Development Key Issue #4: “Why do less developed countries face obstacles to development?”

Improvement in PINGs To promote development, PINGs seek to improve the indicators…economic, social, and demographic PINGs are improving, but the gap is growing ◦Example: PINGs have improved income by $4,000, but PEDs have improved by $20,000

Differences in consumption 1/5 of the world’s population living in PEDs consume 5/6 of the world’s goods 14% of the world’s people living in Africa only consume about 1%

Two fundamental obstacles to PINGs trying to develop 1. Adopting policies that successfully promote development 2. Finding funds to pay for development

Development through self- sufficiency For most of the 20 th century, self- sufficiency was the more popular of the development alternatives Key elements: 1.Investment is spread across all economic sectors 2.Focus is on promoting wealth across income levels, not just the rich 3.Barriers are set on imports (tariffs, taxes, quotas, requiring licenses)

Example of Self-Sufficiency: India India made efficient use of barriers to trade Indian businesses were discouraged from producing goods for export Businesses produce for India If private companies were unable to make a profit by selling only to India, then the government would provide a subsidy

Problems with self-sufficiency 1. Inefficiency: self-sufficiency protects inefficient industries Business has little incentive to improve quality, lower production costs, reduce prices, or increase production 2. Large Bureaucracy: self-sufficiency requires large bureaucracy to administer the controls A complex administrative system encouraged abuse and corruption

Development through international trade A country identifies its distinctive/unique assets What product can the country manufacture and distribute at a higher quality and a lower cost than other countries?

Rostow’s Development Model 1. The traditional society – a country that has not started development; large amounts of people in agriculture and “nonproductive” activities (religion and military) 2. The preconditions for takeoff – the process of development begins when an elite group begins to invest in technology and infrastructure

Rostow’s Development Model cont… 3.The takeoff – rapid growth is promoted in a few number of activities (i.e. textiles, food products) 4. The drive to maturity – modern technology diffuses to more industries which experience rapid growth and workers become more skilled 5. The age of mass consumption – the economy shifts from heavy industry to consumer goods

More on Rostow’s Model Each country is in one of the five stages. PINGs will achieve development by moving through the stages Two factors that encouraged Rostow’s optimism: 1.Europe and Anglo-America have achieved stage five and have been joined by Eastern Europe and Japan 2.PINGs have raw materials

Examples of the International Trade Approach The Four Asian Dragons: South Korea, Singapore, Taiwan, and Hong Kong ◦Influenced by Japan ◦Concentrated on clothing and electronics Petroleum Rich Arabian Peninsula States: ◦The increase in petroleum prices in the 1970s greatly enriched these countries

Problems with the International Trade Alternative 1. Uneven resource distribution 2. Market stagnation 3. Increased dependence on PEDs

Recent Triumph of International Trade Approach This approach has been adopted by most in recent years India switched to an international trade approach India’s GDP grew 7% per year in the 1990s Manufactured goods accounted for more than 4/5 of exports from PINGs in 2000

World Trade Organization Established in 1995 by countries representing 97% of world trade Reduces barriers to trade: ◦Countries negotiate reduction or elimination of international trade restrictions ◦The WTO enforces agreements

Financing Development PINGs lack money! Loans – mainly for infrastructure ◦The World Bank ◦International Monetary Fund Structural Adjustment Programs – in exchange for repaying debt, lending agencies require PINGs to create conditions favorable for international trade

Fair Trade Fair trade – products are made and traded according to standards that protect workers and small businesses in PINGs Producer Standards Worker Standards