Developmental Economics

Types of Countries Industrially Advanced Countries (IACs; MDC, 1st World) Developing Countries (DVCs, LDC/NIC, 2nd/3rd World) 1) V. diff. abilities to improve (China vs. Sudan) 2) Absolute income gap widening

Obstacles to Development 1) use resources more efficiently: un/underemployment, productive + allocative efficiency 2) Expand available resources

Natural Resources Unequal distribution of resources Resource curse Climate Primary production greater price variability (boom + bust; carryover effects of recessions)

Human Resources 1) Overpopulation 2) Un/underemployment rampant China + India underpopulated? 2) Un/underemployment rampant 3) Labor productivity low Standard of living = consumer goods (food) production / population Higher s of l more population: mortality rate falls + birthrate increases (less infant mortality) lower s of l Malthusian “the rich get richer and the poor get children”

Population Pressures 1) Reduced saving and investment 2) Productivity lower: large pop requires equally large capital stock 3) Large pop requires food Resource Overuse ( soil erosion/depletion famine) 4) Urban Problems

Demographic Transition View Rising income fewer kids Marginal benefits vs. marginal costs

Capital Accumulation 1) DVCs suffer shortage capital goods 2) Capital stock crucial: unlikely/impossible increase arable land 3) Capital accumulation may be cumulative: capital productivity higher real income greater saving + investment more capital

Domestic Capital Formation + Flight Poverty inability to give up current consumption for investment; even w/high saving rate, large % of small % still small amount Lack of investors + incentives, infrastructure impedes returns on investments Instability (pol. + econ) capital flight “Brain Drain” Overcome: concerted leadership + group sacrifice

Technological Advance DVCs can adopt some tech from IACs (crop rotation, grain storage bins) at low cost Capital accumulation w/o more money: transfer investment from less to more productive Capital-saving tech vs. capital-using tech (expensive metal plows, better fertilizers)

Sociocultural and Institutional Factors “the will to develop” Sociocultural impediments: 1) Tribal + ethnic allegiance > economic self-interest; 2) caste systems; 3) religious beliefs (capricious universe view) Institutional obstacles: 1) corruption, education, etc.; 2) Land reform (Guatemala)

Vicious Circle DVC characteristics both causes + consequences poverty

Role of Domestic Government Positive Roles: Law + Order Take up entrepreneurial slack Infrastructure Forced saving + investment Social-institution problems Negative: cronyism, inefficiency, genocide as law + order, counterproductive showpiece projects (Aswan High Dam, Three Gorges Dam)

Role of Advanced Nations Expanding Trade Foreign Aid: Loans + Grants World Bank: 1) last resort lending, 2) basic development projects, 3) technical assistance Private Capital Flows Microloans, “emerging market hunters” Foreign Harm? 1) Dependency: aid as welfare 2) Bureaucracy + Centralized Gov’t: aid to gov’t create + maintain bureaucracies to run aid programs more regulation + slower economic growth 3) Corruption + Misuse (Oil-for-Food)

DVC Policies for Growth 1) Establish rule of law 2) Free trade 3) Control population 4) Encourage foreign investment 5) Build human capital 6) Peace 7) Independent central banks 8) Realistic exchange-rate policies 9) Privatize state industries

IAC policies 1) Direct aid to neediest 2) Reduce tariffs, quotas, + subsidies 3) Provide debt relief 4) Allow temp workers but discourage brain drain 5) Discourage arm sales