CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 1 of 37 PowerPoint Lectures for Principles of Microeconomics, 9e By Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 2 of 37

© 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 21 PART IV THE WORLD ECONOMY Economic Growth in Developing and Transitional Economies Fernando & Yvonn Quijano Prepared by:

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 4 of Life in the Developing Nations:Population and PovertyEconomic Development: Sources and Strategies The Sources of Economic DevelopmentStrategies for Economic DevelopmentGrowth versus Development: The Policy Cycle Two Examples of Development: China and India Issues in Economic DevelopmentPopulation GrowthThe Transition to a Market EconomySix Basic Requirements for Successful Transition CHAPTER OUTLINE PART IV THE WORLD ECONOMY Economic Growth in Developing and Transitional Economies

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 5 of 37 Economic Growth in Developing and Transitional Economies All economic analysis deals with the problem of making choices under conditions of scarcity, and the problem of satisfying people’s wants and needs is as real for Somalia and Haiti as it is for the United States, Germany, and Japan. The universality of scarcity is what makes economic analysis relevant to all nations, regardless of their level of material well-being or ruling political ideology. Even though economic problems and the policy instruments available to tackle them vary across nations, economic thinking about these problems can be transferred easily from one setting to another.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 6 of 37 Life in the Developing Nations: Population and Poverty TABLE 21.1 Indicators of Economic Development Country Group Population, 2006 Gross National Income per Capita, 2006 (dollars) Literacy Rate (percent over 15 years of age) Infant Mortality, 2006 (deaths before age 5 per 1,000 births) Internet Users per 1,000 people, 2005 Low-income2.3 billion Lower middle- income 2.4 billion1, Upper middle- income million4, High-income1.0 billion32,0402, Source: World Bank,

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 7 of 37 In the year 2006, the population of the world and the number of nations were: a.200 billion people and 155 nations. b.6.5 billion and over 200 nations. c.1.2 billion and more than 2,000 nations. d.3.2 billion and more than 300 nations.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 8 of 37 In the year 2006, the population of the world and the number of nations were: a.200 billion people and 155 nations. b.6.5 billion and over 200 nations. c.1.2 billion and more than 2,000 nations. d.3.2 billion and more than 300 nations.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 9 of 37 Life in the Developing Nations: Population and Poverty While the developed nations account for only about one quarter of the world’s population, they are estimated to consume three-quarters of the world’s output. This leaves the developing countries with about three-fourths of the world’s people but only one- fourth of the world’s income. The simple result is that most of our planet’s population is poor.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 10 of 37 Economic Development: Sources and Strategies The Sources of Economic Development Capital Formation vicious-circle-of-poverty hypothesis Suggests that poverty is self-perpetuating because poor nations are unable to save and invest enough to accumulate the capital stock that would help them grow. capital flight The tendency for both human capital and financial capital to leave developing countries in search of higher expected rates of return elsewhere with less risk.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 11 of 37 The vicious cycle of poverty is an explanation of poverty that emphasizes: a.Income distribution and wealth accumulation. b.Hunger, illiteracy, and malnutrition. c.Consumption, saving, investment, and capital accumulation. d.Agriculture versus industry and imports versus exports.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 12 of 37 The vicious cycle of poverty is an explanation of poverty that emphasizes: a.Income distribution and wealth accumulation. b.Hunger, illiteracy, and malnutrition. c.Consumption, saving, investment, and capital accumulation. d.Agriculture versus industry and imports versus exports.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 13 of 37 Economic Development: Sources and Strategies The Sources of Economic Development Human Resources and Entrepreneurial Ability brain drain The tendency for talented people from developing countries to become educated in a developed country and remain there after graduation. Social Overhead Capital social overhead capital Basic infrastructure projects such as roads, power generation, and irrigation systems.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 14 of 37 Which of the following statements is correct? a.Poverty alone cannot explain capital shortages, and poverty is not necessarily self perpetuating. b.Development cannot proceed without human resources capable of initiating and managing economic activity. c.The governments of developing countries can do important and useful things to encourage development, especially in areas that the private sector would never touch. d.All of the above statements are correct.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 15 of 37 Which of the following statements is correct? a.Poverty alone cannot explain capital shortages, and poverty is not necessarily self perpetuating. b.Development cannot proceed without human resources capable of initiating and managing economic activity. c.The governments of developing countries can do important and useful things to encourage development, especially in areas that the private sector would never touch. d.All of the above statements are correct.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 16 of 37 Economic Development: Sources and Strategies The Sources of Economic Development Social Overhead Capital Corruption The following chart shows the World Bank’s rating of corruption levels in a number of countries around the world. The countries are ranked from those with the strongest controls on corruption— Germany and France—to those with the lowest controls—Pakistan and Nigeria. Indonesia, as you can see, is near the bottom of the list.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 17 of 37 Economic Development: Sources and Strategies Strategies for Economic Development Agriculture or Industry? TABLE 21.2 The Structure of Production in Selected Developed and Developing Economies, 2003 Country Per-Capita Gross National Income (GNI) Percentage of Gross Domestic Product AgricultureIndustryServices Tanzania $ Bangladesh China2, Colombia2, Thailand2, Brazil4, Korea (Rep.)17, Japan38, United States44, Source: World Bank, World Development Indicators, 2008; Sectoral numbers for U.S. and Japan are for 2003.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 18 of 37 Economic Development: Sources and Strategies Strategies for Economic Development Exports or Import Substitution? import substitution An industrial trade strategy that favors developing local industries that can manufacture goods to replace imports. export promotion A trade policy designed to encourage exports.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 19 of 37 When imports of manufactured goods become relatively expensive in the domestic market, while exports become relatively inexpensive world markets, a country would naturally tend to choose: a.Import substitution over export promotion. b.Export promotion over import substitution. c.Both import substitution and export promotion. d. Neither import substitution nor export promotion.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 20 of 37 When imports of manufactured goods become relatively expensive in the domestic market, while exports become relatively inexpensive world markets, a country would naturally tend to choose: a.Import substitution over export promotion. b.Export promotion over import substitution. c.Both import substitution and export promotion. d. Neither import substitution nor export promotion.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 21 of 37 Economic Development: Sources and Strategies Strategies for Economic Development Central Planning or the Market? International Monetary Fund (IMF) An international agency whose primary goals are to stabilize international exchange rates and to lend money to countries that have problems financing their international transactions. World Bank An international agency that lends money to individual countries for projects that promote economic development.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 22 of 37 Economic Development: Sources and Strategies Strategies for Economic Development Microfinance: A New Idea In the mid 1970s, Muhammad Yunus, a young Bangladeshi economist created the Grameen Bank in Bangladesh. Microfinance is the practice of lending very small amounts of money, with no collateral, and accepting very small savings deposits. It is aimed at introducing entrepreneurs in the poorest parts of the developing world to the capital market. Relative to traditional bank loans, microfinance loans are much smaller, repayment begins very quickly, and the vast majority of the loans are made to women (who, in many cases, have been underserved by mainstream banks).

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 23 of 37 Economic Development: Sources and Strategies Growth versus Development: The Policy Cycle structural adjustment A series of programs in developing nations designed to: (1) reduce the size of their public sectors through privatization and/or expenditure reductions, (2) decrease their budget deficits, (3) control inflation, and (4) encourage private saving and investment through tax reform.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 24 of 37 Economic Development: Sources and Strategies Growth versus Development: The Policy Cycle Cell Phones IncreaseProfits for Fishermenin India Kerala is a poor state in a region of India. Beginning in 1997 and continuing for the next several years, mobile phone service was introduced to this region of India. Once the phones were introduced, waste, which had averaged 5 to 8 percent of the total catch, was virtually eliminated. In fact, cell phones are improving the way markets in less developed countries work by providing price and quantity information so that both producers and consumers can make better economic decisions.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 25 of 37 Economic Development: Sources and Strategies Two Examples of Development: China and India China and India provide two interesting examples of rapidly developing economies. While low per- capita incomes still mean that both countries are typically labeled developing as opposed to developed countries, many expect that to change in the near future. Many commentators expect India and China to dominate the world economy in the twenty-first century.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 26 of 37 Issues in Economic Development Population Growth The populations of the developing nations are estimated to be growing at about 1.7 percent per year. Concern over world population growth is not new. The Reverend Thomas Malthus (who became England’s first professor of political economy) expressed his fears about the population increases he observed 200 years ago. Malthus believed that populations grow geometrically at a constant growth rate—thus the absolute size of the increase each year gets larger and larger—but that food supplies grow more slowly because of the diminishing marginal productivity of land. These two phenomena led Malthus to predict the increasing impoverishment of the world’s people unless population growth could be slowed.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 27 of 37 Issues in Economic Development Population Growth The Consequences of Rapid Population Growth  FIGURE 21.1 The Growth of World Population, Projected to A.D For thousands of years, population grew slowly. From A.D. 1 until the mid-1600s, population grew at about.04 percent per year. Since the Industrial Revolution, population growth has occurred at an unprecedented rate.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 28 of 37 Thomas Malthus, England’s first professor of political economy, expressed his fears about: a.Excessive industrialization leading to worker exploitation. b.Geometric growth in population but diminishing marginal productivity of the land. c.The limitations that population growth imposes on saving and investment. d.The inability of societies to improve human capital through nutrition and formal education when population grows too rapidly.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 29 of 37 Thomas Malthus, England’s first professor of political economy, expressed his fears about: a.Excessive industrialization leading to worker exploitation. b.Geometric growth in population but diminishing marginal productivity of the land. c.The limitations that population growth imposes on saving and investment. d.The inability of societies to improve human capital through nutrition and formal education when population grows too rapidly.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 30 of 37 Issues in Economic Development Population Growth Causes of Rapid Population Growth fertility rate The birth rate. Equal to (the number of births per year divided by the population) × 100. mortality rate The death rate. Equal to (the number of deaths per year divided by the population) × 100. natural rate of population increase The difference between the birth rate and the death rate.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 31 of 37 The difference between the birth rate and the death rate is called: a.The fertility rate. b.The mortality rate. c.The natural rate of population increase. d.The labor force participation rate. e.The stabilization rate.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 32 of 37 The difference between the birth rate and the death rate is called: a.The fertility rate. b.The mortality rate. c.The natural rate of population increase. d.The labor force participation rate. e.The stabilization rate.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 33 of 37 The Transition to a Market Economy Six Basic Requirements for Successful Transition Economists generally agree on six basic requirements for a successful transition to a market-based system: (1) macroeconomic stabilization, (2) deregulation of prices and liberalization of trade, (3) privatization of state-owned enterprises and development of new private industry, (4) establishment of market-supporting institutions such as property and contract laws and accounting systems, (5) a social safety net to deal with unemployment and poverty, and (6) external assistance.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 34 of 37 The Transition to a Market Economy Six Basic Requirements for Successful Transition Macroeconomic Stabilization To achieve a properly functioning market system, prices must be stabilized. Deregulation of Prices and Liberalization of Trade An unregulated price mechanism ensures an efficient allocation of resources across industries. Privatization Private ownership provides a strong incentive for efficient operation, innovation, and hard work that is lacking when ownership is centralized and profits are distributed to the people.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 35 of 37 The Transition to a Market Economy Six Basic Requirements for Successful Transition Market-Supporting Institutions The capital market, which channels private saving into productive capital investment in developed capitalist economies, is made up of hundreds of different institutions. Social Safety Net This social safety net might include unemployment insurance, aid for the poor, and food and housing assistance. External Assistance Very few believe that the transition to a market system can be achieved without outside support and some outside financing.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 36 of 37 Which of the following are market supporting institutions? a.Private property. b.The right to profits. c.The enforcement of contracts and property rights. d. All of the above.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 37 of 37 Which of the following are market supporting institutions? a.Private property. b.The right to profits. c.The enforcement of contracts and property rights. d. All of the above.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 38 of 37 The Transition to a Market Economy Six Basic Requirements for Successful Transition Shock Therapy or Gradualism? shock therapy The approach to transition from socialism to market capitalism that advocates rapid deregulation of prices, liberalization of trade, and privatization.

CHAPTER 21 Economic Growth in Developing and Transitional Economies © 2009 Prentice Hall Business Publishing Principles of Economics 9e by Case, Fair and Oster 39 of 37 brain drain capital flight export promotion fertility rate import substitution International Monetary Fund (IMF) mortality rate natural rate of population increase shock therapy social overhead capital structural adjustment tragedy of commons vicious-circle-of-poverty hypothesis World Bank REVIEW TERMS AND CONCEPTS