Chapter 36 Problems of developing countries

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Chapter 36Problems of developing countries

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

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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

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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.

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Welfare indicators by country group
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Problems of LDCs (1)

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

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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

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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.

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Possible paths to development?

• Trade in primary products
• Industrialization
• Borrowing
• Structural adjustment
• Aid

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Developmentthrough 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

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Commodity price stabilization
A buffer stock is an organization aiming to
stabilize a commodity market.
Price
DD
Exports are still 0Q at price P.
0
Quantity
The buffer stock stabilizes prices and export
earnings
but requires resources to buy and store.
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Developmentthrough 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

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Developmentthrough export promotion?

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

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Developmentthrough 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
  ...

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Developmentthrough 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

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Developmentthrough 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

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Developmentthrough 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

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The distribution of world population and GNP, 1998