© The McGraw-Hill Companies, 2008 Chapter 36 Problems of developing countries David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward

© The McGraw-Hill Companies, 2008 Some key issues Less-developed countries (LDCs) –countries with low levels of per capita output Why have LDCs remained poor? The potential roles of: –comparative advantage –industrialisation –international debt –structural adjustment –aid

© The McGraw-Hill Companies, 2008 The distribution of world population and GNP, 2006

© The McGraw-Hill Companies, 2008 Welfare indicators by country group

© The McGraw-Hill Companies, 2008 Problems of LDCs Resource scarcity –LDCs lack natural resources –or the means to exploit them Capital –few domestic resources available for investment –multinationals may repatriate profits, rather than reinvesting.

© The McGraw-Hill Companies, 2008 Life Expectancy at Birth ( )

© The McGraw-Hill Companies, 2008 Illetarcy rate in Turkey (%) ( )

© The McGraw-Hill Companies, 2008 Population Growth Rate in Turkey (%) ( )

© The McGraw-Hill Companies, 2008 Social investment in infrastructure –LDCs may not be able to achieve scale economies in power generation roads telephone systems urban housing Customs and ideology –in SOME cases, traditional attitudes may inhibit development –but this argument is often over-stated Problems of LDCs (2)

© The McGraw-Hill Companies, 2008 Human capital –LDCs lack resources to invest in health nutrition education industrial training –so workers in LDCs tend to be less productive than workers using the same technology in HICs. Low productivity agriculture –Many LDCs have a high proportion of their labour force engaged in low productivity agriculture. Problems of LDCs (3)

© The McGraw-Hill Companies, 2008 Possible paths to development? Trade in primary products Industrialisation Borrowing Structural adjustment Aid

© The McGraw-Hill Companies, 2008 Development: through trade in primary products? Primary products are agricultural goods and minerals. Comparative advantage suggests that LDCs should specialise in primary production, BUT: –some evidence suggests the terms of trade have been moving against primary products and towards manufactures –prices of primary products tend to be volatile –export concentration can be destabilising

© The McGraw-Hill Companies, 2008 Commodity Prices

© The McGraw-Hill Companies, 2008 Import substitution is a policy of replacing imports by domestic production –under the protection of high tariffs or import quotas –in the short run this involves inefficient use of resources –in the long run, domestic market may not be large enough to allow scale economies –and it fosters an inward-looking attitude –and promotes activities in which the country begins with a comparative disadvantage Development: through import substitution?

© The McGraw-Hill Companies, 2008 Export-led growth stresses production and income growth through exports rather than the displacement of imports. The most successful economies of the last 3 decades have followed this route –especially countries in South East Asia. But for other countries to follow, co- operation is needed from the industrial countries to avoid over-protectionism. Development: through export promotion?

© The McGraw-Hill Companies, 2008 Export Promotion

© The McGraw-Hill Companies, 2008 LDCs have traditionally been borrowers in world markets –funds used to import capital goods to supplement domestic investment –borrowing finances a current account deficit Borrowing increased after the first OPEC oil-price shock of 1973/74 –notably borrowing by non-oil developing countries Development: through borrowing?

© The McGraw-Hill Companies, 2008 Countries were reluctant to borrow from the IMF under stringent conditions so borrowed from commercial sources –often at variable interest rates high real interest rates in the early 1980s created debt-servicing problems for many borrowers raising the possibility of default the HIPC initiative of the late 1990s attempted to tackle the debt burden which many LDCs found unsustainable Development: through borrowing? (2)

© The McGraw-Hill Companies, 2008 Debt

© The McGraw-Hill Companies, 2008 Structural adjustment programmes –the pursuit of supply-side policies aimed at increasing potential output by increasing efficiency, e.g.: reductions in government subsidies to industry privatisation trade liberalisation price reforms monetary and fiscal discipline Development: through structural adjustment?

© The McGraw-Hill Companies, 2008 Development: through aid? Aid is an international transfer payment from rich countries to poor countries. –takes many forms: subsidised loans gifts of food or machinery technical help –justified on grounds of equity? –but may create dependency –allowing freer trade is an alternative

© The McGraw-Hill Companies, 2008 Globalisation A threat to developed and developing economies Electronic communication a threat to high-end professional services

© The McGraw-Hill Companies, 2008 Are income gaps widening?