most resources

– Coordination of economic activity

• Price signals generated by market forces

• What, how, and for whom to produce it

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• Rules of the game, central planning

– Government ownership of most

resources

– Allocation of resources

• Central plans

– Limited personal freedom

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• Privatization

– The process of turning government

enterprises into private enterprises

• Social capital

– The shared values and trust that promote

cooperation in the economy

25



Exhibit 7

26

GDP per Capita for Transitional Economies in 2011





Income Distribution

• Among 12 nations

– Poorest fifth of population

• 7.7% of income in high-income countries

• 5.8% of income in middle-income countries

• 7.2% of income in low-income countries

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International Trade & Development

• Trade problems for developing countries

– Exports: primary products

• Wild price fluctuation

– Imports: manufactured goods

– Trade deficits

• Restrict imports of capital goods

– Face trade restrictions

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• Migration and the brain drain

– Migrants: $400 billion sent home

– Brain drain

• Import substitution

– Domestic manufacturing of products that

were imported

– Problems

• Erased gains from specialization

• Inefficiency, Retaliation

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• Export promotion

– Produce for the export market

– Emphasis on specialization

– Efficiency

– Less government intervention

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• Trade liberalization and special interests

– Difficulty pursuing policies conducive to

development

– Gains from economic development -

widespread

• Beneficiaries (consumers) do not recognize

their potential gains

– Losers tend to be concentrated

• Producers - fight reforms that might harm

their livelihood

31





Foreign Aid

• Foreign aid

– International transfer made on especially

favorable terms

– For the purpose of promoting economic

development

– Grants and Loans

– Money, capital goods, technical

assistance, food

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Foreign Aid

• Bilateral assistance

– Country-to-country

• Multilateral assistance

– World Bank

– IMF

• United States, last four decades

– $400 billion in aid to the developing world

– U.S. Agency for International

Development (USAID)33





Foreign Aid

• Additional purchasing power

– Possibility of increased investment,

capital imports, and consumption

• Unclear

– Supplements domestic savings

• Increasing investment

– Or substitutes for domestic savings

• Increasing consumption

34





Foreign Aid

• Source of discretionary funds

– That benefit not the poor but their leaders

• 90% of the funds distributed by USAID

– To governments - whose leaders assume

responsibility for distributing these funds

• Bilateral funding

– Tied to purchases of goods and services

from the donor nation

• Unintended consequences

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Foreign Aid

• 1950s, U.S., Food for Peace program

– Sell U.S. farm products abroad

– Some recipient governments

• Sold that food to finance poorly conceived

projects

• Low-priced food from abroad

– Drove down farm prices in the


– Hurting poor farmers there

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Foreign Aid

• Used clothing

– Donated to thrift shops and charitable

organizations in industrialized countries

– Wind up for sale in Africa

• Low price discourages local production

• Foreign aid

– Raised the standard of living in some


37





Foreign Aid

• Foreign aid

– But it didn’t increased their ability to

become self-supporting at that higher

standard of living

– Insulated government officials

• From their own incompetence

• From the fundamental troubles of their own

economies

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ch 19 economic development macro econ4

Economy & Finance