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Zimbabwe

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Title: Zimbabwe


1
Zimbabwe
  • Economic Development
  • Workshops

2
What is development?
  • GDP
  • GNP
  • HDI
  • Others

3
What does the HDI measure?
  • Waste control and pollution
  • Poor water supplies
  • High real population growth
  • Living standards
  • Civil liberties
  • The status of women
  • Access to education

4
Types of economies
  • Second World Country - this mainly referred to
    those countries of the former eastern block and
    meant that were poor but had some basic
    facilities.
  • Third World Country - many of these are located
    in the 'southern section' of the globe. They are
    more commonly known as Developing Countries
    (DC's) and have within them a number of different
    types of economy.
  • .

5
Characteristics
  • a) The very poorest, where people live on less
    than 500 a year and have access to very few of
    the features we see in our lives.
  • (b) Middle-income countries, which though still
    poor by our standards, do have pockets of
    considerable economic growth within them. At the
    top end of this category are nations such as
    South Korea and Singapore. Some prefer to call
    these Newly Industrialised Countries (NIC's).
    Within this group are many of the Tiger Economies
    of the Far East

6
How are things changing?
  • The 'second world' economies noted above are now
    mostly in transition. That is they are changing
    from being command economies into using the more
    liberal, free market ideals seen in the
    high-income economies. As such they are
  • Introducing market forces via demand and supply
    factors to determine prices
  • De-regulating markets
  • Privatising industries
  • Removing protective barriers
  • Seeking orders outside their old trading circles
  • Joining the European Union.

7
Problems facing developing countries
  • The major problems faced by developing economies
    are
  • (a) That they have rapid population growth. This
    means that their age pyramid tends to be 'bottom
    heavy' and this put pressure on education and
    employment.
  • (b) They lack physical capital structures, so
    they have inadequate supplies of communication
    facilities, roads, rail, ports, radio and TV sets
    and less well-irrigated land

8
Problems continued..
  • (d) The high population growth mentioned above
    puts enormous strain on facilities and in many of
    these countries people's life styles are actually
    getting worse. The 'dependency rates' are getting
    larger as those in work become responsible for
    more who are not directly contributing to the
    economy.
  • (e) Again high population growth places enormous
    burdens on the health facilities and infant
    deaths remain very high in most of these
    countries.
  • (e) With some many people living in these
    countries trying to find a job is difficult. This
    leads to high unemployment and also
    underemployment. Which is when people have a job,
    saying selling you single cigarettes but they do
    not constitute a real form of employment as the
    'West' see it

9
The developing world
  • The majority of those living in the poorest
    nations still live on or near the land. A visit
    to any of these countries will show just how
    resourceful people can be when finding places to
    grow food!
  • Slowly, some are moving more into the secondary
    or manufacturing sectors of how we divide
    economies. This allows them to add more value and
    so have some central funds to spend on hospitals,
    schools etc.

10
The developing world
  • In only the most 'advanced' of the poorest
    countries does a meaningful services sector
    exist. Some of these have allowed themselves to
    be used as 'off-shore' banking facilities for
    funds from rich nations. Many have banks,
    insurance companies etc but they are in their
    infancy, or are sometimes branches of well-known
    western companies. Some do support a small
    quaternary sector and Internet cafes are becoming
    a common sight in even the poorest of nations.
    But the hardware and software is all imported and
    that costs large amounts of foreign exchange. The
    'digital divide' is a pressing problem and is not
    improved by problems of electricity supply.
  • Foreign Trade also shows us some of the
    essentials of being a developing economy. Many of
    the poorest countries exist on selling low-valued
    primary products, such as coffee and tea. They
    keep little of the real value and have to accept
    the prices we in the developed economies want to
    pay. They do produce some manufactures but they
    too tend to be low in value.

11
The developing world
  • Most developing countries depend on a formal
    economy for their wealth creation but outside
    this formal area exists an enormous informal
    sector. People survive by growing, buying and
    selling a huge variety of goods and services.
    Revenues are not declared and are not taxed.
    Government sees only a small amount of what it is
    due and therefore cannot afford to spend on the
    essentials of life.
  • The difference between rural and urban life is
    clear to anyone who visits one of these
    countries. The urban areas tend to suffer from
    overcrowding, poor sanitation and
    unemployment/underemployment. Inadequate
    education and health services are a feature of
    the lives of many urban dwellers. However, huge
    differences do exist and air conditioning,
    satellite dishes and other signs of wealth e.g.
    four wheel drive vehicles clearly differentiate
    the rich from the poor.

12
The developing world
  • In rural areas the contrasts between the rich and
    the poor are normally less obvious. They exist
    but in less stark ways. Education remains a
    privilege and health facilities remain poor. But
    they can grow food and live a life closer to that
    of their culture and for many this is more
    rewarding.
  • The traditional economy still supports the
    majority in most of these countries. Food,
    clothing, cooking ware and other essentials are
    what most contribute towards. However, some more
    modern industries do play an important role in
    the fabric of the economy. Transport is one and
    this employs quite large numbers. Power
    generation, communications and financial services
    are also growing in importance.
  • So too are manufacturing industries that add
    value to local produce or products

13
Economic, social and political issues
  • Culture is a strong influence on economics. It
    creeps into how people see their role in an
    economy and just where, for example, women fit
    into the world of business. In some countries
    women remain firmly the providers of food for men
    folk and the main carers of children. Even the
    role and ownership of money differs from one
    country to another.
  • Politics is certainly an important factor is
    deciding who does what within an economy.
    Democracy does not have a one-sized, single model
    fits all. Civil rights differ and this impacts on
    how well people can use their natural talents.
    Dictatorships exist in some countries and one
    party states are quite common. Military regimes
    frequently appear and then the right to vote and
    change a government is suspended

14
History is important
  • The colonial history is also important. The
    British tended to want colonies to break-even, or
    even make a profit. The French and Belgians
    exercised different forms of control and the
    former still does to this day. They ways in which
    government, the role of the state in the economy
    and the direction of economic development took
    during colonial days still affect these countries
    today. For many the immediate post-colonial days
    were spent trying to follow a more Socialist form
    of economics. Five year plans and big centrally
    controlled investments were the ways in which
    development would be achieved. However, few of
    these were successful and the collapse in
    commodity prices and the rise in oil prices left
    many of these nations in serious debt problems.
    When this occurred the World Bank had to be
    called in and they imposed a strict regime of
    dismantled price controls, a drastic reduction in
    the printing of money and various other
    implications of the Structural Adjustment
    Programmes. Now, many of these countries are
    embarking on programmes of de-regulation and
    privatisation

15
So how do we change things?
16
Maybe free trade?
  • Free trade
  • International trade is based on specialisation
    at a national level. Countries exchange goods
    with others and pay for imports from the revenues
    received from exporting. To work effectively,
    this system relies on few, if any, barriers
    existing to interfere with 'free trade'.

17
But nothing is static
  • Transport costs and tariffs will change the
    relative prices of goods and may therefore 'blur'
    the impact of comparative advantage.
  • Exchange rates do not always relate exactly to
    what comparative advantage theory suggests as
    they have many other determinants - this may also
    negate the theory.
  • Imperfect competition may lead to prices being
    different to opportunity cost ratios. Imperfect
    competition may also lead to the exploitation of
    economies of scale which may adjust to what
    comparative advantage theory suggests should
    happen.
  • Comparative advantage theory is a static theory
    and does not take account of some of the more
    dynamic elements determining world trade. In
    particular, the factor of production capital is
    not a natural resource, and so may come outside
    the scope of the theory.

18
Rostow?
  • One of the most regarded models of economic
    growth and therefore development potential is
    known by its founders name Walt Rostow. He
    considered that all economies pass through FIVE
    phases. These are as follows
  • The traditional phase - where barter is common
    and most work on or about the land.
  • Pre-take-off - where a self-sustaining growth
    potential is close and savings are rising at a
    rate of 15-20 of national income
  • Take-off - the economy is recording continuous
    periods of economic growth
  • Drive for maturity - the economy is genuinely
    moving from the developing to the developed form
  • Mass consumption - the majority of citizens enjoy
    a high materials standard of living.

19
Rostow
  • Rostow placed considerable importance on the role
    of savings and how these in turn produce
    investment. The savings could be both domestic
    and foreign and would therefore collectively
    drive the economy into a period of growth and
    maturity. By by-passing any problems with
    domestic savings (the savings gap) the world
    economy would be both helping the poorer nations
    and itself, as total demand would increase. Some
    now argue that savings and investment alone are
    not enough to promote real economic growth. They
    suggest that (a) the direction and purpose of
    investment has to be carefully selected and
    monitored and that (b) domestic sums have to be
    encouraged to remain 'at home'. Too often
    'capital flight' leads to savings being deposited
    in other, more lucrative overseas markets.

20
Fisher and Clark
  • Primary production is concerned with the
    extraction of raw materials through agriculture,
    mining, fishing, and forestry. Low-income
    countries are assumed to be predominantly
    dominated by primary production.
  • Secondary production concerned with industrial
    production through manufacturing and
    construction. Middle-income countries are often
    dominated by their secondary sector.
  • Tertiary production concerned with the provision
    of services such as education and tourism. In
    high-income countries the tertiary sector
    dominates. Indeed having a large tertiary sector
    is seen as a sign of economic maturity in the
    development process.

21
Fisher and Clark
  • Countries are assumed to first pass through the
    primary production stage then the secondary stage
    and finally the tertiary stage. As economies
    develop and incomes rise then the demand for
    agricultural goods will increase but due to their
    low income elasticity of demand at a
    proportionally lower rate than income

22
Fisher and Clark
  • However, the demand for manufactured goods will
    have a higher income elasticity of demand. So as
    incomes grow further the demand for these goods
    will grow at a proportionately higher rate. Hence
    the secondary industry will grow. As incomes
    continue to grow then people will start to
    consume more services as these have an even
    higher income elasticity of demand. Thus the
    tertiary sector will then grow and develop.
  • However, this may be misleading.

23
Fisher and Clark
  • Some LDC's may have a large tertiary sector due
    to a large tourist industry without having
    developed a secondary industry. Economists argue
    that this could be somewhat risky. If the
    economic base is dominated by an economic
    activity such as tourism that has a high-income
    elasticity of demand then a recession in the
    consuming nations will have a disproportionately
    large impact on the export earnings. A fall
    income will bring about a proportionately greater
    reduction in demand for the service and this will
    have severe impact on the economy. If it does not
    have a primary or secondary production to fall
    back on then borrowing and debt might be the only
    prospect.

24
Harrod Domar
  • The model suggests that the economy's rate of
    growth depends on
  • The level of saving
  • The productivity of investment i.e. the capital
    output ratio

25
Harrod Domar how does it work?
  • For example, if 15 worth of capital equipment
    produces each 1 of annual output, a
    capital-output ratio of 15 to 1 exists. A 5 to 1
    capital-output ratio indicates that only 5 of
    capital is required to produce each 1 of output
    annually. The model concludes that
  • Economic growth depends on the amount of labour
    and capital.
  • As DC's often have an abundant supply of labour
    it is a lack of physical capital that holds back
    economic growth and development.
  • More physical capital generates economic growth.
  • Net investment leads to more capital
    accumulation, which generates higher output and
    income.
  • Higher income allows higher levels of saving.

26
Harrod-Domar
  • Developed in 1930s
  • Economic growth and economic development are not
    the same. Economic growth is a necessary but not
    sufficient condition for development
  • Practically it is difficult to stimulate the
    level of domestic savings particularly in the
    case of developing countries where incomes are
    low.
  • Borrowing from overseas to fill the gap caused by
    insufficient savings causes debt repayment
    problems later.
  • The law of diminishing returns would suggest that
    as investment increases the productivity of the
    capital will diminish and the capital to output
    ratio will therefore rise.

27
Lewis' model
  • productivity was central to development of an
    economy. This was best achieved by encouraging
    migration of workers from the less productive
    sectors of the economy, for example agriculture,
    which is traditional and into the newer
    industries of manufacturing and tertiary. The
    latter would be more productive and so accumulate
    greater wealth. In turn this would generate
    greater funds for government through taxation and
    this would enable them to spend on the essentials
    of development. Savings would be encouraged, as
    rates of return would increase. Lewis felt that
    the marginal productivity of a rural worker was
    low.

28
Lewiss model - problems
  • The idea that the productivity of labour in rural
    areas is almost zero may be true for certain
    times of the year however during planting and
    harvesting the need for labour is critical to the
    needs of the village.
  • The assumption of a constant demand for labour
    from the industrial sector is questionable.
    Increasing technology may be labour saving
    reducing the need for labour. In addition if the
    industry concerned declines again the demand for
    labour will fall.
  • The idea of trickle down has been criticised.
    Will higher incomes earned in the industrial
    sector be saved? If the entrepreneurs and labour
    spend their new found gains rather than save it,
    funds for investment and growth will not be made
    available.
  • The rural urban migration has for many LDCs been
    far larger that the industrial sector can provide
    jobs for. Urban poverty has replaced rural
    poverty.

29
Neo-classical growth model
  • Increase in the labour quantity (population
    growth)
  • Improvements in the quality of labour through
    training and education
  • Increase in capital (through higher savings and
    investment)
  • Improvements in technology

30
Neo-classical
31
Neo-classical
  • Neo classical economists advocate the following
    strategies should be encouraged
  • Competitive free markets
  • Privatisation of state owned industries
  • A move from closed (no trade) to open (trading)
    economies
  • Opening up the domestic economy through
    encouraging free trade (i.e. abolish tariffs and
    quotas) and foreign direct investment.

32
Neo-classical - criticisms
  • These policies will stimulate investment, higher
    output and income and hence higher savings. This
    model makes a number of unrealistic assumptions
    and ignores a number of crucial issues
  • The assumption is that the creation of a free
    market and a private enterprise culture is
    possible and desirable.
  • The existence of market failure such as
    externalities associated with economic growth are
    ignored
  • The problem of uneven distribution of income is
    ignored

33
Dependency theory
  • Underdevelopment is seen as the result of unequal
    relationships between rich developed capitalist
    countries and poor developing ones. In the past
    colonialism embodied the inequality between the
    colonial powers and their colonies. As the
    colonies became independent the inequalities did
    not disappear. Powerful developed countries such
    as the US, Europe and Japan dominate dependent
    powerless developing economies via the capitalist
    system and that continues to perpetuate power and
    resources inequalities.

34
Dependency Theory
  • Dominant countries have such a technological and
    industrial advantage that they can ensure the
    global economic system works in their own
    self-interest. Organisations such as the World
    Bank, the IMF and the WTO have agendas that
    benefit the firms, and consumers of primarily the
    rich world. Freeing up world trade, one of the
    main aims of the WTO, benefits the wealthy
    nations that are most involved in world trade.
    Creating a level playing field for all countries
    assumes that all countries have the necessary
    equipment to be able to play. For the worlds'
    poor this is often not the case.

35
Dependency Theory
  • In this model the responsibility for lack of
    development within developing economies rests
    with the rich nations. Those who support the
    dependency theory argue that only substantial
    reform of the world capitalist system and a
    redistribution of assets will 'free' developing
    economies from poverty cycles and enable
    development to occur. Measures that the rich
    nations could take would include the elimination
    of world debt and the introduction of global
    taxes such as the Tobin Tax. This tax on foreign
    exchange transactions, named after its proponent,
    the American Economist, James Tobin, would
    generate large revenues that could be used to pay
    off debt or fund development projects. Gordon
    Brown has suggested something similar and the
    Jubilee movement has put forward that debt should
    be cancelled and not re-scheduled

36
Dependency Theory..but
  • Power is not easily redistributed, as countries
    that possess it are unlikely to surrender it. It
    may be that it is not the governments of the rich
    nations hold the power but large multinational
    enterprises that are reluctant to see the world's
    resources being reallocated in favour of the
    developing economies.
  • The redistribution of assets globally will result
    in slower rates of growth in the rich economies
    and this might be politically unpopular.

37
Balanced and unbalanced growth
38
Balanced and unbalanced growth
  • Allocation of resources
  • All of us have recently become aware of the real
    cost of resource usage. We now need to be
    conscious of externalities. How will the
    developing world control air pollution, or the
    risk of deforestation? Will they simply become
    the dumping ground for rich nation's waste?
  • Another problem in balancing growth might be soil
    erosion and degradation. They also need to be
    aware of water scarcity, pollution and waste
    disposal. All of these challenges face us in the
    developed world but those experiencing the
    challenges of economic develop have to 'balance'
    their desire to grow against the possible
    problems that might arise. The reduction in their
    biodiversity might also need to be addressed, as
    will atmospheric changes. Do they

39
Balanced and unbalanced growth
  • Ban or impose strict rules and controls
  • Extend property rights and force private
    enterprise to pay more to the problems they cause
  • Impose taxes on pollution and other externalities
  • Subsidise non-pollution methods of production
  • Award permits to pollute

40
To achieve these we will have to..
  • Land ownership and reform
  • Involving the local communities in their own
    development
  • Engaging the poor and making them feel that some
    opportunities will come their way
  • Pricing in ways that include the real costs of
    development

.
41
Challenges
  • Productivity
  • How will they increase the quality of their
    inputs and control the real costs of what they
    hope will be genuine increases in output. It's
    quality as well as quantity. Should the balance
    be towards export-led growth or import
    substitution?
  • Human capital development
  • What comes first teacher training, or schools in
    which the teachers can work, or should they await
    the arrival of students? Not an easy problem to
    resolve. What of technical, adult and higher
    education? Where do they fit into the demand for
    precious resources?
  • Financial systems
  • These too are essential but like all systems they
    can be abused. Do you force domestic savings to
    stay national? Do you monitor investment flows to
    make certain they are going to what you want them
    to? This is an area of development riddled with
    problems.

42
Challenges
  • Price distortions
  • What will be the short-term negative affects of
    the removal of price caps and subsidies as
    against the benefits for the economy in the long
    term?
  • Openness of markets
  • Can government do without customs revenues and so
    allow in goods that are needed? In return can
    exports be allowed into developed markets, or
    will the big players, such as the EU continue to
    block goods from developing countries?
  • Access to technology
  • Should domestic companies be encouraged to use
    technology, say be tax relief or subsidies? Maybe
    overseas investment could be encouraged by
    allowing tax write-offs if they bring technology
    with them?

43
Challenges
  • Access to technology
  • Should domestic companies be encouraged to use
    technology, say be tax relief or subsidies? Maybe
    overseas investment could be encouraged by
    allowing tax write-offs if they bring technology
    with them?
  • Agricultural reform
  • Surely one target must be self - sufficiency in
    basic food requirements? This will take
    short-term resource allocation but what will be
    the long-term benefits?
  • Intervention in markets
  • This works for some economies and not others.
    Should government use public funds to subsidise
    some industries and not others? What exactly are
    'essential' industries?

44
Challenges
  • Culture
  • Will development simply ride over thousands of
    years of history and evolution? Or, will another
    'balance' have to be sort? Too fast a pace of
    change can have serious consequences. Likewise,
    the adjustment of women to their new roles and
    challenges needs to be carefully explained and
    introduced.
  • Achieving a balanced and sustainable growth
    record is difficult but the target is to develop
    via ways that do not endanger the quality of life
    of those who follow.

45
Domestic Problems
  • Fight off the power of multi-nationals and still
    keep access to the lucrative markets that the
    companies come from
  • Maintain a biodiversity and balance of nature as
    pressures increase for the profits contained in
    their natural resource exploitation.
  • Allow the economy to develop within the terms of
    sustainable development
  • Another important factor is factor endowment and
    the ability to exploit these. Some of the
    countries on 'Southern Africa' have huge reserves
    of the most valuable resources in the world. But
    how do they develop them so as to benefit as many
    of their population as possible? Will they import
    expensive expatriate technology or will they
    train their own workforce

46
Population
  • Population
  • Population will be an important part of the
    development
  • The net population increase figure (births -
    deaths migration) will be an important factor.
    In some developing economies population growth is
    still around 4 per annum. In the short run this
    will put pressure on education and employment but
    eventually social provision for the elderly will
    have to be financed. Population growth also
    impacts on the
  • Supply of food - though little starvation exists
    in the developing world malnutrition (see chart 1
    below) is a major problem in many countries. It
    adds to the size of infant mortality.
  • Environment - food pressure puts pressure on land
    and takes valuable resources away from other
    sectors. Intensive methods require inputs that
    might damage the environment. GM crops are
    thought by some to be a major reducer of poverty
    whilst for others they threaten our very
    survival.

47
Population
  • Age has already been touched on but we need to
    consider the dependency ratio again. Those no
    longer working will require a larger proportion
    of national income than they currently need. This
    will be fuelled in the developing world by the
    problems of
  • (a) Inadequate education systems
  • (b) The need to keep children away from school to
    work on the land
  • (c) A lack of adequate jobs for those who have
    received a more formal education. The lack of
    jobs leads to crime and increasing drug abuse.

48
Birth rate
  • Government and the birth rate - development
    implies better health, education etc and a fast
    growing population make this more difficult. So,
    should government try to influence the size of
    families? China tried this with its one child
    policy. Some of the problems associated with this
    form of population manipulation are not
    attractive.
  • Whatever the government decides to do one fact is
    agreed upon by most, namely, that as an economy
    develops so the number of conceptions per female
    declines

49
Other factors
  • Education - health care and family planning can
    feature in government-sponsored programmes. As
    mentioned earlier fiscal (tax) incentives can be
    used to promote fewer children.
  • The role of women in society - if women can earn
    some money - say by a female only micro loan and
    then save this in a women-only bank then they can
    gain some financial independence. This seems to
    be a successful way of reducing family sizes.

50
Migration
  • Migration - the pull of cities continues to cause
    large numbers to move to urban areas. Some argue
    that agricultural workers have low productivity
    and that they should be encouraged to move to
    cities and the higher productivity jobs to be
    found there. However, they create little, if
    anything if all they drift into is unemployment,
    poverty and crime. Many of those who migrate to
    the cities do so on the expectation that
    eventually they will earn more than in the rural
    areas. Perhaps it might be best if some
    government funding went to the rural areas, so
    making life in those regions more closely
    resemble what the rural dwellers perceive urban
    life to be? This would take both money and time,
    as schools, hospitals, roads etc would be needed
    to offer a similar lifestyle to that which the
    urban liver supposedly has access to.

51
Poverty
  • Poverty is a grinding fact of life. You receive
    little education, hope or access to any of the
    normal features of our lives. What value can be
    added to these people? They may be intelligent
    and gifted individuals but they will receive
    little, if any education. Health care will be
    non-existent. The inequalities apparent within
    their economy will breed resentment. This can
    lead to hatred, ethic violence, corruption and
    the undermining of the democratic process. Those
    thinking of investing in such an economy will
    probably decide not to. If you earn little, say
    just a few dollars a day what chance do you have
    of saving any money, or owning a bank account?
    The acquiring of capital is basically impossible
    and that precludes you from passing wealth to
    your direct descendants.

52
Poverty cycle
  • This poverty can be very difficult to reduce as
    many economies struggle to develop. They often
    find themselves in what is known as the poverty
    cycle. This can be seen as a spiral that prevents
    them from developing. To develop, we know that
    they need to invest. Investment needs funding and
    this requires savings. However, if they have low
    income levels, then they have low savings levels.
    This means a lack of funds for investment, which
    in turn leads to lower incomes. It is in essence
    a downward spiral of cumulative causation. Low
    incomes means low investment levels which means
    even lower incomes. They need to break the cycle
    to develop, but how?

53
Poverty Cycle
54
Government Failure
  • This can arise as the result of
  • inadequate information - government seldom
    possess full and accurate information. So, it
    makes decisions on inadequate detail and mistakes
    arise.
  • Conflicting objectives - all decisions have an
    opportunity cost and any elected government
    normally wants to satisfy those who voted for it.
    This might be to the detriment of those who did
    not.
  • Administrative costs - sometimes the cost of
    correcting a market failure actually outweigh the
    benefits.
  • Market distortion - by intervening to correct one
    market failure a government might create another.
    It in turn might be worse than the original they
    first attacked. In the UK the minimum wage
    continues to attract such criticism.

55
Public Choice Theory
  • Public choice theory, which is now popular in
    developed economies, suggests that politicians
    will not always attempt to maximise economic
    welfare. They will try to maximise their
    popularity by the laws and decisions they make.
    In pure economics these may not be the best ways
    of spending our money. Decisions might be
    influenced by
  • Local interests
  • Trying to include minority interests
  • Conflicting personal interests
  • Short-termism
  • Regulatory capture

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International Problems
  • Developing economies mainly trade in primary
    exports. The money raised from their sale pays
    for manufactured imports. Diversification has
    been a slow process and again it has a strong
    geographic bias. The Far Eastern economies have
    been able to move up through the categories of
    exports to command increased market shares of low
    and medium technology goods. Alas, for many of
    their poorer African cousins the reliance on
    low-valued primary exports has not fallen by a
    significant amount in the sources of foreign
    exchange earnings
  • One major problem facing a number of developing
    economies is the volatility of the commodity
    markets. For over 30 years the prices of
    commodities, both hard and soft varieties, have
    been falling in real terms
  • Many of the exported commodities are relatively
    inelastic in the short run and once the crop has
    begun its development there is little else to do
    but accept whatever the world price is at the
    time of harvest. Without unreliable flows of
    earnings it is difficult to put aside monies for
    investment in diversification

57
Commodity Market problems
  • Overproduction, which puts pressure on that
    country to accept whatever price they can get
  • Failure to get all producers to join the 'club'
  • Storage of some commodities is difficult and
    expensive, so fluctuations cannot be evened out
  • Floor prices are too high and encourage
    overproduction. This then requires precious
    revenues to buy and so the investment funds begin
    to disappear
  • Terms of Trade deteriorate

58
The developing world and debt
  • Increased interest rates
  • Increased value of the dollar, so they had to
    sell more exports in order to pay back debt
    valued in dollars
  • The recession in the developed world meant that
    they imported less from developing economies. A
    long-term decline started in the real value of
    most commodities
  • Net capital inflows reduced dramatically
  • Many of the developing countries experiencing net
    outflows of money, in that they actually paid
    more to the developed economies than they
    received from them. So, the poorest nations were
    sending a substantial part of their income to the
    richer countries (the poor aiding the rich!).
  • Their total debt increased 25 fold during the two
    decades of the 1980s and 90s.
  • Their debt-export ratio rose and they had to earn
    more money from the sale of exports just to pay
    their debts.
  • Their debt to GDP ratio rose and so a larger
    proportion of their national income was owed in
    debt.
  • Their debt-service ratio rose. This shows the
    percentage of export revenue that has to be used
    to repay debt plus interest. This need not be a
    problem if exports are rising faster in real
    terms, but they were not.

59
Other problems
  • They can attempt to expand GDP faster than their
    debt ratio. This is quite easy to write but
    difficult to achieve in reality.
  • The richer nations could write-off debts.
    Supporters of this action argue that, once
    released from a burden they cannot afford to pay,
    developing economies would import more and so
    boost developed world trade. Such imports could
    raise living standards and allow for more
    investment. Opponents, and the US is amongst
    these, point to irresponsible borrowing being
    promoted if old debt is wiped off. The Highly
    Indebted Poor countries initiative of the EU and
    others has borne some fruit but, in reality, many
    of the debts cancelled would never have been
    repaid. Most countries attempt to re-schedule
    debt, or seek a moratorium while they adjust to
    the increased sums needed to be allocated to
    debt.
  • Structural adjustment programmes can be accepted
    as part of an IMF loan to clear debts. This
    scheme tends to impose heavy costs on economies

60
Other problems
  • Non-convertible currencies
  • These mainly apply to developing countries whose
    exchange rates are fixed (usually against the
    dollar), rather than floating, and whose
    currencies are not therefore freely convertible
    through the financial markets.
  • As the fixed rate is usually one that would be
    greater than the free market equilibrium rate,
    the exchange rates have tended to be overvalued.
    This may act as a barrier to development as it
    makes exports more expensive, causing yet another
    problem for exporters of primary commodities,
    while at the same time making imports cheaper.
  • Usually a pre-condition of the IMF when it gives
    loans to heavily indebted developing countries is
    that they devalue their currencies and allow them
    to float
  • Capital flight
  • Capital flight is an aspect of the debt crisis of
    developing countries. Indebted countries have
    often borrowed more money to simply finance their
    debts but, rather than being used to repay these
    debts, much of this money has been put on deposit
    in foreign banks by firms and individuals, or has
    been put into stocks and shares and property.
  • Capital flight occurs when firms or individuals
    speculate on the prospect of earning a higher
    return abroad. This will particularly occur when
    there is
  • Fear of devaluation / a belief that the exchange
    rate is overvalued
  • High rates of inflation
  • A low real rate of interest
  • A need to 'launder' money abroad
  • A poor domestic investment prospect.

61
Globalisation
  • Employment - those who see globalisation as a
    'success' point to the increase in employment
    worldwide. Between 1980 and 1994 the world
    workforce grew by over 630 million workers. The
    pro-globalisation lobby also point to the
    increase in life expectancy in such countries as
    South Korea, which only 30 years ago recorded
    infant mortality rates close to those of the
    worst now being posted in parts of Africa.
  • Poverty - the thing now is to transform more and
    more countries into dynamic parts of this
    expansive economy.'
  • Capital - this is one area where the
    globalisation process has been seen to produce
    problems as well as perceived advantages. In the
    1980s came the Latin American crisis, then that
    of Mexico and as the century drew to a conclusion
    the Asian capital outflow caused severe problems.
    What now seems to happen is that short-term
    capital follows move with alarming speed from one
    high return location to another. These sudden
    rushes either in or out of one market cause
    serious problems for the domestic banking system
    and the exchange rate, property prices and other
    asset values.
  • Debts - the scale of this problem has enormous
    potential for disaster amongst some of the
    poorest nations.
  • When we consider debts it is clear that there is
    a need for tighter supervision of
  • Capital flows, especially those short term flows,
    such as hedge funds and derivatives, that can
    move at alarming speed from one economy to
    another.
  • The provision of international liquidity, so as
    currency crises can be reacted to quickly and in
    sufficient volumes to stop the erosion in a
    certain currencies value.

62
Globalisation
  • The ability of the IMF to act as international
    lender of last resort. Indeed, the future might
    be best served by the creation of a Global
    Central Bank.
  • A more orderly way of settling rescue packages.
    Ways need to be found to involve private
    investors as early as possible, else they can
    gain from the movements of currency values that
    accompany a sharp fall in just one currency.
  • Who decides what is to happen? In the opinion of
    some this remains the domain of the rich
    countries. Membership of G7 and G8 needs to be
    broadened. This has already started with the
    formation of GX, to which China, India, Brazil,
    Russia, South Korea and South Africa have been
    added to the original G7 membershipp

63
Policies to promote development
  • Aid
  • Humanitarian - which can both be by individual
    country to country or via a major organisation
    such as one of the UN agencies. This is NOT a
    loan and is normally sent to help against a
    specific problem e.g. drought.
  • Bi-lateral - which is given by one country to
    another. It is a loan, though may be subject to a
    long period prior to re-payment commencing and
    granted of soft, or below market terms. The
    largest recipient of UK bilateral aid is India.
  • Multi-lateral - which is when separate countries
    pay money into one central organisation, say the
    IMF and it then determines who receives money and
    for what. Once again this is a loan and has to
    re-pay.
  • Some grants are made and they might be directed
    at technical services, or scholarships for some
    students to study in a particular country. Aid
    might also be trade related, in that the monies
    will only be made available if the receiving
    country agrees to buy goods or services from the
    donor nation.
  • Successful aid should be an attempt to
  • Overcome the low savings ratios recorded in
    developing economies. Most poor people consume
    the vast majority of what they earn.
  • Help reduce foreign exchange outflows, so
    allowing the domestic government to use such
    monies to build the necessary infrastructure for
    development.
  • Reduce the dependency of private investment,
    which may not arrive or will only be found at a
    high price to the country seeking such funding

64
Aid should
  • Successful aid should also
  • Improve the living standards of the poorest
    people in the receiving country. This is not
    always possible, as government is normally based
    in the capital, which is by definition an urban
    centre. Like all political regimes those in
    developing countries serve those who elected them
    to office and power. Those who did not tend to
    receive little. If this persists it can be a
    cause of unrest and even coups and military
    takeovers.
  • Move with the times and accept that what was
    fashionable several years may no longer be. Local
    opinion and knowledge is increasingly used when
    deciding on what to invest in and why.
  • Not simply provide cheap food, except in an
    emergency, as this undermines the domestic
    agricultural sector. In some countries a once
    self-sufficient farming sector has lost part of
    its domestic market to food aid and now the
    country imports part of its staple food crop.
  • Allow choice to be exercised by the receiving
    country. A problem with tied aid is that it
    reduces choice and the developing economy may not
    be getting the best deal

65
Aid works best when..
  • They work best when
  • Allowed to tackle issues at local level
  • Encouraged to employ as many local workers as
    possible
  • Specialise in specific and often rural-based
    project work
  • Project monitoring is done very carefully
  • Relations with government are cordial but not too
    friendly
  • However
  • Structural Adjustment Programmes. These are part
    of any 'rescue package' a developing country may
    ask for. Normally, they require the receiver to
    accept that
  • They cut, or even drop all subsidies and price
    controls, even on basic foodstuffs
  • They cut public expenditure
  • They reduce the quantity of money in circulation
  • They reduce those employed in the public sector
  • They quickly reduce domestic inflation
  • They open up home markets
  • They privatise essential utilities such as gas,
    water and electricity, as well as other
    industries

66
Domestic Policies
  • Sectoral change
  • Industrialisation
  • Population
  • Macro stabilisation
  • Conclusion
  • The developing world faces many problems as it
    attempts to increase the amount of economic
    welfare available to its citizens. The main
    difficulties are
  • Being able to exploit their resources
  • Being able to specialise and gain through
    comparative advantage
  • Being able to keep more value added within their
    own economy
  • Having fair access to developed markets
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