Economic Growth in Developing Nations

Characteristics of Developing Nations

 Developed Nations : nations with relatively high standards of living and economies based more on industry than on agriculture  Developing Nations : nations with little industrial development and relatively low standards of living

 Only 35 of the more than 192 world nations are considered developed nations.  The rest are developing nations.  The only common factors of developing nations are that they have less industrial development and a relatively low standard of living.

 Very low GDP per capita  Natural and human resources, but not enough capital or knowledge to use those resources to their full potential  Agricultural economies  Most families living at a subsistence level  Subsistence Agriculture : growing just enough food by a family to take care of its own needs

 Poor health conditions, including shortages of doctors and medical care, and high infant mortality rates  Low literacy rates  A large percentage of people who cannot read or write  Rapid population growth

 In many developing nations, there are less well-defined, government-protected private property rights.  Peru is one such country, with 80 percent of the land having no private owner.  No large-scale farming occurs because individual farmers cannot buy and sell land.  The peasant farmers have little incentive to improve the value of the property.

The Process of Economic Development

 A basic problem for many developing nations is how to finance the equipment and training necessary to improve their standard of living.  One source of money capital is domestic savings.  The two major outside sources of capital are:  Investment by foreign businesses  Foreign aid from developed nations

 Foreign corporations set up branch offices or companies in the developing nation due to low wage rates.  However the foreign investor takes a risk because there may be political instability in the country.  Citizens of the developing nation lose economic control when foreigners control their resources.

 Foreign aid can be given to the developing nation by governments and private organizations in many forms.  Foreign Aid : money, goods, and services given by governments and private organizations to help other nations and their citizens  Forms of foreign aid include:  Economic Assistance  Technical Assistance  Military Assistance

 Economic assistance: providing loans and money/capital donations  Technical assistance: providing professionals to train and teach skills to local population  Military assistance: Providing the nation’s armed forces with money or people who teach and train

 While the U.S. gives a large dollar amount in aid, it is a low percentage of its GDP when compared to other countries.  $23 Billion in foreign aid  $14 Billion in foreign military assistance  The U.S. channels a lot of its aid through the Agency for International Development (AID).

 The United Nations has agencies that distribute funds to developing nations.  The International Monetary Fund (IMF) has recently become a major foreign aid agency.  Many developing nations are unable to repay the loans they have received in foreign aid.

 Humanitarianism is the desire to relieve human suffering, and a major goal of private aid organizations.  It is in the best economic interest of developed nations to help because it will create more trading partners and investment opportunities.  Political objectives, such as creating allies

 To help develop a military alliance, a developed nation will give economic aid.  If the developing nation’s government changes hands, the new government may be hostile to the developed nation, and use its military equipment against them.

Obstacles to Growth in Developing Nations

 Attitudes and Beliefs  People don’t trust innovation and technology, they are comfortable with the old way of doing things.  Continued Rapid Population Growth  The population is growing faster than the nation’s GDP.

 Misuse of Resources  Corrupt governments and poor allocation of resources (capital flight)  Trade Restrictions  Trade restrictions in developed nations make it difficult or impossible to increase exports.

 Indonesia had a large population and a variety of rich natural resources.  The country received $2 billion in foreign aid, but still the economy was a disaster.  The people did not have a national identity and were divided by nationality, religion, and politics.  The economy under the leadership of Sukarno was a disaster.

 General Suharto brought improvements, but relied too heavily on oil so that the economy was hit hard by the oil crisis in 1980s, and further suffered from economic crisis of  Money alone does not enable a country to experience economic growth.  Governments must loosen their restrictions on the economy.

 Foreign aid, domestic savings, foreign investment, and government policies must all work together.  Depending upon only one or two products leads to only a temporary economic growth.

Industrialization and the Future

 Unwise Investments  Some developing nations have invested in industries in which they do not have a comparative advantage.  For example, India steel mills produced steel 2-3 times more expensively than what it would cost to import the steel.  Not Adapting to Change  People need time to adapt to new patterns of living and working.

 Using Inappropriate Technology  Countries need to use technology that is best suited for its culture.  Instead of buying tractors, countries could use steel plows because the benefits could be more widely distributed.  Rushing Through the Stages of Development  The economy itself needs time to adapt to the change, build savings, and increase the number of educated and skilled workers.

 There are many factors that influence economic development.  Trade with the outside world  A government structure that provides for economic incentives, such as reasonable tax rates and private property rights  Natural resources

 Lack of one of these factors does not necessarily mean the country has fallen into the vicious cycle of poverty.  Vicious Cycle of Poverty : situation in which a less- developed county with low per capita incomes cannot save and invest enough to achieve acceptable rates of economic growth and thus is trapped  Economic development can also depend on entrepreneurship and private property rights.

 Media and the Internet transport information to developing nations.  Developing nations can then see the benefits of working together.  Alone, one developing nation has little power or impact in the world market, but as a group they can have influence.  Developing nations now partner with developed nations.