1 developing and developed economies about ¾ of the world’s people live in less- developed...
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Developing and Developed Economies
About ¾ of the world’s people live in less-developed countries (LDCs) / Emerging Market Economies / Third World countries.– LDCs are characterized by low per capita GDP
(GNP) a low standard of living.
“First World countries” are the highly industrialized nations of western Europe, Japan, Australia/NZ and North America.“Second World countries” are eastern European countries and the countries of the former Soviet Union.
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The World by Stage of
Development
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Poverty
Absolute sense:– In the U.S., the poverty level for a family of four
in 2003 was an annual income of $18,244 or less.
– The World Bank uses per capita GNP of $755 or less as its criterion for a low-income country.
Poverty is also a relative concept, making it difficult to compare across countries.– The income of many households in the U.S. who
are considered poor is substantially higher than the incomes of poor families in other countries.
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Other measures of developmentCaloric intakeHealth careClothingShelter
Physical quality-of-life index– Life expectancy, infant mortality, and
literacy standardsWhat about justice, personal freedom, environmental quality, employment?
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Obstacles to GrowthPolitical Obstacles–Lack of Administrative Skills (ranging
from ineptness to corruption)–Political Instability and Risk
The key issue is property rights.–Corruption (from rents to pay-offs)–Good Economics as Bad Politics
Cutting government payrolls or cutting food subsidies difficult while maintaining peace and political support.
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Obstacles to GrowthSocial ObstaclesSocial Obstacles– Lack of Entrepreneurs
Do entrepreneurs come from blocked minorities? Do they take the risks because they have nothing to lose? Do immigrants become entrepreneurs because they have special skills?
– Rapid Population GrowthStandards of living improve when per capita output rises. New population growth starts with more dependents, children who require services but who do not work.It results in capital shallowing, lower productivityGovernment must focus on services for the growing population, and cannot afford infrastructure investment..
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Inward-Oriented Development Strategies–LDCs tend to export primary products
natural resources, raw materials, first-stage products used as inputs to other manufactures.Beware the primary goods trap:
Worsening terms-of-trade / Dutch disease
–Some LDCs adopted inward-oriented strategies: manufacture goods for domestic markets
Import substitution.Limited to goods for which the technologies are readily available.Typically requires government protection
Inefficiency
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Outward OrientedDevelopment Strategies
Export driven growth: Government stimulates exports– Countries with abundant, high-quality
labor to produce labor-intensive goods.Korea, Singapore, Taiwan, Hong Kong
… The Asian Tigers
ChinaMalaysia, Indonesia, Philippines, Thailand … The Dragons
–Give tax breaks and loans to exporters– Gov’t assistance in int’l marketing
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Foreign Direct Investment (FDI)Foreign Direct Investment (FDI)Benefits
Jobs: Learning by doing
Capital
Technology
Foreign Exchange Benefits
Drawbacks
Lack of control
Repatriated profits
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Transition from Socialism
Privatization–Coupons?–Shares?
Price Reform–Eliminate subsidies
Social Safety Net–Health care, unemployment, crime,
political unrest, etc.?
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Transition from SocialismMacroeconomic IssuesMonetary Overhang (Forced Saving):
Could generate excess demand if prices not allowed to rise fast enough
–Currency convertibility–Money and Credit – Establish private banks
–Fiscal Policy remove subsidies, fight deficits, establish taxes on an appropriate tax base.
Microeconomic IssuesLet inefficient firms die