Economic Problems Of Developing Countries

Economic Problems of Developing Countries

Economic Problems of Developing Countries

The Problem of Underdevelopment

THE PROBLEM OF UNDERDEVELOPMENT ■

The gulf between rich and poor countries ✜

differences in GNY

GNY per head as % of US GNY per head: 2000 (using ppp exchange rates) 100.0

USA

88.6

Switzerland

77.2

Japan

74.9

Hong Kong Germany

73.0

Singapore

72.9 71.4

France

68.7

UK

49.4

Greece

24.4

Malaysia

23.4

Russia

21.4

Brazil

13.8

Peru

11.5

China

10.2

Jamaica

7.0

India

5.7

Pakistan Nigeria

2.3

Ethiopia

1.9

Sierra Leone

1.3 0

10

20

30

40

50

60

70

80

90

100

THE PROBLEM OF UNDERDEVELOPMENT ■

The gulf between rich and poor countries ✜

differences in GNY

✜

differences in mortality and health

THE PROBLEM OF UNDERDEVELOPMENT ■

The gulf between rich and poor countries ✜

differences in GNY

✜

differences in mortality and health

✜

other differences

Selected world statistics

Selected world statistics

Selected world statistics

Selected world statistics

Selected world statistics

Selected world statistics

Selected world statistics

Selected world statistics

Selected world statistics

Selected world statistics

THE PROBLEM OF UNDERDEVELOPMENT ■

Differences between developing countries ✜

resources and climate

✜

infrastructure

✜

cultural and social factors

✜

degree of industrialisation

✜

relations with developed world

THE PROBLEM OF UNDERDEVELOPMENT ■

Measuring development ✜

basic needs approach ✦ advantages

of this approach

✦ disadvantages

✜

using GNY statistics ✦ advantages

of this approach

✦ disadvantages

✜

of this approach

of this approach

the Human Development Index

Human Development Index (HDI) for selected countries (1999)

Human Development Index (HDI) for selected countries (1999)

Human Development Index (HDI) for selected countries (1999)

Human Development Index (HDI) for selected countries (1999)

Human Development Index (HDI) for selected countries (1999)

Human Development Index (HDI) for selected countries (1999)

Human Development Index (HDI) for selected countries (1999)

Human Development Index (HDI) for selected countries (1999)

Human Development Index (HDI) for selected countries (1999)

Economic Problems of Developing Countries

International Trade and Development

INTERNATIONAL TRADE AND DEVELOPMENT ■

Role of international trade in economic development ✜

importance of trade

✜

trade strategies ✦ primary

outward-looking strategy

✦ secondary

inward-looking strategy

• import-substituting industrialisation (ISI) ✦ secondary

outward-looking strategy

• exporting manufactures

INTERNATIONAL TRADE AND DEVELOPMENT ■

Primary outward-looking strategy importance of primary exports ✜ justification for exporting primaries ✜

✦ comparative

advantage (Heckscher–Ohlin) ✦ vent for surplus; engine for growth

weakness of traditional trade theory ✜ problems for primary exporters: long term ✜

✦ slow

growth in exports ✦ rapid growth in imports ✜

problems for primary exporters: short term ✦ price

and output fluctuations

World primary commodity prices (1990 = 100)

World primary commodity prices (1990 = 100)

INTERNATIONAL TRADE AND DEVELOPMENT ■

Primary outward-looking strategy importance of primary exports ✜ justification for exporting primaries ✜

✦ comparative

advantage (Heckscher–Ohlin) ✦ vent for surplus; engine for growth

weakness of traditional trade theory ✜ problems for primary exporters: long term ✜

✦ slow

growth in exports ✦ rapid growth in imports ✜

problems for primary exporters: short term

INTERNATIONAL TRADE AND DEVELOPMENT ■

Primary outward-looking strategy importance of primary exports ✜ justification for exporting primaries ✜

✦ comparative

advantage (Heckscher–Ohlin) ✦ vent for surplus; engine for growth

weakness of traditional trade theory ✜ problems for primary exporters: long term ✜

✦ slow

growth in exports ✦ rapid growth in imports ✜

problems for primary exporters: short term ✦ price

and output fluctuations

INTERNATIONAL TRADE AND DEVELOPMENT ■

Import-substituting industrialisation ✜

the process of ISI

✜

justification ✦ problems

of primary-outward looking policies

✦ greater

dynamic potential with industrial production

✦ infant

industries

INTERNATIONAL TRADE AND DEVELOPMENT ■

Import-substituting industrialisation ✜

adverse effects ✦ against

comparative advantage

✦ cushions ✦ urban

bias

✦ damages ✦ wide

inefficiency

exports

variations in effective protection

✦ social

/ cultural problems

✦ environmental

costs

INTERNATIONAL TRADE AND DEVELOPMENT ■

Exporting manufactures

Growth rates and export performance of selected secondary outward-looking countries

Growth rates and export performance of selected secondary outward-looking countries

Growth rates and export performance of selected secondary outward-looking countries

INTERNATIONAL TRADE AND DEVELOPMENT ■

Exporting manufactures ✜

transition from inward-looking to outward-looking industrialisation

INTERNATIONAL TRADE AND DEVELOPMENT ■

Exporting manufactures ✜

transition from inward-looking to outward-looking industrialisation

✜

benefits from a secondary outward-looking policy

INTERNATIONAL TRADE AND DEVELOPMENT ■

Exporting manufactures ✜

transition from inward-looking to outward-looking industrialisation

✜

benefits from a secondary outward-looking policy

✜

drawbacks of a secondary outward-looking policy

Economic Problems of Developing Countries

Structural Problems in Developing Countries

STRUCTURAL PROBLEMS IN DEVELOPING COUNTRIES ■

■

The neglect of agriculture ✜

problems of urban bias

✜

policies to promote agriculture

✜

problems with these policies

Inappropriate technology ✜

capital-intensity biases

✜

arguments for capital-intensive technology

✜

arguments for labour-intensive technology

STRUCTURAL PROBLEMS IN DEVELOPING COUNTRIES ■

Unemployment ✜

rapid population growth

✜

capital-intensity bias

Limited choice of techniques: one technique only Q2

Q3

Capital (K)

Q1

Q3 Q2 Q1

O Labour (L)

Limited choice of techniques: one technique only Q1

Q2

Q3

Capital (K)

Expansion path

c

K3 b

K2 K1

O

Q3 Q2

a Q1

L1

L2

L3 Labour (L)

Limited choice of techniques: one technique only Q1

Q2

Q3 Assume that total capital supply is K

Capital (K)

total labour supply is L

Q3 K

Q2 Q1

O

L Labour (L)

Limited choice of techniques: one technique only Q1

Q2

Q3 With K of capital, only Q2 can be produced. Only L1 will be required

Capital (K)

L − L1 will be unemployed. Q3 K

Q2 Q1

O

L1

L Labour (L)

Capital intensity bias Assume that the total supply of capital is K, and

Capital (K)

the total supply of labour is L.

K

Q2 O

L Labour (L)

Q1

Capital intensity bias

Capital (K)

A

With competitively determined prices, the market will clear at point d with output of Q1 and price ratio given by the slope of AB

K

d

Q2 O

L Labour (L)

B

Q1

Capital intensity bias With a lower relative price of capital (given by slope of line CD) or a bias in favour of capital-intensive techniques, less labour will be employed (L1) and output will be lower (Q2).

A Capital (K)

C

d

K

Q2 O

L1

L

D

Labour (L)

B

Q1

STRUCTURAL PROBLEMS IN DEVELOPING COUNTRIES ■

Unemployment ✜

rapid population growth

✜

capital-intensity bias

✜

rural–urban migration

STRUCTURAL PROBLEMS IN DEVELOPING COUNTRIES ■

Unemployment ✜

rapid population growth

✜

capital-intensity bias

✜

rural–urban migration

✜

external influences

STRUCTURAL PROBLEMS IN DEVELOPING COUNTRIES ■

■

Unemployment ✜

rapid population growth

✜

capital-intensity bias

✜

rural–urban migration

✜

external influences

Inflation

STRUCTURAL PROBLEMS IN DEVELOPING COUNTRIES ■

■

Unemployment ✜

rapid population growth

✜

capital-intensity bias

✜

rural–urban migration

✜

external influences

Inflation ✜

problems of hyper-inflation

STRUCTURAL PROBLEMS IN DEVELOPING COUNTRIES ■

■

Unemployment ✜

rapid population growth

✜

capital-intensity bias

✜

rural–urban migration

✜

external influences

Inflation ✜

problems of hyper-inflation

✜

monetarist explanations

STRUCTURAL PROBLEMS IN DEVELOPING COUNTRIES ■

■

Unemployment ✜

rapid population growth

✜

capital-intensity bias

✜

rural–urban migration

✜

external influences

Inflation ✜

problems of hyper-inflation

✜

monetarist explanations

✜

structuralist explanations

Economic Problems of Developing Countries

The Problem of Debt

Growth in debt of developing countries: (average annual)

Growth in debt of developing countries: (average annual)

Growth in debt of developing countries: (average annual)

Growth in debt of developing countries: (average annual)

Debt ratios and the growth of debt: (average of all developing countries)

Debt ratios and the growth of debt: (average of all developing countries)

Debt ratios and the growth of debt: (average of all developing countries)

THE PROBLEM OF DEBT ■

Effects of the first oil shock 1971–78

■

Effects of the second oil shock 1979–84

■

✜

deep world recession

✜

decline in commodity prices

✜

high interest rates

Effects of recessions in early 1990s and early 2000s

THE PROBLEM OF DEBT ■

■

The effects of the debt problem on developing countries ✜

effects on growth

✜

effects on poverty

Coping with debt crises: rescheduling ✜

rescheduling official loans

✜

rescheduling commercial loans

THE PROBLEM OF DEBT ■

Dealing with debt ✜

structural reform in developing countries ✦ IMF

policy recommendations

✦ interventionist

solutions

✜

debt swaps

✜

debt forgiveness ✦ the

HIPC initiative

✦ Jubilee

2000

✦ subsequent

✜

events

should all debt be cancelled and aid increased?