Chapter 18: Issues of Economic Development Section 2: A Framework for Economic Development Objectives pgs. 552-561

Resources What does a nation need to develop economically? Natural Resources The Right Climate Human Capital Physical Capital

High Levels of Human Capital People are the most valuable resources in a market economy. Education and training help people develop the skills to enter into the function productively in the economy. Educated citizens are able to make informed decisions about health matters. Educated parents are likely to vaccinate their children and invest in their children’s education. Furthermore, educated citizens are likely to vote, participate in civic affairs, raise above poverty, and avoid criminal activity.

High Levels of Physical Capital Physical capital is also an important factor contributing to economic growth. It consists of the human-made goods—machines—that are used in the production of other goods and services. Investments in physical capital make people more productive. LDCs get to take the technology and other innovative capital developed in developed nations, so they don’t have to reinvent tech. This does, however take education and human capital.

Stability While such inputs as human capital and physical capital are necessary for increased output, they are only part of the framework for economic growth. The overall governmental and economic environments must be stable enough to support growth before those inputs can best be put to use.

Effective Government Institutions In the U.S., we take for granted the stability of our government. We know that laws will be made public for all to know and follow. In many countries, however, the rule of law is still out of reach, and in those places, economic growth suffers. People don’t want to open businesses when private property rights are unprotected. Democracy is very important in the economic growth of nations.

Stable Prices In areas where prices are stable and where the governments’ fiscal and monetary policies are sound, economic growth can take root. Investors in such an environment know what to expect. With price stability, businesses can make long-term plans with some assurance that interest rates, prices, and government debt will be stable. Unstable countries become further behind, since the funds that could be used for economic expansion are placed in more stable nations.

Protected Property Rights Guaranteed protection of private property provides an incentive for economies to grow. If businesses have no way to assert ownership of their enterprises, they will have little incentive to take economic risks, since they will have no guarantee of reaping the rewards if they succeed. These rights prevent the government from interfering with or restricting their operations and stops corruption and favoritism.

Opportunity Economic opportunity depends on a number of functions that fall to the government. These include opening international trade, helping people move up the income ladder, controlling corruption, and limiting regulations.

Open International Trade The government can create opportunities for economic growth by lowing restrictions on international trade. Trade benefits the trading nations by allowing them to produce what they are most efficient at producing and trading for the rest. Partners in a trading relationship produce more than they would w/o trade, leading to economic growth. LDCs often impose high tariffs on imports and institute other protectionist measures in an effort to give local producers an advantage. These measures come with a cost. Consumers have to pay more for goods than they would in a market open to imports.

Increase Social & Economic Mobility Economic opportunity leads to the most vigorous economic growth when that opportunity is open to the entire population. In some traditional cultures, however, social conditions do not promote equal opportunity. For example, in some LDCs with traditional culture, the lower status of women keeps half the labor force from developing its full potential.

Control Corruption Corruption, the abuse of public office for private gain, is an especially urgent problem that helps explain why some nations are able to develop and other not. When government officials are at liberty to enrich themselves and others—by taking bribes and kickbacks, the rest of the nation, especially the poor, pays the price. Much more often than not, countries with less corruption have higher per capita GDPs.

Limit Regulation Governments with reasonable tax levels and business regulations help create economic opportunity. Businesses and other investors are more likely to be attracted to nations with relatively little “red tape.”

Financing Development Nations seeking to finance economic development can look to four main sources: internal investment, foreign investment, aid from foreign governments, or investments from international agencies.

Internal Investment Investment funds for economic development can come from both public and private internal investment. Banks within the nation invest in economic enterprises such as roads, bridges, and other infrastructure. In poorer nations, personal savings are very low, so banks have little to invest. Compounding the problem, the wealthy citizens of these countries sometimes invest their funds in developed countries rather than their own country, a problem known as capital fight. If private banks lack the funds to invest, the country’s government may provide funds. It might also seek foreign investment from multinational corporations or through sales of government bonds.

Foreign Investment There are several ways in which foreign interests can invest in an economy. One is foreign direct investment (FDI), the establishment of a business enterprise in a foreign country. A second is foreign portfolio investment, through which foreign investors take part in a nation’s stock and other investment in less developed countries. Another are multinationals that open manufacturing plants in foreign nations.

Loans and Aid Developing nations have also turned to loans to help finance their economic development. External debt, money borrowed from foreign banks or governments, has become an issue of great concern in some LDCs. Some countries, have more debt than they can pay back. When a nation cannot pay interest or principle on a loan, it is said to be in default. Nations may also seek foreign aid—money from other nations.

International Help Agencies World Bank is a financial institution that provides loans, policy advice, and technical assistance to low-and middle-income countries to reduce poverty. International Monetary Fund (IMF) helps nations overloaded with debt to develop debt restructuring, a method used by countries with outstanding debt obligations to alter the terms of the debt agreements in order to achieve some advantage. It often oversees stabilization programs, in which it requires these troubled nations to carry out reforms-reducing trade deficits & external debt. UN Development Program (UNDP) is a UN agency working to fight poverty. In 2006 it had active programs in 174 nations.