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The EconomicsOf DevelopingCountries
Chapter 39W
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Distinguishing between industrial advanced countries and developing countries
• Obstacles to economic development • The vicious circle of poverty • The role of government in promoting
economic development• Industrial nation’s attempts to aid
low-income countries39-2
Country Classifications
• Industrially advanced countries–High income nations–Well-developed market economies–Per capita income $36,608 in 2006
• Developing countries–Middle income nations –Low income nations–Wide variation in income per capita
39-3
2006 Comparisons
• U.S. GDP $13.2 trillion• Combined GDP of developing
countries $11.7 trillion• U.S. has 5% of population but
produces 27% of world’s output• U.S. per capita GDP 186 times that
of Sierra Leone• Wal-Mart’s annual revenue greater
than all but 19 nation’s GDP39-4
The Rich and the Poor
• Some developing countries have grown considerably–China, Malaysia, Chile, Thailand
• Some developing countries have become high-income–Singapore, Greece, Hong Kong
• Income gap has widened–Developing countries must grow
faster to narrow the gap39-5
Obstacles to Development
• The path to economic development–Use existing resources more
efficiently–Expand available supplies of
resources
• Simple generalizations are not possible
39-6
Obstacles to Development
• Lack of natural resources• Overpopulation
–9 out of 10 people born in a DVC–Reduced standard of living–Less saving and investment–Lower productivity–Resource overuse–Urban problems–Qualifications 39-7
Obstacles to Development
• Unemployment• Underemployment• Low labor productivity• Brain drain• Capital accumulation is key
–Domestic capital formation–Savings potential–Capital flight
39-8
Obstacles to Development
• Investment obstacles–Lack of infrastructure
• Technological advance–Borrowed technology
• Sociocultural obstacles
• Institutional obstacles–Land reform
39-9
The Vicious Circle of Poverty
RAPIDPOPULATION
GROWTH
LOW LEVELOF DEMAND
LOW LEVELOF SAVING
LOWPRODUCTIVITY
LOW LEVELS OFINVESTMENT INPHYSICAL AND
HUMAN CAPITAL
LOWPER CAPITA
INCOME
39-10
Role of Government
• A positive role–Law and order–Lack of entrepreneurship–Infrastructure–Forced saving and investment–Social-institutional problems
• Public sector problems–Corruption
39-11
Corruption
The Corruption Perception Index, 2007
Source: Transparency International
FinlandNew Zealand
CanadaUnited Kingdom
GermanyUnited States
UruguayTaiwan
ItalyGreece
ChinaIndia
MexicoRussia
MyanmarSomalia
0 1 2 3 4 5 6 7 8 9 10
39-12
Role of Advanced Nations
• Expanding trade• Foreign aid
–Direct aid–The World Bank group
• Foreign harm–Dependency and incentives–Bureaucracy–Corruption and misuse• Flows of private capital
39-13
Role of Advanced Nations
Development Assistance as a Percentage of GDP, 2007
Source: OECD
0 .20 .40 .60 .80 1.00
Norway
Netherlands
Ireland
France
Germany
Canada
Japan
United States39-14
Policies for Promoting Growth
• Establishing and implementing the rule of law
• Opening economies to international trade
• Controlling population growth• Encouraging foreign direct
investment• Building human capital
39-15
Policies for Promoting Growth
• Making peace with neighbors• Establishing independent central
banks• Establishing realistic exchange-
rate policies• Privatizing state industries
39-16
Policies for Industrial Countries
• Direct foreign aid to the poorest countries
• Reduce tariffs, import quotas, and farm subsidies
• Provide debt forgiveness to the poorest countries
• Admit temporary workers and discourage brain drains
• Discourage arms sales 39-17
Famine in Africa
• Root causes – natural and human • Droughts
– Lack of rainfall• Civil strife
– Rebellions and civil wars• Population growth• Ecological degradation• Public policies• External debt
39-18
Key Terms
• industrially advanced countries (IACs)
• developing countries (DVCs)
• demographic transition view
• underemployment• brain drain• capital flight• infrastructure• capital-saving technology
• capital-using technology• the will to develop• capricious universe view• land reform• vicious circle of poverty• corruption• World Bank• direct foreign investment
39-19