problems of developing countries

Chapter 36Problems of developing countries David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith...  Soci

Chapter 36

Problems of developing countries

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,

6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith

Some key issues

 Less-developed countries (LDCs)

– countries with low levels of per capita output

 The potential roles of:

– comparative advantage

– industrialization

– international debt

– structural adjustment

– aid

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.

Welfare indicators by country group

0 20 40 60 80

100 per

1,000 live births

Infant mortality

1980 1997

0

10

20

30

40

50

%

Adult illiteracy 1997

Male Female

Problems of LDCs (1)

 Resource scarcity

resources

– or the means to exploit them

 Capital

available for investment

repatriate profits, rather than reinvesting.

0

1

2

3

4

5

% p.a.

Population growth

1980-90 1990-98

 Social investment in infrastructure

– LDCs may not be able to achieve scale

economies in

– in SOME cases, traditional attitudes may

inhibit development

– but this argument is often over-stated

Problems of LDCs (2)

 Human capital

 health

 nutrition

 education

 industrial training

workers using the same technology in HICs.

 Low productivity agriculture

engaged in low productivity agriculture.

Problems of LDCs (3)

Possible paths to development?

 Trade in primary products

 Industrialization

 Borrowing

 Structural adjustment

through 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

Commodity price stabilization

Quantity

DD

0

A buffer stock is an organization aiming to stabilize a

1

If there is a bumper

harvest at SS 1 ,

P

Q

Exports are 0Q at price P.

Exports are still 0Q at price P.

The buffer stock stabilizes prices and export earnings

… but requires resources to buy and store.

A B

If there is a poor harvest

at SS 2 , buffer stock sells CA.

 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

Development:

through import substitution?

 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

Development:

through export promotion?

 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

Development:

through borrowing?

 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

Development:

through borrowing? (2)

 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

Development:

through structural adjustment?

through 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

The distribution of world population

and GNP, 1998

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%