The Economics Of Developing Countries Chapter 39W McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Distinguishing between industrial advanced countries and developing countries Obstacles to economic development The vicious circle of poverty The role of government in promoting economic development Industrial nation’s attempts to aid low-income countries 39-2

Country Classifications Industrially advanced countries –High income nations –Well-developed market economies –Per capita income $36,608 in 2006 Developing countries –Middle income nations –Low income nations –Wide variation in income per capita 39-3

2006 Comparisons U.S. GDP $13.2 trillion Combined GDP of developing countries $11.7 trillion U.S. has 5% of population but produces 27% of world’s output U.S. per capita GDP 186 times that of Sierra Leone Wal-Mart’s annual revenue greater than all but 19 nation’s GDP 39-4

The Rich and the Poor Some developing countries have grown considerably –China, Malaysia, Chile, Thailand Some developing countries have become high-income –Singapore, Greece, Hong Kong Income gap has widened –Developing countries must grow faster to narrow the gap 39-5

Obstacles to Development The path to economic development –Use existing resources more efficiently –Expand available supplies of resources Simple generalizations are not possible 39-6

Obstacles to Development Lack of natural resources Overpopulation –9 out of 10 people born in a DVC –Reduced standard of living –Less saving and investment –Lower productivity –Resource overuse –Urban problems –Qualifications 39-7

Obstacles to Development Unemployment Underemployment Low labor productivity Brain drain Capital accumulation is key –Domestic capital formation –Savings potential –Capital flight 39-8

Obstacles to Development Investment obstacles –Lack of infrastructure Technological advance –Borrowed technology Sociocultural obstacles Institutional obstacles –Land reform 39-9

The Vicious Circle of Poverty RAPID POPULATION GROWTH LOW LEVEL OF DEMAND LOW LEVEL OF SAVING LOW PRODUCTIVITY LOW LEVELS OF INVESTMENT IN PHYSICAL AND HUMAN CAPITAL LOW PER CAPITA INCOME 39-10

Role of Government A positive role –Law and order –Lack of entrepreneurship –Infrastructure –Forced saving and investment –Social-institutional problems Public sector problems –Corruption 39-11

Corruption The Corruption Perception Index, 2007 Source: Transparency International Finland New Zealand Canada United Kingdom Germany United States Uruguay Taiwan Italy Greece China India Mexico Russia Myanmar Somalia

Role of Advanced Nations Expanding trade Foreign aid –Direct aid –The World Bank group Foreign harm –Dependency and incentives –Bureaucracy –Corruption and misuse Flows of private capital 39-13

Role of Advanced Nations Development Assistance as a Percentage of GDP, 2007 Source: OECD Norway Netherlands Ireland France Germany Canada Japan United States 39-14

Policies for Promoting Growth Establishing and implementing the rule of law Opening economies to international trade Controlling population growth Encouraging foreign direct investment Building human capital 39-15

Policies for Promoting Growth Making peace with neighbors Establishing independent central banks Establishing realistic exchange- rate policies Privatizing state industries 39-16

Policies for Industrial Countries Direct foreign aid to the poorest countries Reduce tariffs, import quotas, and farm subsidies Provide debt forgiveness to the poorest countries Admit temporary workers and discourage brain drains Discourage arms sales 39-17

Famine in Africa Root causes – natural and human Droughts –Lack of rainfall Civil strife –Rebellions and civil wars Population growth Ecological degradation Public policies External debt 39-18

Key Terms industrially advanced countries (IACs) developing countries (DVCs) demographic transition view underemployment brain drain capital flight infrastructure capital-saving technology capital-using technology the will to develop capricious universe view land reform vicious circle of poverty corruption World Bank direct foreign investment 39-19