The Obstacles to Development

The Two Paths of Development Developing countries chose one of two models to promote development: Self-sufficiency Countries encourage domestic production of goods, discourage foreign ownership of businesses and resources, and protect their businesses form international competition. Most popular for most of 20th century International trade Countries open themselves to foreign investment and international markets. Became more popular beginning in the late 20th century

Keys to Self-Sufficiency Barriers limit the import of goods from other places. Businesses are not forced to compete with international corporations. Investment spread almost equally across all economic sectors and in all regions of a country. Minimalized discrepancies in wages among urban and rural dwellers with the intent to reduce poverty.

Self-Sufficiency Challenges Protection of inefficient businesses Guaranteed high prices made possible by isolation from international competition creates little incentive for business to improve quality of product or become more efficient. Companies protected from international competition aren’t compelled to keep up with rapid technological changes. Need for large bureaucracy A complex administrative systems needed to administer the controls encourages inefficiency, abuse, and corruption.

Rostow’s Model of Development Traditional Society Marked by a very high percentage of people engaged in agriculture and a high percentage of national wealth allocated to “nonproductive” activities. e.g. military Preconditions for Takeoff Elite group initiates innovative economic activities that ultimately stimulate an increase in productivity. Takeoff Rapid growth is generated in a limited number of economic activities. e.g. textiles Drive to Maturity Modern technology pervades from the few takeoff industries to other economic sectors, thus sparking rapid growth. Age of Mass Consumption Marked by a shift from heavy industry, such as steel, to consumer goods.

Challenges of International Trade Uneven resource distribution Commodity prices are not guaranteed to to rise faster than the cost of products a developing country needs to purchase. Increased dependence on developed countries Developing countries may allocate all resources to few take off industries instead of spreading resources among the other companies that provide food, clothing, and other necessities for local residents. Market decline Developing countries have found increased difficulty selling their manufactured goods in a world market that has recently declined for many products.

The Success of International Trade Most countries have embraced the international trade approach since the late 20th century. Trade has increased more rapidly than wealth as measured by GDP. GDP is the value of the total output of goods and services produced in a country in a given time period (typically a year)

Finance for Countries (The Allocation of Assets) Foreign Direct Investment (FDI) Defined: Investment made by a foreign company in the economy of another country. FDI grew from $130 billion in 1990s to $1.5 in 2000 and 2010. In 2010, only 2/5 went from developed to developing Major source of FDI are transnational corporations

Finance for Countries (The Allocation of Assets) Loans Two major lenders to developing countries: World Bank Includes the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA). IBRD provides loans to countries to reform public administration and legal institutions, develop and strengthen financial institutions, and implement transportation and social service projects. IDA provides support to countries considered too risky to receive loans from IBRD. International Monetary Fund (IMF) IMF provides loans to countries experiencing balance-of-payments problems that threaten expansion of international trade. IMF assistance designed to help a country rebuild international reserves, stabilize currency exchange rates, and pay for imports without the imposition of harsh trade restrictions or capital controls that could hamper the growth of world trade.

Finance Causes Challenges The recent global economics crisis was primarily driven by bad lending practices and poorer spending practices… If countries are spending more than they bring in, they are spending in DEFICIT. If the deficit is not made up and lenders aren’t paid, it is referred to as debt. When your countries debt is an increasing portion of its GDP or GNI, your country is in a difficult financial state. GNI – the value of the output of goods and services including money that leaves and enters a country.

What happens if a country goes bankrupt? If a nation defaults on international debt… At one time Greece’s debt was $400B which is 120% of its GDP

Free Trade and Development Free trade is a policy in international markets in which governments do not restrict imports or exports. This process has the potential to be exploitative toward developing world countries. (Low wages and Resource depletion) The North-South Divide Or Brandt Line

A Case Study on Economic Development Fair Trade Defined: Commerce in which products are made and traded according to standards that protect workers and small businesses in developing countries. Ex. In North America, Ten Thousand Villages is the largest fair trade organization in North America. Because fair trade organizations bypass distributors, a greater percentage of the retail price makes it way back directly to the producers. Fair Trade requires employers to pay workers fair wages, permit union organizing, and comply with minimum environmental and safety standards. Its not as simple as it seems Improving Lives TED - Paul Rice TED - Bandi Mbubi TED - Martin Rappaport Fair Trade – The Story

Fair Trade Federation Principles Creating Opportunities for Economically and Socially Marginalized Producers Developing Transparent and Accountable Relationships Building Capacity Promoting Fair Trade Paying Promptly and Fairly Supporting Safe and Empowering Working Conditions Ensuring the Rights of Children Cultivating Environmental Stewardship Respecting Cultural Identity

The World is Divided (Where is the line?) Countries above and below the global average GDP (PPP) per capita. ($10,700)

Globalization Globalization is the process of international integration arising from the interchange of world views, products, ideas and other aspects of culture.