1 Developing and Developed Economies About ¾ of the world’s people live in less- developed countries (LDCs) / Emerging Market Economies / Third World countries. – –LDCs are characterized by low per capita GDP (GNP)  a low standard of living. “First World countries” are the highly industrialized nations of western Europe, Japan, Australia/NZ and North America. “Second World countries” are eastern European countries and the countries of the former Soviet Union.

2 The World by Stage of Development

3

4 Poverty Absolute sense: – –In the U.S., the poverty level for a family of four in 2003 was an annual income of $18,244 or less. – –The World Bank uses per capita GNP of $755 or less as its criterion for a low-income country. Poverty is also a relative concept, making it difficult to compare across countries. – –The income of many households in the U.S. who are considered poor is substantially higher than the incomes of poor families in other countries.

5 Other measures of development Caloric intake Health care Clothing Shelter Physical quality-of-life index – – Life expectancy, infant mortality, and literacy standards What about justice, personal freedom, environmental quality, employment?

6 Obstacles to Growth Political Obstacles – –Lack of Administrative Skills (ranging from ineptness to corruption) – –Political Instability and Risk The key issue is property rights. – –Corruption (from rents to pay-offs) – –Good Economics as Bad Politics Cutting government payrolls or cutting food subsidies difficult while maintaining peace and political support.

7 Obstacles to Growth Social Obstacles – –Lack of Entrepreneurs Do entrepreneurs come from blocked minorities? Do they take the risks because they have nothing to lose? Do immigrants become entrepreneurs because they have special skills? – –Rapid Population Growth Standards of living improve when per capita output rises. New population growth starts with more dependents, children who require services but who do not work. It results in capital shallowing, lower productivity. Government must focus on services for the growing population, and cannot afford infrastructure investment.

8 Inward-Oriented Development Strategies – –LDCs tend to export primary products natural resources, raw materials, first-stage products used as inputs to other manufactures. Beware the primary goods trap: Worsening terms-of-trade / Dutch disease – –Some LDCs adopted inward-oriented strategies: manufacture goods for domestic markets  Import substitution. Limited to goods for which the technologies are readily available. Typically requires government protection  Inefficiency

9 Outward OrientedDevelopment Strategies Export driven growth: Government stimulates exports – – Countries with abundant, high-quality labor to produce labor-intensive goods. Korea, Singapore, Taiwan, Hong Kong … The Asian Tigers China Malaysia, Indonesia, Philippines, Thailand … The Dragons – –Give tax breaks and loans to exporters – – Gov’t assistance in int’l marketing

10 Foreign Direct Investment (FDI) Benefits Jobs: Learning by doing Capital Technology Foreign Exchange Benefits Drawbacks Lack of control Repatriated profits

11 Transition from Socialism Privatization – –Coupons? – –Shares? Price Reform – –Eliminate subsidies Social Safety Net – –Health care, unemployment, crime, political unrest, etc.?

12 Transition from Socialism Macroeconomic Issues Monetary Overhang (Forced Saving): Could generate excess demand if prices not allowed to rise fast enough – –Currency convertibility – –Money and Credit – Establish private banks – –Fiscal Policy remove subsidies, fight deficits, establish taxes on an appropriate tax base. Microeconomic Issues Let inefficient firms die