Chapter 33 THE ECONOMIC PROBLEMS OF LESS- DEVELOPED ECONOMIES Gottheil — Principles of Economics, 7e © 2013 Cengage Learning 1

Economic Principles © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 2 Poverty in the less-developed countries (LDCs) Development traps The big-push strategy for economic development

Economic Principles © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 3 The unbalanced growth strategy for economic development Foreign investment in the LDCs Economic aid to the LDCs

Less-Developed Countries (LDCs) © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 4 Less-developed countries (LDCs) The economies of Asia, Africa, and Latin America.

The Economic Problems of Less-Developed Economies © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 5 Who are the “the bottom billion”? By 2000, the world’s population had increased to 6 billion—1 billion in the developed world and 4 billion in the rapidly growing economies of most LDCs. The bottom billion are those people living in failed LDCs. For them the future remains bleak.

© 2013 Cengage Learning Gottheil — Principles of Economics, 7e 6 EXHIBIT 1REGIONAL AVERAGE GDP PER CAPITA AS A RATIO OF OECD ECONOMIES Note: High-income OECD excludes OECD members classified as developing countries and those in Eastern Europe and the CIS. Source: Human Development Report Office calculations based on World Bank 2001g.

Exhibit 1: Regional Average GDP per capita as a Ratio of OECD Economies © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 7 What is the “good-news, bad-news” about LDCs shown in Exhibit 1. It shows, for 1960–1998, regional convergence toward or divergence away from a moving target: the average annual per capita GDP for high-income economies in Western Europe and North America.

Exhibit 1: Regional Average GDP per capita as a Ratio of OECD Economies © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 8 Which regions shown in Exhibit 1 have shown the most progress? a. Canada b. Caribbean and South America c. All of the above

Exhibit 1: Regional Average GDP per capita as a Ratio of OECD Economies © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 9 Which regions shown in Exhibit 1 have shown the most progress? a. Canada b. Caribbean and South America c. All of the above

The Economic Problems of Less-Developed Economies © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 10 What are the “Asian Tigers”? The East Asian and Pacific shown in Exhibit 1. This region drew to within one-sixth of OECD’s 1998 level.

© 2013 Cengage Learning Gottheil — Principles of Economics, 7e 11 EXHIBIT 2GDP (1975–2005) PER CAPITA, ANNUAL GROWTH RATES, AND YEAR OF HIGHEST VALUE FOR SELECTED REGIONS AND COUNTRIES Source: Human Development Report 2007/2008, Palgrave McMillan, New York, 2007, pp. 278–280.

Exhibit 2: GDP per Capita, Annual Growth Rates, and Year of Highest Value for Selected Regions and Countries (1975–2005) © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 12 What LDCs are the most depressed? Those confined to triple-digit GDP per capita, where the average income per year does not even exceed $1,000.

Exhibit 2: GDP per Capita, Annual Growth Rates, and Year of Highest Value for Selected Regions and Countries (1975–2005) © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 13 What region is geographically the largest zone of LDCs in Exhibit 2? a. Sub-Saharan Africa b. The former Soviet Union c. Central America

Exhibit 2: GDP per Capita, Annual Growth Rates, and Year of Highest Value for Selected Regions and Countries (1975–2005) © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 14 What region is geographically the largest zone of LDCs in Exhibit 2? a. Sub-Saharan Africa b. The former Soviet Union c. Central America

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 15 For the bottom billion in their LDCs, a set of development traps have been in place to frustrate their attempts at breaking free: The demographic trap The political instability trap The natural resource trap The absence of infrastructure trap

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 16 How might economic development be inhibited by the psychological, religious, and cultural character of LDCs? Cultural traditionalism can inhibit economic development by promoting large families, inhibiting the use of new technologies, and denying women access to education and work outside the home.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 17 The rate of population growth is written as: Birth rate – Death rate/100 When birth rates exceed death rates population increases.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 18 The rate of population growth is written as Birth rate – death rate/100. When birth rates exceed death rates population increases.

© 2013 Cengage Learning Gottheil — Principles of Economics, 7e 19 EXHIBIT 3ANNUAL POPULATION GROWTH RATE AND PERCENT OF POPULATION UNDER AGE 15: 1975–2005 and 2005 Source: Human Development Report 2007/2008, Palgrave McMillan, New York, 2007.

Exhibit 3: Annual Population Growth Rate and Percent of Population under Age 15: 1975–2005 and 2005 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 20 Yes. A preponderance of older people. 1. Do countries with low population growth rates have a particular age distribution?

Exhibit 3: Annual Population Growth Rate and Percent of Population under Age 15: 1975–2005 and 2005 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 21 The U.S., Germany, France, the Netherlands, and other OECD countries have less than 25 percent of their population under 15 years of age.

Exhibit 3: Annual Population Growth Rate and Percent of Population under Age 15: 1975–2005 and 2005 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 22 In contrast, countries with high population growth rates, such as Nigeria and Kenya, typically have more than 40 percent of their populations under 15 years of age.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 23 1.How is per capita income growth related to income growth and population growth? Per capita income growth is equal to income growth divided by population growth.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 24 2.What happens to per capita income if population grows faster than income? Since per capita income growth is equal to income growth divided by population growth, if population grows faster than income, then per capita income must fall.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 25 3.What is the vicious cycle of poverty? People are poor because they can’t invest in capital goods, and they can’t invest in capital goods because they are poor.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 26 Most people under age 15, and particularly those under 10, are unable to produce enough to meet their own consumption needs. 4.Why is the vicious cycle of poverty more likely to occur in countries that have a large percentage of their population under 15 years of age?

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 27 4.Why is the vicious cycle of poverty more likely to occur in countries that have a large percentage of their population under 15 years of age? If almost one-half of a country’s population consumes more than it produces, there are few resources that can be shifted from producing consumer goods to producing capital goods.

© 2013 Cengage Learning Gottheil — Principles of Economics, 7e 28 EXHIBIT 4THE VICIOUS CIRCLE OF POVERTY

Exhibit 4: The Vicious Cycle of Poverty © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 29 What is the consequence of Ethiopia producing at point a rather than point b in Exhibit 3? Slower economic growth rates and lower per- capita incomes in the future.

© 2013 Cengage Learning Gottheil — Principles of Economics, 7e 30 EXHIBIT 5CIVIL WARS IN SUB-SAHARA AFRICA

Exhibit 5: Civil Wars in Sub-Sahara Africa © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 31 Political instability in the form of civil war, as shown in Exhibit 5, can measurably reduce economic growth. On average, these civil wars decrease by 2.2 percent the economies’ annual growth rates during periods of conflict.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 32 Which components of infrastructure are less reliable under politically unstable regimes? a.Banks b.Legal systems c.Monetary systems d.Free markets e.All of the above

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 33 Which components of infrastructure are less reliable under politically unstable regimes? a.Banks b.Legal systems c.Monetary systems d.Free markets e.All of the above

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 34 What is it about civil wars that make them not only characteristic of the political instability trap, but the demographic trap too? The high proportion of young, uneducated men recruited to fight them. Imbalances between ethnic groups.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 35 What is the “Dutch Disease”? It is an example of the natural resources trap. ‘‘Dutch Disease’’ came of the discovery and export of natural gas in the Netherlands. Economist believe it was responsible for the erosion of its manufacturing base. The export of a natural resource provided the foreign currencies needed to import goods.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 36 Resource-poor economies such as Mexico and the Asian Tigers pursue what kind of developmental strategy? They focus on labor-intensive manufacturing, which catapulted them from low-level LDC performers into high income-generating economies. They focus on people as their springboard to economic development.

Infrastructure © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 37 Infrastructure The basic institutions and public facilities upon which an economy’s development depends.

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 38 Which of the following a trap in the sense of not having an economy? The political instability trap The natural resource trap The absence of infrastructure trap The demographic trap

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 39 Which of the following a trap in the sense of not having an economy? The political instability trap The absence of infrastructure trap The demographic trap

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 40 What is not infrastructure?: a.Markets b.Roads c.People (i.e., skilled workers) d.Banks e.Coal f.The Web g.None of the above

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 41 What is not infrastructure?: a.Markets b.Roads c.People (i.e., skilled workers) d.Banks e.Coal f.The Web g.None of the above

Development Traps © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 42 Which of the following is an “economic” trap?: The political instability trap The absence of infrastructure trap The demographic trap

The Big Push Strategy © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 43 Big push The development strategy that relies on an integrated network of government-sponsored and financed investments introduced into the economy all at once.

The Big Push Strategy © 2013 Cengage Learning Gottheil — Principles of Economics, 7e What is the argument in favor of the big push strategy? Each potential investment’s success depends upon there being a market for its output.

The Big Push Strategy © 2013 Cengage Learning Gottheil — Principles of Economics, 7e What is the argument in favor of the big push strategy? For example, in order for an automobile plant to succeed, there must be input producers, a road system, and gasoline stations, as well as people with sufficient income to purchase the cars.

The Big Push Strategy © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 46 1.What is the argument in favor of the big push strategy? Therefore the big push strategy builds everything at once so that all necessary infrastructure and markets are in place.

The Big Push Strategy © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 47 2.What are some possible problems with the big push strategy? Skills and materials may get spread too thinly, and the tax burden needed to finance the big push may be destabilizing.

The Unbalanced Development Strategy © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 48 What is the basic idea underlying the unbalanced development strategy? Government triggers the process by funding and putting into place key infrastructure investments.

The Unbalanced Development Strategy © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 49 What is the basic idea underlying the unbalanced development strategy? Private entrepreneurs initiate investments that are funded from the entrepreneur’s own savings or from the private banking system.

Forward Linkages © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 50 Forward linkages Investments in one industry that create opportunities for profitable investments in other industries, using the goods produced in the first as inputs.

Backward Linkages © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 51 Backward linkages Investments in one industry that create demands for inputs, inducing investment in other industries to produce those inputs.