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Life in Developing Nations: Population and Poverty

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Import substitution is an industrial trade strategy that favors ... Japan , South Korea ... Development Indicators, 2000. 14 154.6 China 20 98.2 India 29 232 ... – PowerPoint PPT presentation

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Title: Life in Developing Nations: Population and Poverty


1
Life in Developing Nations Population and Poverty
  • The universality of scarcity makes economic
    analysis relevant to all nations.
  • Economic problems and policy instruments are
    different, but economic thinking about these
    problems can be transferred easily from country
    to country.

2
Life in Developing Nations Population and Poverty
  • food shortages
  • explosive population growth
  • hyperinflation
  • low productivity and low GDP per capita
  • prevalence of informal markets
  • primitive shelter
  • Illiteracy
  • infant mortality

3
Life in Developing Nations Population and Poverty
  • In the year 2,000, the world population reached
    over 6.1 billion people. Most of the worlds
    more than 200 nations belong to the developing
    world.
  • While the developed nations account for only
    about one-quarter of the worlds population, they
    consume about three-quarters of the worlds
    output.

4
Life in Developing Nations Population and Poverty
  • Developing countries have three-fourths of the
    worlds population, but only one-fourth of the
    worlds income.

5
Sources of Economic Development Land
  • Many developing nations are rich in natural
    resources
  • Their ability to exploit these resources depends
    largely on their access to capital technology
  • The presence of valuable resources has led to
    instability due to past colonization and current
    resource wars

6
Sources of Economic Development
Labor/Entrepreneurship aka Human Capital
  • Human resources and Entrepreneurial Ability The
    quality of labor may pose a serious constraint on
    the growth of income.
  • Just as financial capital seeks the highest
    return, so does human capital
  • Brain drain is the tendency for talented people
    from developing countries to become educated in a
    developed country and remain there after
    graduation.

7
Sources of Economic Development
Labor/Entrepreneurship aka Human Capital
  • Entrepreneurs who can organize economic activity
    appear to be in short supply.
  • Government intervention/ownership often serves as
    a substitute for private entrepreneurship,

8
Sources of Economic Development Capital
  • Capital formation Almost all developing nations
    have a scarcity of physical capital relative to
    other resources, especially labor.
  • The vicious cycle 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.
  • A poor nation consumes most of its income. This
    implies limited saving and investment.

9
Sources of Economic Development Financial Capital
  • Capital flight is the tendency of both human
    capital and financial capital to leave developing
    countries in search of higher rates of return
    elsewhere.
  • Instability discourages domestic investment.
  • The absence of productive capital prevents
    incomes from rising.

10
Sources of Economic Development Social Capital
  • Social Capital is the basic infrastructure
    projects such as roads, power generation, and
    irrigation systems that add to a nations
    productive capacity.
  • It also includes health and human services
  • In developing economies, government provision of
    public goods is highly deficient due to lack of
    resources and corruption

11
Strategies for Economic Development
  • A developing economy with insufficient human and
    physical capital faces some very basic
    trade-offs. Three of these trade-offs are
  • Agriculture or industry?
  • Exports or Import Substitution?
  • Central planning or free markets?

12
Agriculture or Industry?
  • Industry has some apparent attractions over
    agriculture
  • The building of factories is an important step
    toward increasing the stock of capital.
  • Developed economies have experienced a structural
    transition from agriculture to industrialization
    and greater provision of services.
  • However, industrialization in many developed
    countries has not brought the benefits that were
    expected.

13
Agriculture or Industry?
The Structure of Production in Selected Developed and Developing Economies, 1998 The Structure of Production in Selected Developed and Developing Economies, 1998 The Structure of Production in Selected Developed and Developing Economies, 1998 The Structure of Production in Selected Developed and Developing Economies, 1998 The Structure of Production in Selected Developed and Developing Economies, 1998
COUNTRY PER CAPITA INCOME PERCENTAGE OF GROSS DOMESTIC PRODUCT PERCENTAGE OF GROSS DOMESTIC PRODUCT PERCENTAGE OF GROSS DOMESTIC PRODUCT
COUNTRY PER CAPITA INCOME AGRICULTURE INDUSTRY SERVICES
Tanzania 220 46 15 39
Bangladesh 350 22 28 50
China 750 18 49 33
Thailand 2,160 11 41 48
Colombia 2,470 13 25 61
Brazil 4,630 8 29 63
Korea 8,600 5 43 52
United States 29,240 2 26 72
Japan 32,350 2 37 61
Source World Bank, World Development Report, 2000. Source World Bank, World Development Report, 2000. Source World Bank, World Development Report, 2000. Source World Bank, World Development Report, 2000. Source World Bank, World Development Report, 2000.
14
Exports or Import Substitution?
  • Import substitution is an industrial trade
    strategy that favors developing local industries
    that can manufacture goods to replace imports.
  • When the terms of trade deteriorate (imports
    become relatively expensive and exports
    relatively cheap), import substitution becomes
    attractive.

15
Exports or Import Substitution?
  • The import-substitution strategy has failed
    almost everywhere, for the following reasons
  • Domestic industries, sheltered from international
    competition, develop major economic
    inefficiencies.
  • Import substitution encouraged the production of
    capital-intensive production methods, which
    limited the creation of jobs.
  • The cost of the resulting output was far greater
    than the price of that output in world markets.

16
Exports or Import Substitution?
  • Export promotion is a trade policy designed to
    encourage exports.
  • Several countries including Japan, South Korea,
    Colombia, and Turkey, have had some success with
    outward-looking trade policy.
  • Government policies to promote exports include
    subsidies to export industries and the
    maintenance of a favorable exchange rate
    environment.

17
Central Planning or the Market?
  • Today, planning takes many forms in developing
    nations.
  • The economic appeal of planning lies in its
    ability to channel savings into productive
    investment and to coordinate economic activities
    that otherwise might not exist.
  • But the reality of central planning is that it is
    technically difficult, highly politicized, and
    difficult to administer.

18
Central Planning or the Market?
  • Market-oriented reforms recommended by
    international agencies include
  • the elimination of price controls
  • privatization of state-run enterprises
  • reductions in import restraints
  • The International Monetary Fund is 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.

19
Central Planning or the Market?
  • Structural adjustment is a series of programs in
    developing nations designed to
  • reduce the size of their public sectors through
    privatization and/or expenditure reductions,
  • decrease their budget deficits,
  • control inflation, and
  • Encourage private saving and investment through
    tax reform.

20
Issues in Economic Development
  • The growth of the population in developing
    nations is about 1.7 percent per year, compared
    to only 0.5 percent per year in industrial market
    economies.
  • Thomas Malthus, Englands first professor of
    political economy, believed population grows
    geometrically. He believed that due to the
    diminished marginal productivity of land, food
    supplies grow much more slowly.

21
Issues in Economic Development
  • Population growth is determined by the
    relationship between births and deaths.
  • The fertility rate, or birth rate, equals
  • The mortality rate, or death rate, equals

22
Issues in Economic Development
23
Issues in Economic Development
  • The natural rate of population increase is the
    difference between the birth rate and the death
    rate. It does not take migration into account.
  • Any nation that wants to slow its rate of
    population growth will probably find it necessary
    to have in place economic incentives for fewer
    children as well as family planning programs.

24
Developing Country Debt Burdens
  • Debt rescheduling is an agreement between banks
    and borrowers through which a new schedule of
    repayments of the debt is negotiated often some
    of the debt is written off and the repayment
    period is extended.
  • An stabilization program is an agreement between
    a borrower country and the International Monetary
    Fund in which the country agrees to revamp its
    economic policies to provide incentives for
    higher export earnings and lower imports.

25
Developing Country Debt Burdens
Total (Public and Private) External Debt for Selected Countries, 1998 (Billions of Dollars) Total (Public and Private) External Debt for Selected Countries, 1998 (Billions of Dollars) Total (Public and Private) External Debt for Selected Countries, 1998 (Billions of Dollars)
COUNTRY TOTAL EXTERNAL DEBT TOTAL DEBT AS A PERCENTAGE OF GDP
Guinea-Bissau 1.0 363
Nicaragua 6.0 295
Angola 12.7 280
Sudan 16.8 172
Indonesia 150.9 169
Thailand 86.2 76
Russian Federation 183.6 62
Peru 32.4 55
Argentina 144.0 52
Turkey 102.1 49
Mexico 159.9 41
Brazil 232.0 29
India 98.2 20
China 154.6 14
Source World Bank, World Development Indicators, 2000. Source World Bank, World Development Indicators, 2000. Source World Bank, World Development Indicators, 2000.
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