Why Do Less Developed Countries Face Obstacles to Development? Chapter 9 Key Issue 4 Why Do Less Developed Countries Face Obstacles to Development?

Development Through Self-Sufficiency For much of the 20th century self-sufficiency or balanced growth was the most popular development alternative, especially for LDCs. It protects infant industries by setting barriers and tariffs on imports, as well as fixing quotas and requiring licenses to restrict the number of legal importers. India followed this model of development in the decades after independence from Britain. It has two major problems. It protects inefficient industries and creates a large bureaucracy to administer the various controls.

Development Through International Trade In the 1950s W.W. Rostow proposed his development model, which helped countries to move towards development through international trade. This was a five-stage model. Stage 1 is a traditional society, in which a country is still predominantly agricultural. In Stage 2, a country reaches the preconditions for takeoff when entrepreneurs initiate economic activities. Infrastructure develops and productivity increases. Stage 3 is takeoff, which is essentially the beginning of an industrial revolution. Stage 4, in the drive to maturity stage, industry diffuses and results in rapid growth. Stage 5, the final stage, is the age of mass consumption, when the economy shifts from heavy industry to the production of consumer goods.

Examples of International Trade Approach The international trade approach has been followed by numerous countries in Asia. The most successful initially in Asia included South Korea, Singapore, Taiwan and Hong Kong. They concentrated on the production of manufacturing goods using cheap labor. The petroleum-rich Arab countries pursued the same approach. Saudi Arabia, Kuwait, Bahrain, Oman, and the United Arab Emirates have been very successful, using petroleum revenues to finance large-scale projects.

Problems and Triumphs with the International Trade Alternative The international trade approach to development also has problems. These include (1) uneven resource distribution, (2) market stagnation, (3) and increased dependence on MDCs. But it has now been embraced by most countries. This approach has been aided by the creation of the World Trade Organization (WTO) in 1995, which helps to reduce barriers to international trade. The WTO helps to eliminate trade restrictions between countries. It also enforces international trade agreements. Investment made by transnational corporations (TNCs) in foreign countries is known as foreign direct investment (FDI). The headquarters of most TNCs are in the U.S. and western Europe.

Financing Development LDCs borrow money for major projects from two major international lenders. The World Bank includes the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). They provide loans for the reform of public administration and legal institutions. The International Monetary Fund (IMF) provides loans to countries that have balance-of-payment problems rather than for specific projects. There are numerous problems associated with all of these loans. Many new projects in LDCs are expensive failures, and many LDCs have been unable to repay interest and loans. Neither of these organizations will cancel or refinance debts without strings attached. Before granting debt relief, an LDC is required to prepare a Policy Framework Paper (PFP) outlining a structural adjustment program that includes economic goals and strategies for achieving the objectives.

Fair Trade Fair trade has been proposed as an alternative to the international trade model of development. Fair trade means that products are made and traded according to standards that protect workers and small businesses in LDCs. Standards for fair trade are set internationally by Fairtrade Labelling Organizations International (FLO). Ten Thousand Villages, which specializes in handicrafts, is the largest fair trade organization in North America. Two sets of standards distinguish fair trade; one set applies to workers on farms and in factories and the other to producers.