1. 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

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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 17-10 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

11. 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 17-11 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

12. 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 17-12 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

13. 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 17-13 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

14. 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 17-14 Sociocultural Obstacles Ethnicity over national identity Religious beliefs Allocational obstacles – e.g. caste systems restricting the free movement of human resources

15. 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 17-15 Institutional Obstacles Political corruption Bribery National prestige Inequity of land allocation

16. 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 17-16 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

17. 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 17-17 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

18. 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 17-18 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

19. 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 17-19 LDC Debt Crisis (cont.) Consequences – Rescheduling of LDC debt – Austerity programs started – Reduced consumption and investment

20. 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 17-20 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

21. 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 17-21 New International Economic Order (cont.) Voting rights on international bodies Trade barriers Exploitation and dependence Terms of trade Debt relief Aid and redistribution

22. 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 17-22 Next Chapter: Models of the Exchange Rate