1. Presentation Pro © 2001 by Prentice Hall, Inc. Economics: Principles in Action C H A P T E R 18 Economic Development and Transition

2. 123 Go To Section: 4 Economic Development and Transition C H A P T E R 18 Economic Development and Transition SECTION 1 Levels of Development SECTION 2 Issues in Development SECTION 3 Financing Development SECTION 4 Transitions to Free Enterprise Chapter 18 2222 3333 4444 1111

3. 123 Go To Section: 4 Chapter 18, Section 3 Financing Development S E C T I O N 3 Financing Development What role does investment play in development? 2222 4444 1111

4. 123 Go To Section: 4 The Role of Investment Internal Financing Internal financing is derived from the savings of a country’s citizens. In many LDCs, there is little internal financing. Foreign Investment Foreign investment is investment which originates from other countries. There are two types of foreign investment, foreign direct investment, and foreign portfolio investment. Building an infrastructure, providing education and health care, and creating technology and industry, all require large sums of money. Chapter 18, Section 3 2222 4444 1111

5. 123 Go To Section: 4 Two Types of Foreign Investment Foreign Direct Investment Foreign direct investment is the establishment of an enterprise by a foreigner. Many multinational corporations are attracted to foreign direct investment because of the possibilities for increased profits. Foreign Portfolio Investment Foreign portfolio investment is the entry of funds into a country when foreigners make purchases in the country’s stock and bond markets. Foreign portfolio investment creates funds which indirectly increase production. Chapter 18, Section 3 2222 4444 1111 What role does investment play in development?

6. 123 Go To Section: 4 Foreign Aid Many developed nations provide aid to less developed nations for building schools, sanitation systems, roads, and other infrastructure. Chapter 18, Section 3 Dollars (in millions) U.S. Foreign Aid, 1996 Recipient 1,200 1,000 800 600 400 200 0 Source: Statistical Abstract of the United States Israel Egypt Bosnia- Herzegovina Russia India 2222 4444 1111 What role does investment play in development?

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8. 123 4 International Economic Institutions World Bank The largest provider of development assistance is the World Bank. The World Bank offers loans, advice, and other resources to many less developed countries. United Nations Development Program (UNDP) The United Nations Development Program is dedicated to the elimination of poverty through development. International Monetary Fund The International Monetary Fund (IMF) primarily offers policy advice and technical assistance to LDCs. The IMF is also viewed as a lender of last resort. Chapter 18, Section 3 2222 4444 1111 What role does investment play in development?

9. 123 Go To Section: 4 Section 3 Review 1. Why does the money that is invested in many less developed countries have to come from outside the country? (a) The amounts of money needed are large. (b) Entrepreneurs from developed countries do not want to invest in these countries. (c) Most residents do not have enough money to save and invest. (d) Multinational corporations want to invest in these countries. 2. The establishment of a business enterprise by someone who lives outside a country is called (a) a foreign publication group. (b) a multinational corporation. (c) a foreign direct investment. (d) an outside capitalization. Want to connect to the Economics link for this section? Click Here!Click Here! Chapter 18, Section 3 2222 4444 1111

10. 123 Go To Section: 4 Transitions to Free Enterprise S E C T I O N 4 Transitions to Free Enterprise What steps are taken when moving from a centrally planned economy to a free market economy? Chapter 18, Section 4 2222 3333 1111

11. 123 Go To Section: 4 Moving Toward a Market Economy Privatization Privatization is the sale or transfer of state-owned businesses to individuals. Private ownership gives individuals, rather than the government, the right to make decisions about what to produce and how much to produce. Protecting Property Rights A government must create whole new sets of laws that ensure a person’s right to own land and transfer property. Other New Roles for Government A government must also be able to deal with possible unrest caused by the transition to a market economy. A government may also play a role in establishing a new work ethic, or a system of values that gives central importance to work. Chapter 18, Section 4 2222 3333 1111 What steps are taken when moving from a centrally planned economy to a free market economy?

12. 123 Go To Section: 4 Transition in Russia Chapter 18, Section 4 2222 3333 1111 What steps are taken when moving from a centrally planned economy to a free market economy?

13. 123 Go To Section: 4 Transition in China The Great Leap Forward In 1958, Mao Zedong introduced the Great Leap Forward. The program’s intent was to turn China into a great economic power, but instead resulted in famine and about 20 million deaths. Transition to the Free Market Mao died in 1976. His successor, Deng Xiaoping, introduced new approaches to government and the economy. Deng shifted industrial and agricultural production decisionmaking back to individual farmers and factory owners. Economic Zones Deng also set up four special economic zones along China’s east coast. In these zones, local governments are allowed to offer tax incentives to foreign investors and local businesses can make their own production decisions. China now has hundreds of special economic zones. Chapter 18, Section 4 Since the end of China’s civil war in 1949, China has developed its own unique version of communism. 2222 3333 1111 What steps are taken when moving from a centrally planned economy to a free market economy?

14. 123 Go To Section: 4 Economic Development and Transition Most LDCs have discovered that a centrally planned economy limits development. Many communist nations are reshaping their economies. Former Soviet Union, Cuba, North Korea, and etc. They have dismantled their economies and replaced them with market-based systems. China has modified their command economy to incorporate some free market practices. The transition to free markets and capitalism is a huge adjustment for an economy and a nation. What steps are taken when moving from a centrally planned economy to a free market economy?

15. 123 Go To Section: 4 Economic Development and Transition Moving Toward a Market Economy: One of the key elements of a command economy is that the government, not individuals, owns and controls the factors of production. The government answers the three key economic questions. First step moving from a command economy to capitalism is privatization. What steps are taken when moving from a centrally planned economy to a free market economy?

16. 123 Go To Section: 4 Economic Development and Transition Moving Toward a Market Economy: Privatization – the sale or transfer of government-owned businesses to individuals. Private ownership give the individual, not the government, the right to make decisions about what to produce and how much to produce. Ways to do this… 1. sell the business to one owner 2. sell shares in the business to interested people 3. give every citizen a voucher or certificate that can be used to purchase shares in the businesses when they are privatized. What steps are taken when moving from a centrally planned economy to a free market economy?

17. 123 Go To Section: 4 Economic Development and Transition Protecting Property Rights: Even when the government gives up its role as the owner and decision-maker, they play a vital role in the economy. Their role is to ensure the success of a new market-based economy. Government must set up private property laws to protect people who own the land. Entrepreneurs need laws to prevent criminals from stealing their profits. It takes time to develop a legal system that will support a market-based economy. What steps are taken when moving from a centrally planned economy to a free market economy?

18. 123 Go To Section: 4 Economic Development and Transition More New Roles for Government: The Government must be prepared to deal with the unrest that might develop from rising unemployment. The government must also play a role in helping workers make the transition from a centrally planned economy to a market- based economy. Workers in transition often need to learn a new work ethic – system of values that gives central importance to work. In a free market economy, incentives, not quotas, influence people’s labor. What steps are taken when moving from a centrally planned economy to a free market economy?

19. 123 Go To Section: 4 Economic Development and Transition Transition in Russia: Soviet Union was once the most powerful communist nation. The lagging Soviet economy prompted economic and social reform. Change came quickly to Russia, as economic freedom led to the desire for political freedom.

20. 123 Go To Section: 4 Economic Development and Transition Communism in Russia: Soviet Union arose out a revolution in 1917. Vladimir Lenin, took control of the government He had a repressive form of control The Soviets reorganized their farmland into state farms and collective farms. State farm workers received wages, similar to factory workers. They had few incentives to encourage people to work hard. Agricultural output was low.

21. 123 Go To Section: 4 Economic Development and Transition Communism in Russia: Soviet policy emphasized the development of heavy industry. By 1940, the Soviets were the 2 nd largest producer of iron and steel in Europe. With so much devoted to heavy industry, very little was left for consumer goods. The every day items were in short supply.

22. 123 Go To Section: 4 Economic Development and Transition Glasnost and Perestroika: In the late 1980s, Mikhail Gorbachev began a series of radical political and economic reforms. He believed that economic prosperity could happen without political freedom, he introduced Glasnost – a policy of political “openness” that encouraged Soviet citizens to say what they wished for without fear of government persecution.

23. 123 Go To Section: 4 Economic Development and Transition Glasnost and Perestroika: Gorbachev’s reform was a plan of economic restructuring called Perestroika. It called for a gradual change from a centrally planned system to a free enterprise system. Gorbachev’s main desire was to incorporate the use of markets and incentives into the existing structure of communism. Under this system, the government began to allow factory managers to decide what goods to produce and how much to charge for them.

24. 123 Go To Section: 4 Economic Development and Transition Glasnost and Perestroika: Collapse of Communism – In 1991, the Russians voted in their first democratic elections. Gorbachev resigned as president at the end of 1991. – The end of the Soviet Union as we knew it. – Transition to the Free Market – »Boris Yeltsin came to power and promoted a market- based economy. »There were many improvements, but hardships continued.

25. 123 Go To Section: 4 Economic Development and Transition Transition to the Free Market: In 1992, Yeltsin lifted all price controls Supply and Demand controlled the prices Money was moved to try and build up the urban centers. Corruption led to many problems. They received billions of dollars of aid from around the world. The World bank and IMF helped out the country. Things have got better for them, but they have a ways to go.

26. 123 Go To Section: 4 Economic Development and Transition Transition in China: 1949 – Communist forces brought Mao Zedong to power. Promoted the Great Leap Forward intended to turn China into a world economic power in the shortest time possible. The government took over all of the land and the people were organized into self-sufficient settlements. These were communes of 25,000 people.

27. 123 Go To Section: 4 Economic Development and Transition Transition in China: This Great Leap Forward was a huge disaster. The people had no incentives to work hard, so production fell. The country went through a period of famine and around 20 million people starved to death. What steps are taken when moving from a centrally planned economy to a free market economy?

28. 123 Go To Section: 4 Economic Development and Transition Cultural Revolution – - In the 1960s, Mao instituted this cultural revolution – intended so that China could further embrace communism. - Organized the Red Guard – young men and women to carry out his policy. They persecuted people who did not follow. He was trying to get rid of the “Four Olds” 1. old ideology2. old thought 3. old habits4. old customs What steps are taken when moving from a centrally planned economy to a free market economy?

29. 123 Go To Section: 4 Economic Development and Transition Transition to the Free Market: Mao died in 1976. Deng Ziaoping took over He introduced a new approach that shifted power to local government. He introduced a program of economic reform He tried to incorporate some free markets into the economy. This program was called the “Four Modernizations” What steps are taken when moving from a centrally planned economy to a free market economy?

30. 123 Go To Section: 4 Economic Development and Transition Four Modernizations To improve agriculture, science and technology, and defense quickly. Agriculture – people had contracts with the government to produce so much grain at a certain price. Any amount of grain over that set quota, the farmer got to keep. Industry was to produce consumer goods so that more people would buy them and to produce more light industry (clothing, appliances, etc) What steps are taken when moving from a centrally planned economy to a free market economy?

31. 123 Go To Section: 4 Economic Development and Transition Economic Zones Deng set up four special economic zones along China’s east coast. Local governments in these zones were allowed to offer tax incentives to foreign investors. Businesses were allowed to make most of their own investment and production decisions. China began to have rapid economic growth (mainly along the economic zones). Today, China continues to grow economically. What steps are taken when moving from a centrally planned economy to a free market economy?

32. 123 Go To Section: 4 Section 4 Review 1. Why must private ownership of property be legally guaranteed before a free market economy will work? (a) Unemployment will be too high for the private ownership to work without the guarantee. (b) Foreign investors will take over the ownership of all property if it is not guaranteed. (c) People will not invest in businesses unless their legal rights are protected, and they know contracts will be legal and enforced. (d) Foreign investors will try to impose their own system of property rights on the country. 2. China’s special economic zones (a) represent China’s commitment to communist principles. (b) represent China’s shift toward a free market economy. (c) provide fewer incentives for foreign investors. (d) are an attempt to limit the growth of the free market in China. Want to connect to the Economics link for this section? Click Here!Click Here! Chapter 18, Section 4 2222 3333 1111