1. Issues of Economic Development

2. Chapter 18: Issues of Economic Development
KEY CONCEPT
A transitional economy is a country that has moved (or is moving) from a command economy to a market economy.
WHY THE CONCEPT MATTERS
Promoting development also promotes good government and economic opportunity in less developed countries. When a nation’s government is democratic and stable and its citizens are prosperous, the benefits reach the world community.

3. Definitions of Development
Levels of Development
KEY CONCEPTS
Economists gather data to compare economies of nations
also compare impact of economies on people’s standard of living
Have defined three major levels of economic development

4. Levels of Development Developed Nations
Developed nations have market economies with high standard of living
high GDP, industrialization, property ownership, stable governments
U.S., Canada, West Europe, Australia, New Zealand, Japan, South Korea
Most people healthy, educated, with comfortable lives, urban jobs
Few agricultural workers produce food surplus through technology

5. Levels of Development Transitional Economies
Transitional economy—country moving from command to market economy
China, Russia, various Eastern European countries
Example of Poland:
democracy and economic freedom improving economy and quality of life

6. Levels of Development Less Developed Countries
Less developed country—lower GDP, less industry, lower living standard
often ineffective or corrupt governments do not protect property rights
Middle-income Brazil, Thailand; low-income Mozambique, Cambodia
Low-income lack infrastructure—basic support systems of an economy
people have little education, poor sanitation, little political freedom

7. Standards of Economic Development
KEY CONCEPTS
Economists weigh various factors to evaluate a nations standard of living
example: television ownership not equally valued in all cultures
Africa compared to Thailand, expensive to own a TV in Africa compared to Thailand which is cheap

8. Standards of Economic Development
Per Capita Gross Domestic Product
Per capita gross domestic product—GDP divided by total population
most popular measure of economic development
to compare nations, figures adjusted for difference in cost of products

9. Standards of Economic Development
Health
Health and health care statistics help determine level of development
Infant mortality rate—babies who die in first year per 1,000 births
low rate is result of good sanitation, health care, nutrition
Life expectancy—number of years person likely to live
Afghanistan
119.41

10. Standards of Economic Development
Education
Literacy rate—percent of people over 15 who can read and write
Percentage of school-age children actually enrolled an important statistic
Human development index (HDI)—combines various measures
real GDP per capita, life expectancy, literacy rate, student enrollment

11. Standards of Economic Development
Consumption of Goods and Services
How people spend income after food and shelter indicates development
Increasing consumption of big-ticket items shows economy growing
also rising living standards
Less developed nations have more growth potential for consumer consumption
Today North America, Western Europe: 12 percent population, 60 percent consumption

12. Standards of Economic Development
Energy Use
Electricity, energy contribute to economic development
Average global electricity consumption 2,744 kilowatt-hours per capita per year
developed nations use over 7,000; less developed use 750
Energy used for commerce correlates to technology use, other measures
Projection to 2025: LDC energy use will rise far more than developed

13. Standards of Economic Development
Labor Force
All economically active people between 15 and 65, employed or not
More developed nations have
fewer agricultural workers, more manufacturing and service workers

14. Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
developed nations and less developed countries
human development index and infant mortality rate

15. A Framework for Economic Development Objectives
Resources
KEY CONCEPTS
Fertile farmland and appropriate climate help development
Natural resources help
Also must invest in human and physical capital for economic expansion

16. Resources High Levels of Human Capital
People most valuable resource in a market economy
Commitment to education major element of growing market economy
Educated citizens can make informed decisions for themselves and children
get health care, vote, take part in civic affairs, avoid poverty

17. Resources High Levels of Physical Capital
Physical capital, including technology, makes people more productive
Technology always being refined in developed nations
LDCs can copy or import
Copying requires trained people; importing requires foreign investment
investors prefer LDC with human capital

18. Stability KEY CONCEPTS
Governmental, economic environments must be stable to support growth
human and economic capital can then be put to best use

19. Stability Effective Government Institutions
Rule of law—made public, applied fairly, used to resolve disputes
bureaucracy and judges not corrupt
Rule of law means predictability, reduces economic risks of business
Democratic nations have higher rate of economic growth than others

20. Stability Stable Prices
Stable prices, sound fiscal and monetary policies lead to growth
investors can make long-term plans in nation without dramatic changes
Investors avoid nations with high inflation, volatile interest rates

21. Stability Protected Property Rights
Guaranteed property rights stimulate entrepreneurship
businesses assured of reaping rewards if successful
Businesses avoid places where government interferes with operations
due to corruption, decision to redistribute land to poor

22. Opportunity KEY CONCEPTS Government can create economic opportunity by
opening international trade
promoting social mobility
controlling corruption (Thailand)
limiting regulations

23. Opportunity Open International Trade
Fewer restrictions on free trade promote specialization, trade
LDCs often impose tariffs and other protectionist measures
justify as short-term
costs: higher prices, inefficiency, dependence on barriers

24. Opportunity Increase Social and Economic Mobility
Strongest growth happens when opportunity opens to whole population
U.S. studies: as people seek personal economic reward, economy grows
Some cultures restrict women—half of labor force—economically
In cultures with fixed class structure, rich keep control of economy

25. Opportunity Control Corruption
Corruption is abuse of public office for private gain
Corrupt countries fail to develop, poor especially pay the price

26. Opportunity Limit Regulation
Reasonable tax levels and regulations create economic opportunity
investors attracted to nations with little “red tape”
Many LDCs have significantly high number of regulations
businesses get around them by paying off government officials

27. Financing Development
KEY CONCEPTS
Four sources available for financing economic development:
internal investment
foreign investment
foreign government aid
international agencies

28. Financing Development
Internal Investment
Banks within a nation invest in infrastructure
very poor nations: personal savings low, banks have little to invest
Wealthy citizens sometimes want safer, more productive investment
result is capital flight: sources of capital are sent abroad
Government may provide funds or seek foreign investment

29. Financing Development
Foreign Investment
Foreign portfolio investment—participation in financial markets
Foreign direct investment—establishing business in foreign country
multinationals provide jobs and training, benefit from cheap labor
Foreign investment has grown dramatically since 1990
LDCs have tried to create more attractive business climate

30. Financing Development
Loans and Aid
External debt—money borrowed from foreign banks or governments
has become problem in some countries in South America, Africa
Default—nations inability to pay interest or principle on a loan
Nations may also seek foreign aid—money from other nations

31. Financing Development
International Help Agencies
World Bank—provides loans, policy advice, technical assistance
United Nations Development Program (UNDP)—fights poverty
in 2006 had active programs in 174 nations

32. Financing Development
International Help Agencies
International Monetary Fund (IMF)—international organization
promotes monetary cooperation, fosters economic growth
also gives temporary assistance to ease balance of payments adjustment
Helps with debt restructuring—altering debt agreements for advantage
Stabilization programs—reforms required of economy likely to default

33. Anne Krueger: Reforming IMF Development Policy
A New Role for IMF
As First Deputy Director, Krueger proposed new role for IMF
oversee restructuring of LDC debt rather than provide bailout funds
let creditor supermajority overrule creditor wanting more pay than able
Opposed forgiving debt, says debtors do not spend funds helping poor
Agreed to forgive 18 nations’ debt that created development policies

34. Reviewing Key Concepts
Explain the relationship between these terms:
International Monetary Fund and stabilization program

35. Transition to a Market Economy
New Challenges
KEY CONCEPTS
China, former Soviet Union, Eastern Europe adopting market economy
Government, individuals, businesses must find new answers to problems

36. New Challenges Challenge 1: Poor Infrastructure
Market economy needs good infrastructure for production, distribution
Command economies had poor infrastructure
lack of competition meant little incentive to be efficient
Transitional economies need to modernize infrastructure
to support and spread goods and services produced

37. New Challenges Challenge 2: Privatization
Privatization—transferring state-owned property, businesses to people
Three basic methods
auction, leaves little savings so few people have needed funds
selling shares of businesses through vehicle like the stock market
giving vouchers to people to purchase shares of a business

38. New Challenges Challenge 3: Rise in Prices
In command economy, some goods have artificially low prices
Price controls must be removed for market to operate
In 1990, Poland began shock therapy
abrupt shift from command to market economy
in first month inflation was 78 percent, then slowly eased

39. Economic Change in the Former Soviet Bloc
KEY CONCEPTS
In 1980s, Mikhail Gorbachev introduced perestroika:
gradually incorporate markets into Soviet Union’s economy
People called for political freedom; Soviet Union dissolved in 1991

40. Economic Change in the Former Soviet Bloc
Example 1: Russia
Shock therapy led to high inflation—lack of goods, many bankruptcies
Government could not perform many functions, such as tax collection
Privatization program favored politically well-connected people
President Putin reluctant to adopt democratic reforms, market economy
combined with corruption and organized crime undermines development

41. Economic Change in the Former Soviet Bloc
Example 2: Former Soviet Republics
Latvia, Lithuania, Estonia did better than others, had less inflation
Baltic republics Armenia, Belarus, Kazakhstan have increased output Higher quality goods and services produced in many nations
In other nations, economic growth stifled by
poor infrastructure, bureaucracy, corruption, undeveloped property laws

42. Economic Change in the Former Soviet Bloc
Example 3: Eastern Europe
Eastern European nations have had varying degrees of success
Czech Republic, Hungary, Poland joined EU, progress apparent
Problems all face include
outdated infrastructure; costly phone and internet services
confusing business laws; high unemployment

43. China Moves Toward a Market Economy
KEY CONCEPTS
China became Communist in 1949 Began transition to free market economy in 1978

44. China Moves Toward a Market Economy
Example: Rapid but Uneven Growth
In 1958, began building collective farms, steel industry; much poverty
Late 1970s, agricultural reforms enacted; 1980s industrial reforms
Special economic zones—areas with different economic laws
goal to increase foreign investment
SEZs have developed rapidly; western rural areas still poor

45. Reviewing Key Concepts
Explain the difference between these terms:
shock therapy and perestroika

46. China’s Campaign for Economic Power
Background
In 1978, Deng Xiaoping began the “four modernizations” (agriculture, industry, science and technology, and defense).
China established several special economic zones, opened 14 coastal cities to foreign investment in 1984, and joined the World Trade Organization in 2001.
What’s the Issue
What accounts for China’s successful transition to a market economy?
Thinking Economically
What key element of financing development does document A cite as a component of China’s success in international trade?
The documents show that the rest of the world is uneasy with China’s economic growth and that China has problems at home.
Discuss these fears and problems in the context of what you’ve learned throughout Chapter 18.