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

Development Strategies Development through self-sufficiency – Elements of self-sufficiency approach – Problems with self-sufficiency Development through international trade – Rostow’s development model – Examples of international trade approach – Problems with international trade Financing development Fair trade

Things are improving worldwide In the 20 th century, in LDCs, – The IMR dropped from 85 to 60 per 1000 – NIR has declined from 2.1 to 1.5 – GDP per capita has increased from $500 to $4,500 – MDCs have also seen improvements – The GAP between LDCs and MDCs is still crazy wide

MDCs vs. LDCs 1/5 of people in MDCs consume 5/6 of the world’s goods 14% of the world’s people who live in Africa consume 1 percent Americans spend more per year on cosmetics than the cost of providing schools for the 2 billion in need of them (8 billion vs. 6 billion) People in Europe spend more on ice cream at 11 billion than the cost of providing a working toilet to the 2 billion people without one in LDCs at 9 billion

Income & Demographic Change, Fig. 9-22: Rates of natural increase and infant mortality have remained much higher in LDCs than in MDCs. Since 1980, the natural increase rate has declined at about the same rates in MDCs and LDCs, while the infant mortality rate has declined more rapidly in LDCs. Per capita GDP has increased more in MDCs than in LDCs during this period.

Obstacles in improving LDCs Adopting policies that successfully promote development Finding funds to pay for development

The Two Main Approaches to Dealing with Those Obstacles Trying to become self-sufficient- balanced growth Pushing international trade

Development through Self-Sufficiency Balanced approach countries should: – Spread investment as equally as possible across all sectors of its economy and in all regions – Pace development modestly – Create a system that is fair because the citizens share benefits and progress or development – Ensure incomes in rural and urban areas are at pace – Push to get rid of poverty rather than achieving as much wealth as possible – Be isolated from the outside world- focus on your country – Protect domestic businesses and customers

Development through Self-Sufficiency Balanced approach countries should: – Set barriers that limit imported goods with tariffs, quotas, and requiring licenses to limit blackmarket – Limit exports – Encourage businesses to focus on selling in their country to their citizens – Provide government subsidies to struggling businesses – Allow the government to run many businesses

Development through Self-Sufficiency Bad things about this approach: – Inefficiency- self-sufficiency protects inefficient businesses, limits comparative advantage, prevents some growth in areas, isolates the nation, limit goods and services to citizens, government controls too much, companies don’t have to compete, not as many choices, often fall behind other countries technologically – Large Bureaucracy- need a huge bureaucracy to enforce and carry out the government’s need, too much dependence on the government, too cumbersome a government, can lead to corruption and abuse, people are rewarded less for hard work, pushes an illegal black market

Development through International Trade This approach calls for a country to identify its distinctive or unique economic assets and capitalize on them internationally A country should ask what they have in abundance that other countries will buy and what product can the country manufacture and distribute at higher quality and lower cost than other countries? Comparative advantage in economics Rostow’s model shows this

Development through International Trade W.W. Rostow was a pioneer of the Development Model in the 1950s He proposed a 5 stage model of development Some countries used this in the 1960s Before then, most countries pushed self- sufficiency This pushes international trade

Development through International Trade Rostow’s Development Model: 5 stages: – 1. The traditional society: this is when a country has not yet started the process of development. A traditional society is based on tradition and contains a large number of people who farm, fish, herd, or perform traditional jobs (your father was a fisherman and you are too and so will your children and their children). A lot of government money goes to religion and military.

Development through International Trade Rostow’s Development Model: 5 stages: – 2. The preconditions for takeoff: The process of development begins in this stage, when an elite group initiates innovative economic activities. The country starts to invest in new technology and infrastructure- these will begin to increase productivity.

Development through International Trade Rostow’s Development Model: 5 stages: – 3. The Takeoff: Rapid growth begins in a limited number of economic activities like textiles or food products. These industries achieve technical advances and become productive. Other industries remain traditional.

Development through International Trade Rostow’s Development Model: 5 stages: – 4. The drive to maturity: Modern technology spreads from the takeoff industries to other industries, which then experience rapid growth. Workers become more skilled and specialized. Fewer traditional industries exist. Wages and standard of living increase.

Development through International Trade Rostow’s Development Model: 5 stages: – 5. The Age of Mass Consumption: the economy shifts from production of heavy industry like steel and energy to consumer goods like cars and appliances. Standard of living and wages continue to increase. Skilled workers and specialized workers increase. People have more money to buy stuff like consumer goods.

Development through International Trade All countries are somewhere in Rostow’s five stages MDCs are in 4 or 5 LDCs are in 1, 2, or 3 Countries progress in the model The US was in stage 1 colonially, stage 2 during the early 1800s, stage 3 during the mid-1800s, stage 4 in the late 1800s, and stage 5 in the early 1900s

Development through International Trade Rostow saw that this model worked for MDCs in the world today He reasoned it should work for LDCs today They can benefit from specializing, growing, and trading internationally They just have to start tapping into their resources and what they do best

Poor Infrastructure in Ghana Many roads in Africa and other developing nations are not paved. This and other problems of infrastructure are obstacles to economic development.

Development through International Trade Problems with this approach: – Uneven resource distribution- some LDCs have really valuable resources, others do not have as much or as valuable of resources, sometimes they cannot tap into it efficiently enough to get past the first bumps, depends on lots of factors – Market stagnation: the international market goes through phases- right now it is not expanding as fast and demand is lower and growth is slower, MDCs are not growing as much – Increased dependence on MDCs: building up a few important industries can take a lot of resources, manpower, and effort. It takes focus away from food, clothing, and necessity production for one’s country. They start buying those from MDCs and become dependent on them.

Development through International Trade Examples: – Two groups of countries chose the international trade approach in the mid-1900s – 1. The Four Asian Dragons: South Korea, Singapore, Taiwan, and Hong Kong (British until 1999) – Singapore and Hong Kong have practically no viable natural resources- both are very urban areas on small lands – Since these lacked natural resources, they focused on producing manufactured goods- textiles and electronics in particular – Low labor costs helped them sell for less than MDCs and grow tremendously

Development through International Trade Examples: – Two groups of countries chose the international trade approach in the mid-1900s – 2. Arabian Peninsula States- Saudi Arabia, Kuwait, Bahrain, Oman, and the UAE (United Arab Emirates) capitalized on their petroleum-rich lands – They have used their revenues from petroleum to finance large-scale projects around their countries – Some Islamic ideals conflict with some business practices (prayer five times a day, traditional clothes, women are exclude from most jobs, in some cases they must wear black, a shroud, and a veil)

International Trade Triumphs This approach has proved successful for many countries Some former traditional approach states like India have turned to this and have seen successful World organizations have popped up to help or unite these developing countries OPEC unites many petroleum-rich states WTO- World Trade Organization promotes the international trade development model, countries representing 97% of the world’s trade created this organization in 1995

International Trade Triumphs The WTO tries to negotiation reduction or elimination of international trade restrictions It promotes international trade by enforcing trade agreements It is often attacked by liberals and conservatives Liberals say it is undemocratic and protects big businesses Conservatives say it takes away some power from businesses and individual countries It is often protested

Anti-Globalization Demonstrators Seattle, 1999

International Trade Triumphs International trade is increasing Economic interdependence is resulting More transnational corporations (they invest and operate in countries other than where the headquarters are) Many foreign countries have stakes in foreign countries- Foreign Direct Investment (FDI) Has increased dramatically from 13 billion in 1970 to 1.4 trillion in 2000

Wal-Mart in China Wal-Mart, which imports many goods to the US that are manufactured in China, opened its first super-store in Shanghai, China in 2005.

Foreign Direct Investment Flows Fig. 9-23: Most transnational companies invest in the three core regions of North America, Western Europe, and Japan. Outside these core regions, the largest investment is in China.

Financing Development One big problem LDCs face regardless of whether they choose self-sufficiency or international trade is getting money to finance development They often have to get funds from MDCs The funds are through one of two things: – Loans by banks and international organizations like the IMF (International Monetary Fund) or World Bank set up around 1944 – Direct investment by transnational corporations

Microfinance in Bangladesh The Grameen Bank provides small loans to women (and men) in Bangladesh. Women in this village are repaying their loans.

Financing Development To get funding, an LDC must prepare a Policy Framework Paper (PFP) and outline a structural adjustment program, which sets economic goals, strategies to reach those goals, financing requirements, and a timetable

Debt as Percent of Income, 2005 Fig. 9-24: Many developing countries have accumulated large debts relative to their GDPs. Much of their budgets now must be used to finance their debt.

Fair Trade Often LDCs have workers and resources that are exploited Fair trade has been pushed Fair trade means that products are made and traded according to standards that protect workers and small businesses in LDCs Standards are set by Fairtrade Labeling Organisations Internal (FLO) The goods can be food or stuff These products costs more but it is worth it to many people

Fair Trade Coffee Because the role of middlemen is reduced and because consumers generally pay higher prices, producers of fair trade coffee can earn more than traditional coffee growers.

Core and Periphery in World Economy Fig. 9-25: This north polar projection of the world shows that most of the MDCs are in a core area north of 30° N latitude. The LDCs are mostly on the periphery of this map.

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