Lecture Macroeconomics (9/e): Chapter 22 - David C. Colander

Chapter 22 - Macro policy in developing countries. After reading this chapter, you should be able to: State some comparative statistics on rich and poor countries, differentiate growth from development and explain how those differences affect macroeconomic policy, explain the particular problems of monetary policy in a developing country context, list seven obstacles facing developing countries.

Rise up, study the economic forces which oppress you…They have emerged from the hand

of man just as the gods emerged from his brain

You can control them

Macro Policy in Developing Countries

Ø State some comparative statistics on rich and poor

countries

Ø Differentiate growth from development and explain

how those differences affect macroeconomic

policy

Ø Explain the particular problems of monetary policy

in a developing country context

Ø List seven obstacles facing developing countries

Ø 5.5 billion people live in developing countries

Ø Per capita income in developing countries is around $500

per year compared to nearly $50,000 in the U.S

Ø Americans and Europeans who are classified as poor find

it hard to contemplate what life is really like in a truly

poor country

Ø You can’t judge just an economy; you must judge the entire

culture

• Often economically poor societies have cultures that provide individuals with a deep sense of fulfillment and satisfaction

Ø Development refers to an increase in productive

capacity and output brought about by a change in a

country’s underlying institutions

• Development occurs through a change in the

production function

Ø Growth refers to an increase in output brought about by

an increase in inputs, given a production function

Developed and Developing Economies

Ø Different weighting of normative goals due to differences

in wealth

• Developing countries face basic economic needs,

like adequate food, shelter, and clothing

Ø Differences in institutions

• Political differences and laissez-faire

• Dual economy

• Fiscal systems

• Financial institutions

Political Differences and Laissez-Faire

• In many developing countries, institutional checks and

balances on government leaders often do not exist

• In these circumstances, economists who would favor an activist macroeconomic policy in a developed country

might favor laissez-faire policies in developing countries

The Dual Economy

Ø A developing country’s economy is usually a dual

economy

Ø Dual economy is the existence of two sectors:

• A traditional sector which does business in local

currency and produces in traditional ways

• An internationally oriented modern market sector

which is often indistinguishable from a Western economy

Fiscal Structure of Developing Economies

Ø Developing countries may experience a regime

change, which is a change in the entire atmosphere

within which the government and the economy

interrelate

Ø A policy change is a change in one aspect of

government’s actions, such as monetary or fiscal

policy

Ø The primary goal of central banks in developing countries

is to keep the economy running

Ø Central banks in developing countries are generally less

independent than ones in developed countries

Ø Buying and selling foreign currencies in order to stabilize

the exchange rate is an important function

Ø Full convertibility is when individuals may change their

currency into any currency they want for whatever legal purpose they want

Ø Convertibility on the current account is a system that

allows people to exchange currencies freely to buy

goods and services, but not assets in other countries

Ø Limited capital account convertibility is a system that

allows full current account convertibility and partial

capital account convertibility

Balance of Payments Constraints

Ø Developing countries often rely on advice from the

International Monetary Fund (IMF)

Ø The IMF is a major source of temporary loans to stabilize

their currencies

Ø The basis for most IMF loans is conditionality which is

the making of loans that are subject to specific

conditions, usually that deficits be lowered and money supply growth be limited

Seven problems facing developing countries are:

1. Political instability

2. Corruption

3. Lack of appropriate institutions

4. Lack of investment

5. Inappropriate education

6. Overpopulation

7. Health and disease

Ø Per capita income in developing countries is about 1/100

of per capita income in the U.S Societies should not be

judged by income alone

Ø Development refers to an increase in productive capacity

and output brought about by a change in underlying

institutions, while growth refers to an increase in output

brought about by an increase in inputs

Ø Many developing countries have serious political problems that make it impossible for government to take an active,

positive role in the economy

Ø Many developing countries have dual economies

Ø Developing countries need regime change rather than

policy change

Ø Although developing countries know that printing too much money leads to inflation, their choices are limited

Ø Some central banks lack independence and for others the only alternative is the collapse of government

Ø Seven obstacles to economic development are political

instability, corruption, lack of appropriate institutions, lack of investment, inappropriate education, overpopulation, and

poor health and disease