© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 Economic EconomicDevelopment 1

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Worlds Apart Standard of living –Output per capita –Gross national income (GNI) –PPP adjusted High-income economies Middle-income economies Low-income economies 2

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 1 3 Share of World Population and World Output From High-, Middle-, and Low-Income Economies as of 2009

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Developing & Industrial Economies Developing countries –Low- and middle-income economies –Higher illiteracy rate –Higher unemployment –Faster population growth –Exports of primary products Agricultural products Raw materials 4

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Developing & Industrial Economies Developing countries –Half of the labor force works in agriculture –Low productivity –84% of the world’s population in 2009 –Produce 28% of the world’s output 5

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Developing & Industrial Economies Industrial market countries –High-income economies –Economically advanced capitalist countries of Western Europe, North America, Australia, New Zealand, and Japan –Developed countries –3% of the labor force works in agriculture 6

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 2 7 Per Capita Income for Selected Countries in 2010

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Health and Nutrition Developing countries –Poor health Malnutrition - Half the calories Disease –Epidemics, AIDS –Lower life expectancy at birth –Greater child mortality rated –Higher infant mortality 8

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 3 9 Child Mortality Rates per 1,000 Live Births as of 2009

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. High Birth Rates Developing countries –High birth rates 80 million (out of 90 million born this year) – in developing countries –High fertility rates - Larger families Source of farm labor No social security system –Population growth rates > growth rate in total production 10

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 4 11 Average Number of Births During a Woman’s Lifetime as of 2011

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Women in Developing Countries Greater poverty –Households headed by women Work in home and in labor market Less educated than men Fewer employment opportunities Lower wages than men Less access to other resources 12

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Labor productivity –Output per worker Low labor productivity –Quality of labor –Amount of capital, natural resources, other inputs 13

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development To increase labor productivity –Invest in human and physical capital Domestic savings Foreign funds Poorest countries –Low income per capita –Low investment in human and physical capital 14

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Technology and education –Better use for available resources –More receptive to new ideas Inefficient use of labor –Unemployment Can’t find jobs –Underemployment Employed in lower-skill jobs Work part-time 15

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development The cycle of poverty –Low productivity results in low income –Low income can affect worker productivity Less saving Less investment in human and physical capital Poor nutrition and insufficient health care 16

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Natural resources –Abundant natural resource (oil) Not enough to create industrial economy Financial institutions –Low savings –High inflation –Small investment –Fewer credits provided by banks 17

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Capital infrastructure –Transport –Communication –Sanitation –Electricity Developing countries –Serious deficiencies in their physical infrastructures 18

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 5 19 Fixed and Mobile Phone Lines per 1,000 People for 2009

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 6 20 Internet Users as Percent of Population for 2009

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Entrepreneurship –Entrepreneurs who are able to bring together resources and take the risk of profit or loss Sources of entrepreneurial experience in developing countries –McDonald’s –Other international franchises 21

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Rules of the game –Formal and informal institutions Laws, Customs, Conventions –Stable political environment –Well-define property rights –Social capital Shared values and trust 22

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Rules of the game, capitalism –Private ownership of most resources –Coordination of economic activity Price signals generated by market forces What, how, and for whom to produce it 23

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Rules of the game, central planning –Government ownership of most resources –Allocation of resources Central plans –Limited personal freedom 24

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Productivity: Key to Development Privatization –The process of turning government enterprises into private enterprises Social capital –The shared values and trust that promote cooperation in the economy 25

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 7 26 GDP per Capita for Developing Economies in 2010

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Income Distribution Among 12 nations –Poorest fifth of population 7.7% of income in high-income countries 5.6% of income in middle-income countries 7.2% of income in low-income countries 27

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Trade & Development Trade problems for developing countries –Exports: primary products Wild price fluctuation –Imports: manufactured goods –Trade deficits Restrict imports of capital goods –Face trade restrictions 28

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Trade & Development Migration and the brain drain –Migrants: $450 billion sent home –Brain drain Import substitution –Domestic manufacturing of products that were imported –Problems Erased gains from specialization Inefficiency, Retaliation 29

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Trade & Development Export promotion –Produce for the export market –Emphasis on specialization –Efficiency –Less government intervention 30

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Trade & Development Trade liberalization and special interests –Difficulty pursuing policies conducive to development –Gains from economic development - widespread Beneficiaries (consumers) do not recognize their potential gains –Losers tend to be concentrated Producers - fight reforms that might harm their livelihood 31

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Foreign Aid Foreign aid –International transfer made on especially favorable terms –For the purpose of promoting economic development –Grants and Loans –Money, capital goods, technical assistance, food 32

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Foreign Aid Bilateral assistance –Country-to-country Multilateral assistance –World Bank –IMF United States, last four decades –$400 billion in aid to the developing world –U.S. Agency for International Development (USAID) 33

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Foreign Aid Additional purchasing power –Possibility of increased investment, capital imports, and consumption Unclear –Supplements domestic savings Increasing investment –Or substitutes for domestic savings Increasing consumption 34

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Foreign Aid Source of discretionary funds –That benefit not the poor but their leaders 90% of the funds distributed by USAID –To governments - whose leaders assume responsibility for distributing these funds Bilateral funding –Tied to purchases of goods and services from the donor nation Unintended consequences 35

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Foreign Aid 1950s, U.S., Food for Peace program –Sell U.S. farm products abroad –Some recipient governments Sold that food to finance poorly conceived projects Low-priced food from abroad –Drove down farm prices in the developing countries –Hurting poor farmers there 36

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Foreign Aid Used clothing –Donated to thrift shops and charitable organizations in industrialized countries –Wind up for sale in Africa Low price discourages local production Foreign aid –Raised the standard of living in some developing countries 37

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Foreign Aid Foreign aid –But it didn’t increased their ability to become self-supporting at that higher standard of living –Insulated government officials From their own incompetence From the fundamental troubles of their own economies 38