Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-1 Chapter 17 Growth and the Less Developed Countries

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-2 Learning Objectives Identify the less economically developed countries (LDCs) and their characteristics. Understand why these developing countries have achieved lower levels of development and income. Discuss policies and strategies by which the less developed countries might achieve more rapid growth.

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-3 Less Economically Developed Countries (LDCs) Those nations that have low per capita income Less developed in their ability to provide incomes and economic consumption for their population

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-4 Economically Advanced Countries (EACs) Those nations that have high per capita income Better able to provide incomes and economic consumption for their population compared to LDCs

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-5 Comparing EACs and LDCs Difficult to compare due to – differences in resource endowments – population growth rates – labour utilisation – political and cultural differences

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-6 Income Gap Income gap between EACs and LDCs is increasing Increases the intensity of discontent of the people of LDCs Aspirations – Standard of living = Social unrest

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-7 Breaking the Poverty Barrier Increasing the efficient use of existing supplies of resources Altering (usually increasing) the supplies of productive resources

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-8 Natural Resources Distribution of natural resources among LDCs is uneven In general, a sufficient natural resource base is important for economic growth – Exceptions: Japan, Israel and Switzerland

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 17-9 Employment of Human Resources Typically, LDCs – are overpopulated – experience underemployment  disguised unemployment  rural–urban migration – have low labour force quality  absence of a vigorous entrepreneurial class

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Capital Good Accumulation LDCs suffer from a critical shortage of capital goods Important because of the limited possibility of increasing the supply of arable land Capital accumulation can feed on itself

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Capital Good Accumulation (cont.) LDCs accumulate capital goods by saving and investing Saving as a % of output by LDCs may be as high as for EACs; however, very low in actual terms

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Capital Good Accumulation (cont.) Investment: obstacles  Businesses unwilling to take risks  Weak incentives to invest  Low levels of basic social capital – Capital flight: Large outflows of investment from LDCs to the comparative safety of EACs – Non-financial investment: Excess labour resources could be redirected to improve basic social capital

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Technological Advance The discovery and application of new ideas concerning production methods Much of the expense of technological discovery could be reduced by LDCs using knowledge base of EACs Capital-saving vs capital-using

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Sociocultural Obstacles Ethnicity over national identity Religious beliefs Allocational obstacles – e.g. caste systems restricting the free movement of human resources

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Institutional Obstacles Political corruption Bribery National prestige Inequity of land allocation

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Solutions: Government’s Role Improve law and order Encourage entrepreneurship Invest in public goods Increase savings and investment Manage sociocultural problems Reform public sector management

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Solutions: EACs’ Role EACs can: – increase trade volumes – encourage the flow of private capital into LDCs  LDCs should eliminate: discriminatory taxation prohibitions on the withdrawal of profits cumbersome government regulations threats of nationalisation without adequate compensation – expand foreign aid through grants and loans

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia LDC Debt Crisis Causes – Higher oil prices – Declines in LDCs’ export earnings – Decreases in LDCs’ terms of trade – Higher interest rates – Fluctuations of value of US dollar – Falling confidence in LDCs’ ability to pay debt

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia LDC Debt Crisis (cont.) Consequences – Rescheduling of LDC debt – Austerity programs started – Reduced consumption and investment

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia New International Economic Order An argument made by some LDCs to redefine the relationships between LDCs and EACs such that all countries would be treated as equals, decreasing exploitation by EACs

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia New International Economic Order (cont.) Voting rights on international bodies Trade barriers Exploitation and dependence Terms of trade Debt relief Aid and redistribution

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Next Chapter: Models of the Exchange Rate