Economic Development and Transition Chapter 18

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

Developed, Developing and Least Developed Nations

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

Worldwide Energy Consumption Per Capita

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

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)

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

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

Issues in Development

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

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

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

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

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

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

Financing Development

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

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

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

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

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

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

Transition to Free Enterprise

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

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

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

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