Chapter 33 THE ECONOMIC PROBLEMS OF LESS- DEVELOPED ECONOMIES Gottheil — Principles of Economics,...

Chapter 33Chapter 33

THE ECONOMIC THE ECONOMIC PROBLEMS OF LESS-PROBLEMS OF LESS-DEVELOPED ECONOMIESDEVELOPED ECONOMIES

Gottheil — Principles of Economics, 7e© 2013 Cengage Learning1

Economic PrinciplesEconomic Principles

© 2013 Cengage Learning Gottheil — Principles of Economics, 7e2

Poverty in the less-developed countries (LDCs)

Development traps

The big-push strategy for economic development

Economic PrinciplesEconomic Principles


The unbalanced growth strategy for economic development

Foreign investment in the LDCs

Economic aid to the LDCs

Less-Developed Countries (LDCs)Less-Developed Countries (LDCs)


Less-developed countries (LDCs)

• The economies of Asia, Africa, and Latin America.

The Economic Problems of The Economic Problems of Less-Developed EconomiesLess-Developed Economies


Who are the “the bottom billion”?• By 2000, the world’s population had increased to 6

billion—1 billion in the developed world and 4 billion in the rapidly growing economies of most LDCs.

• The bottom billion are those people living in failed LDCs. For them the future remains bleak.


EXHIBIT 1 REGIONAL AVERAGE GDP PER CAPITA AS A RATIO OF OECD ECONOMIES

Note: High-income OECD excludes OECD members classified as developing countries and those in Eastern Europe and the CIS.Source: Human Development Report Office calculations based on World Bank 2001g.

Exhibit 1: Regional Average GDP per Exhibit 1: Regional Average GDP per capita as a Ratio of OECD Economiescapita as a Ratio of OECD Economies


What is the “good-news, bad-news” about LDCs shown in Exhibit 1.• It shows, for 1960–1998, regional convergence toward

or divergence away from a moving target: the average annual per capita GDP for high-income economies in Western Europe and North America.



Which regions shown in Exhibit 1 have shown the most progress?a. Canada

b. Caribbean and South America

c. All of the above



Which regions shown in Exhibit 1 have shown the most progress?a. Canada

b. Caribbean and South America

c. All of the above

The Economic Problems of The Economic Problems of Less-Developed EconomiesLess-Developed Economies


What are the “Asian Tigers”?• The East Asian and Pacific shown in Exhibit 1.

• This region drew to within one-sixth of OECD’s 1998 level.


EXHIBIT 2 GDP (1975–2005) PER CAPITA, ANNUAL GROWTH RATES, AND YEAR OF HIGHESTVALUE FOR SELECTED REGIONS AND COUNTRIES

Source: Human Development Report 2007/2008, Palgrave McMillan, New York, 2007, pp. 278–280.

Exhibit 2: GDP per Capita, Annual Exhibit 2: GDP per Capita, Annual Growth Rates, and Year ofGrowth Rates, and Year of

Highest Value for Selected Regions Highest Value for Selected Regions and Countries (1975–2005)and Countries (1975–2005)


What LDCs are the most depressed?• Those confined to triple-digit GDP per capita, where

the average income per year does not even exceed $1,000.




What region is geographically the largest zone of LDCs in Exhibit 2?a. Sub-Saharan Africa

b. The former Soviet Union

c. Central America




What region is geographically the largest zone of LDCs in Exhibit 2?a. Sub-Saharan Africa

b. The former Soviet Union

c. Central America

Development TrapsDevelopment Traps


For the bottom billion in their LDCs, a set of development traps have been in place to frustrate their attempts at breaking free:• The demographic trap

• The political instability trap

• The natural resource trap

• The absence of infrastructure trap



How might economic development be inhibited by the psychological, religious, and cultural character of LDCs?• Cultural traditionalism can inhibit economic

development by promoting large families, inhibiting the use of new technologies, and denying women access to education and work outside the home.



The rate of population growth is written as:

Birth rate – Death rate/100

When birth rates exceed death rates population increases.



The rate of population growth is written as

Birth rate – death rate/100.

When birth rates exceed death rates population increases.


EXHIBIT 3 ANNUAL POPULATION GROWTH RATE AND PERCENT OF POPULATION UNDER AGE 15:1975–2005 and 2005

Source: Human Development Report 2007/2008, Palgrave McMillan, New York, 2007.

Exhibit 3: Annual Population Growth Exhibit 3: Annual Population Growth Rate and Percent of Population Rate and Percent of Population

under Age 15: 1975–2005 and 2005under Age 15: 1975–2005 and 2005


• Yes. A preponderance of older people.

1. Do countries with low population growth rates have a particular age distribution?




The U.S., Germany, France, the Netherlands, and other OECD countries have less than 25 percent of their population under 15 years of age.




In contrast, countries with high population growth rates, such as Nigeria and Kenya, typically have more than 40 percent of their populations under 15 years of age.



1. How is per capita income growth related to income growth and population growth?

• Per capita income growth is equal to income growth divided by population growth.



2. What happens to per capita income if population grows faster than income?

• Since per capita income growth is equal to income growth divided by population growth, if population grows faster than income, then per capita income must fall.



3. What is the vicious cycle of poverty?

• People are poor because they can’t invest in capital goods, and they can’t invest in capital goods because they are poor.



• Most people under age 15, and particularly those under 10, are unable to produce enough to meet their own consumption needs.

4. Why is the vicious cycle of poverty more likely to occur in countries that have a large percentage of their population under 15 years of age?



4. Why is the vicious cycle of poverty more likely to occur in countries that have a large percentage of their population under 15 years of age?

• If almost one-half of a country’s population consumes more than it produces, there are few resources that can be shifted from producing consumer goods to producing capital goods.


EXHIBIT 4 THE VICIOUS CIRCLE OF POVERTY

Exhibit 4: The Vicious Cycle of Exhibit 4: The Vicious Cycle of PovertyPoverty


What is the consequence of Ethiopia producing at point a rather than point b in Exhibit 3?

• Slower economic growth rates and lower per-capita incomes in the future.


EXHIBIT 5 CIVIL WARS IN SUB-SAHARA AFRICA

Exhibit 5: Civil Wars Exhibit 5: Civil Wars in Sub-Sahara Africain Sub-Sahara Africa


Political instability in the form of civil war, as shown in Exhibit 5, can measurably reduce economic growth.• On average, these civil wars decrease by 2.2

percent the economies’ annual growth rates during periods of conflict.



Which components of infrastructure are less reliable under politically unstable regimes?

a. Banks

b. Legal systems

c. Monetary systems

d. Free markets

e. All of the above



Which components of infrastructure are less reliable under politically unstable regimes?

a. Banks

b. Legal systems

c. Monetary systems

d. Free markets

e. All of the above



What is it about civil wars that make them not only characteristic of the political instability trap, but the demographic trap too?• The high proportion of young, uneducated men

recruited to fight them.

• Imbalances between ethnic groups.



What is the “Dutch Disease”?• It is an example of the natural resources trap.

• ‘‘Dutch Disease’’ came of the discovery and export of natural gas in the Netherlands.

• Economist believe it was responsible for the erosion of its manufacturing base.

• The export of a natural resource provided the foreign currencies needed to import goods.



Resource-poor economies such as Mexico and the Asian Tigers pursue what kind of developmental strategy?• They focus on labor-intensive manufacturing,

which catapulted them from low-level LDC performers into high income-generating economies.

• They focus on people as their springboard to economic development.

Infrastructure Infrastructure


Infrastructure

• The basic institutions and public facilities upon which an economy’s development depends.



Which of the following a trap in the sense of not having an economy?


• The natural resource trap


• The demographic trap



Which of the following a trap in the sense of not having an economy?






What is not infrastructure?:a. Markets

b. Roads

c. People (i.e., skilled workers)

d. Banks

e. Coal

f. The Web

g. None of the above



What is not infrastructure?:a. Markets

b. Roads

c. People (i.e., skilled workers)

d. Banks

e. Coal

f. The Web

g. None of the above



Which of the following is an “economic” trap?:




The Big Push Strategy The Big Push Strategy


Big push

• The development strategy that relies on an integrated network of government-sponsored and financed investments introduced into the economy all at once.



1. What is the argument in favor of the big push strategy?

• Each potential investment’s success depends upon there being a market for its output.



1. What is the argument in favor of the big push strategy?• For example, in order for an automobile plant

to succeed, there must be input producers, a road system, and gasoline stations, as well as people with sufficient income to purchase the cars.



1. What is the argument in favor of the big push strategy?

• Therefore the big push strategy builds everything at once so that all necessary infrastructure and markets are in place.



2. What are some possible problems with the big push strategy?

• Skills and materials may get spread too thinly, and the tax burden needed to finance the big push may be destabilizing.

The Unbalanced Development The Unbalanced Development Strategy Strategy


What is the basic idea underlying the unbalanced development strategy?• Government triggers the process by funding

and putting into place key infrastructure investments.

The Unbalanced Development The Unbalanced Development Strategy Strategy


What is the basic idea underlying the unbalanced development strategy?• Private entrepreneurs initiate investments that

are funded from the entrepreneur’s own savings or from the private banking system.

Forward Linkages Forward Linkages


Forward linkages

• Investments in one industry that create opportunities for profitable investments in other industries, using the goods produced in the first as inputs.

Backward Linkages Backward Linkages


Backward linkages

• Investments in one industry that create demands for inputs, inducing investment in other industries to produce those inputs.

Date post:	25-Dec-2015
Category:	Documents
Upload:	sharyl-ellis
View:	220 times
Download:	2 times

Chapter 33 THE ECONOMIC PROBLEMS OF LESS- DEVELOPED ECONOMIES Gottheil — Principles of Economics,...

Documents