1. Economic Development and Transition
Chapter 18

2. Levels of Development
Half the world’s population lives in extreme poverty (less than $1 a day)
Measure well being of country on development (process that nation meets economic, social and political needs of people)
Developed nations (MDC’s)- above average level of material well being
Less Developed Countries (LDC’s) worlds poorest countries
Developing Countries- not poorest but not high standard of living of MDC’s
Development is how well a nation provides food, education, shelter, and levels of economic production

3. Developed, Developing and Least Developed Nations

4. Measuring Development
Primary measure of development is GDP (total market value of all goods and services produced in a year)
Per Capita GDP is GDP divided by total population
Does not account for distribution of wealth, in many LDC’s gap between rich and poor very wide
Energy consumption- amounts of energy used are an indication of industrialization (extensive organization of an economy for manufacturing)
Low levels of energy consumption are a sign of little industry, development

5. Worldwide Energy Consumption Per Capita

6. Measuring Development
Labor Force- LDC’s most labor force devoted to agriculture, little opportunity for workers to specialize
Unable to produce specialized goods for sale, unable to generate cash income
Consumer goods- large number of consumer goods means people have disposable income
Literacy- higher in more developed countries
Higher levels of education mean population is more productive
Life Expectancy- well nourished, well housed population has longer life expectancy
Infant mortality rate- number of deaths in first year of life per 1,000 births

7. Characteristics of Developed Nations
Have high per capita GDPs
Higher degree of economic, political freedom
Agricultural output high, but few farmers (mechanization, industrialization of agriculture)
Most of labor force in service industry or manufacturing
High energy usage
Use of technology increases productivity
Infant mortality low, life expectancy high
Most of population urbanized
Solid infrastructure (services needed to keep economy healthy- roads, communication systems, financial institutions)

8. Characteristics of Less Developed Countries
Low per capita GDP
Low energy usage
Most of population in agriculture (subsistence farming)
Unemployment rates high
Education system inadequate, children needed to work on farms; literacy rates low
Most of population is rural (not always)
Poor diet, access to health care lead to high infant mortality and lower life expectancy

9. Levels of Development
Economic development occurs in the following stages
Primitive equilibrium- no economic system exists, based on tradition
Transition- traditions crumble, new ways adopted
Takeoff- new industries grow and profits reinvested
Semi-developed- economy expands, enters international market
Highly developed- basic needs easily met, economy focused on consumer goods, public sector

10. Issues in Development

11. Rapid Population Growth
Quality of life depends on productive population, LDCs can’t meet needs of rapidly growing population
Many LDCs are experiencing increase in life expectancy and no decrease in birth rates, leading to rapid population growth
Double population means need for more employment opportunities, schoolrooms, agricultural production, industrial output

12. Factors of Production Physical geography makes development difficult
Uneven distributions of resources, arable land
Sometimes problem is how to utilize resources, technology and capital to extract resources absent in many LCDs

13. Physical and Human Capital
Lack of human made resources to create goods and services
Subsistence agriculture does not give families opportunity to save or produce anything more than food
Means large portion of population who don’t produce are supported by others
Health, nutrition, education important to develop human capital
Keeps investors away because they don’t see profit if country lacks a skilled, healthy workforce

14. Health and Education
Health- Performance and productivity depend on good nutrition, less developed countries suffer from chronic food shortages
Education- To use technology and move beyond subsistence educated workforce is necessary
LDCs have low rates of literacy and limited access to education
Ideas about gender keep women out of education and the workforce
Brain drain- best educated citizens leave many LDCs for education opportunities, attracted to opportunities of developed countries

15. Political Factors Limited or reduced development in LDCs
Colonial legacy
Many were former colonies with economies based on extraction of raw materials
Shipped to colonizers, where they were turned into finished products
Many had to rely on colonies for manufactured goods
After WWII many became independent and tried to modernize their economies
At first they turned to central planning, many are now turning to free enterprise
Corruption in government
Policies and political decisions to only benefit a small minority, leaving many with needs unmet
Civil wars and social unrest have plagued many countries
Military leaders spend huge sums of money at the expense of other societal needs

16. Debt
1970’s and 1980’s many LDCs acquired debt from foreign governments and private banks
Worldwide economic crises hindered countries from paying back loans (Oil Crisis 1973 value of dollar increased and made paying loans back more difficult)
Some countries foreign debt is greater than annual GDP

17. Financing Development

18. Investment
Building infrastructure, developing education, healthcare and creating industry require large sums of money
Two methods to finance development:
Internal financing from the countries citizens
Underdeveloped nations do not have much money to invest
Those with money keep it in foreign banks and overseas investments, many LDCs turn to foreign investment
Foreign investment money from other countries

19. Investment
Foreign direct investment- business established in country by foreign firm
Often formed by Multi-National Corporations (MNCs)
MNCs are large corporations that produce and sell goods across the globe
Attracted to LDCs for profit, take advantage of cheap labor and natural resources
Money not reinvested in country, goes to foreign owners
Potential for unethical treatment (low wages for workers)
Positive effects provide jobs, introduce technology, opportunity for related services to develop
Foreign portfolio investment- foreigners purchase stocks and bonds in countries markets, funds lead indirectly to increases in production

20. Foreign Aid
Foreign governments give money and other forms of aid to LDCs to aid development
Build schools, develop infrastructure
Reasons- humanitarian, military, economic, social
Examples- aid to Western Europe after WWII, more recently aid to Middle Eastern countries friendly to American democracy
These countries can provide new markets for American goods

21. International Institutions
International institutions promote development
Most prominent are the World Bank, United Nations Development Program, International Monetary Fund
World Bank- largest provider of development assistance, raises money in financial markets and takes contributions from member nations
UN Development Program- elimination of poverty through development, provides grants for economic and social development, funded by voluntary contributions from UN members

22. World Bank Income Groups
Blue – high Income Green- uppermiddle income Purple- lower middle income Red -poor

23. International Institutions
International Monetary Fund (IMF)- facilitates development through policy advice, technical assistance
Often viewed as the last resort for struggling LDCs
Uses debt rescheduling ( giving more time, forgiving, dismissing borrowed money); stabilization programs (IMF tries to help change economic policies of debtor nation)
Stabilization programs have negative impact on poor; cuts in government services, cutting wages while prices rise
Cause decrease in domestic consumption while country tries to export more to make money

24. Transition to Free Enterprise

25. Toward a Market Economy
LDCs began to see limitations of centrally planned economies
Many have begun to replace them with market based systems
Some are modifying their centrally planned economies to incorporate some free market practices
Huge adjustment for economy and nation
One of the first steps is privatization (sale or transfer of government owned business to private individuals)
Can sell business to one owner
Sell shares in business
Privatization means only profitable business will continue to operate
Means secure life long employment for some is over because competition weeds out the weak

26. Other Issues in Transition
The Legal System and Government
Establishment of a legal system protecting property rights
Laws that ensure the transfer of property
Law and order prevent criminals and government from interfering with the day to day business of the economy
Laws need to provide a framework of regulation
Workers need to develop a different work ethic based on incentive to influence labor

27. Russia in Transition
USSR Once dominant communist nation, late 1980’s lagging economy brought social and economic reform
Most land, labor and capital devoted to heavy industry and the military, little left to produce consumer goods
1980’s new leader Mikhail Gorbachev began series of economic reforms (perestroika) to gradually change over to a free market economy
Workers, factory managers had more control over production
Introduced a more open government policy (glasnost)where citizens could do what they wish without government reprisal
Policy changes led to collapse of communism in 1991

28. Russia in Transition
By 1992 government lifted price controls, prices tripled
Wealth was unevenly distributed and organized crime and corruption infiltrated society and the economy
Financial aid from the World Bank and the IMF was mismanaged and not used efficiently
Recently Russia has started to tap into their vast oil, natural gas and mineral resources to sell on the world market