Developed and Less Developed Countries Chapter 15 Microeconomics

Developed and Less Developed Countries Developed Nation – has a relatively high per capita GDP over $12,000. (Average 38K, 1.3 bill people) Moderately Developed – nations with per capita GDP of between $1k-12k (Average 4K, 4.9 billion people) Less developed country (LDC) – has a relatively low per capita GDP of less than 1k per capita (1 billion people, average of $500) In 2010, about 77% of the world’s population lived in LDCs. CIA Factbook world-factbook/ world-factbook/

What is GDP Video

4 Common Hardships for LDCs 1. High infant mortality rates. See Example 1 on page Afghanistan – 117 of 1,000 born die before 1 yr. old 2. Inadequate diets. (925 million people undernurished) Malnutrition and Obesity becoming equal problems

4 Common Hardships for LDCs 3. Unsafe drinking water and inadequate sanitation. See Examples 4A and 4B on page (884 million lack water, 2.6 billion lack proper sanitation) 4. Inadequate medical services. See Examples 5 and 6 on page US – 1 doctor for every 400 people LDC’s ration more like 1 to 25,000

How long to double a country’s GDP? Use the Rule of 70 The Rule of 70 is a rule of thumb for calculating the approximate time required for any variable to double at a given growth rate. Time to double = 70 ÷ Growth Rate See Examples 7A, 7B, 7C, and 7D on page Make sure you know how to use the RULE of 70!

The Importance of Economic Growth Rates Economic growth rates are very important. Even a small difference in economic growth rates can make a large difference in standard of living over a long period of time. See Examples 8, 9, and 10 on page 15-3.

Economic Freedom and Economic Growth Related Most economists believe that economic freedom is important for economic growth. Economic freedom is measured by such factors as property rights, relative size of government, level of taxation, degree of government regulation, international trade policy, etc.

Economic Freedom and Economic Growth The twenty-five percent of nations with the freest economies experienced an average annual increase in per capita Real GDP of 2.35% from 1990 to The twenty-five percent of nations with the least free economies experienced an average annual increase in per capita Real GDP of.66% from 1990 to 2008.

Obstacles to Economic Development 1. Rapid population growth. Population growth rates tend to be higher in LDCs than in developed countries..4% growth for developed 1.8% for LDC’s The problem is not just overpopulation. It is population density. A country must be able to provide adequate services for each member of population

High Dependency Ratio The problem created by a rapid population growth rate is a “high dependency ratio”. A high dependency ratio means that a large percentage of the population consists of children and the elderly.

Obstacles to Economic Development 2. Low savings rate. Low standards of living in LDCs make it difficult to save (delay consumption). Saving is necessary if investments in physical capital and human capital are to be made.

Obstacles to Economic Development 3. Cultural norms that hinder economic development. LDCs often have cultural norms that are hostile to economic development. (rigid gender roles/no class mobility) Examples of counterproductive cultural norms are “traditionalism and fatalism” (predermined)

Obstacles to Economic Development 4. Counterproductive governmental policies. Certain governmental policies are a hindrance to economic development. Governments in LDCs often follow some or all of the counterproductive policies.

Counterproductive Governmental Policies 1. Weak private property rights (next slide) 2. Restrictions on competitive markets (allow monopoly positions, hinder competition) 3. Restrictions on international trade (tariffs, quotas, fixed exchange rates, sanctions) 4. Excessive inflation (poor monetary policy) 5. A large government (China an example) 6. Poor provision of public services (Water, sanitation, phone, internet, medical)

Weak Private Property Rights Governments of LDCs often weaken private property rights by: 1. Failing to enforce private property rights through criminal and civil law (inefficient courts) 2. Imposing high tax rates (some have 50% tax on relatively low incomes) 3. Imposing excessive government regulations (hard to start new business without bribes) 4. Permitting excessive government corruption (a system of favors and greed)

Corruption and Standard of Living A high degree of corruption is associated with a low standard of living. A low degree of corruption is associated with a high standard of living. See the table on page Transparency International Website

Economic Book, “The Power of Productivity” There is tremendous disparity between rich and poor countries. See Example 16 on page The book asks: “Why do some countries achieve economic growth and grow rich, while other countries fail to achieve economic growth and remain poor?”

“The Power of Productivity” Conclusions 1. A country’s standard of living depends almost exclusively on the productivity of its labor. The average productivity of labor will be more strongly influenced by large sectors of the economy than by small sectors. Both the US and Japan employ 25% of its labor force in manufacturing and 75% in retail sales. Japan outperforms the US in manufacturing and the US outperforms Japan in retail Japan’s per capital GDP is 70% of the US

“The Power of Productivity” 2. A poorly educated labor force and a low level of savings are not huge barriers to increasing the productivity of labor. Workers can attain high productivity through on- the-job training. A country with high productivity will attract financing from foreign countries. See Example 22 on page

“The Power of Productivity” 3. Sound macroeconomic policies make high productivity possible but do not guarantee high productivity. See Example 23 on page Japan has low inflation, flexible exchange rates and low government debt…but its economy was stagnant during the 2000’s due to poor performance in competitive free markets

“The Power of Productivity” 4. A large government is a hindrance to productivity growth, especially for low-income countries. A large government means relatively high tax rates, especially when a large part of the economy is informal and untaxed. (Brazil has a work for that is ½ informal and not part of the tax base) See Example 25 on page

“The Power of Productivity” 5. Free and competitive product markets are vitally important for achieving high productivity. In a competitive market, more productive firms gain market share from less productive firms. The less productive firms must either increase productivity or go out of business. See Example 26 on page

“The Power of Productivity” 6. A focus on consumer interests rather than on producer interests is necessary to achieve free and competitive markets. See Examples 27 and 28 on pages and

Free and Competitive Product Markets To increase productivity, countries can increase competition in product markets by: 1. Reducing trade restrictions on imports. 2. Permitting foreign direct investment. 3. Loosening restrictions on store size, hours of operation, etc. 4. Reducing the size of government.

Foreign Aid Curse Research has found no significant correlation between the amount of foreign aid received and the economic growth rates of the recipient countries. Foreign aid may actually hinder economic growth. This “foreign aid curse” may be similar to “the resource curse”.

“Sweatshops” in LDCs American multinational corporations are often criticized for operating “sweatshops” in less developed countries. When workers in LDCs voluntarily choose jobs in “sweatshops”, it is because these are the most attractive jobs available.

Think Like an Economist You work in an American-owned sweatshop, where you are paid $2 for a 12-hour day. Do you hope that a $5 per eight-hour day global minimum wage is imposed?

LDC Research Paper due 2-9 Paper Guidelines Select a country that fits the LDC criteria Perform a PEST analysis (Political, Economic, Social, Technological) Political: form of government, stability, elections, corruption, taxes Economic: inflation, interest rates, banking, employment, exports/imports Social: culture, education, birth rates, life expectancy, demographics, medical care, water/food/sanitation situation Technology: roads, phones, internet, access to electricity, computers per 4-5 pages, 12 pt font, Times New Roman, 1 inch margins, use 3 sources