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Developing and Developed Economies

About ¾ of the world’s people live in less-developed countries (LDCs) / Emerging Market Economies / Third World countries.– LDCs are characterized by low per capita GDP

(GNP) a low standard of living.

“First World countries” are the highly industrialized nations of western Europe, Japan, Australia/NZ and North America.“Second World countries” are eastern European countries and the countries of the former Soviet Union.

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The World by Stage of

Development

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Poverty

Absolute sense:– In the U.S., the poverty level for a family of four

in 2003 was an annual income of $18,244 or less.

– The World Bank uses per capita GNP of $755 or less as its criterion for a low-income country.

Poverty is also a relative concept, making it difficult to compare across countries.– The income of many households in the U.S. who

are considered poor is substantially higher than the incomes of poor families in other countries.

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Other measures of developmentCaloric intakeHealth careClothingShelter

Physical quality-of-life index– Life expectancy, infant mortality, and

literacy standardsWhat about justice, personal freedom, environmental quality, employment?

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Obstacles to GrowthPolitical Obstacles–Lack of Administrative Skills (ranging

from ineptness to corruption)–Political Instability and Risk

The key issue is property rights.–Corruption (from rents to pay-offs)–Good Economics as Bad Politics

Cutting government payrolls or cutting food subsidies difficult while maintaining peace and political support.

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Obstacles to GrowthSocial ObstaclesSocial Obstacles– Lack of Entrepreneurs

Do entrepreneurs come from blocked minorities? Do they take the risks because they have nothing to lose? Do immigrants become entrepreneurs because they have special skills?

– Rapid Population GrowthStandards of living improve when per capita output rises. New population growth starts with more dependents, children who require services but who do not work.It results in capital shallowing, lower productivityGovernment must focus on services for the growing population, and cannot afford infrastructure investment..

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Inward-Oriented Development Strategies–LDCs tend to export primary products

natural resources, raw materials, first-stage products used as inputs to other manufactures.Beware the primary goods trap:

Worsening terms-of-trade / Dutch disease

–Some LDCs adopted inward-oriented strategies: manufacture goods for domestic markets

Import substitution.Limited to goods for which the technologies are readily available.Typically requires government protection

Inefficiency

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Outward OrientedDevelopment Strategies

Export driven growth: Government stimulates exports– Countries with abundant, high-quality

labor to produce labor-intensive goods.Korea, Singapore, Taiwan, Hong Kong

… The Asian Tigers

ChinaMalaysia, Indonesia, Philippines, Thailand … The Dragons

–Give tax breaks and loans to exporters– Gov’t assistance in int’l marketing

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Foreign Direct Investment (FDI)Foreign Direct Investment (FDI)Benefits

Jobs: Learning by doing

Capital

Technology

Foreign Exchange Benefits

Drawbacks

Lack of control

Repatriated profits

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Transition from Socialism

Privatization–Coupons?–Shares?

Price Reform–Eliminate subsidies

Social Safety Net–Health care, unemployment, crime,

political unrest, etc.?

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Transition from SocialismMacroeconomic IssuesMonetary Overhang (Forced Saving):

Could generate excess demand if prices not allowed to rise fast enough

–Currency convertibility–Money and Credit – Establish private banks

–Fiscal Policy remove subsidies, fight deficits, establish taxes on an appropriate tax base.

Microeconomic IssuesLet inefficient firms die