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Copyright 2008 The McGraw-Hill Companies27-1
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
Key Terms
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27The EconomicsOf DevelopingCountries
Copyright 2008 The McGraw-Hill Companies27-2
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Chapter ObjectivesIn this chapter you will learn:• How the World Bank distinguishes
between industrial advanced countries (high-income nations) and developing countries (middle-income and low-income nations).
• Some of the obstacles to economic development.
• About the vicious cycle of poverty that afflicts low-income nations.
• The role of government in promoting economic development within low-income nations.
• How industrial nations attempt to aid low-income countries.
Copyright 2008 The McGraw-Hill Companies27-3
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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The Rich and the Poor
• Classifications–Industrially Advanced Countries (IACs)•High Income Nations
–Developing Countries (DVCs)•Low Income Nations•Middle Income Nations
Copyright 2008 The McGraw-Hill Companies27-4
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
Key Terms
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The Rich and the Poor• 2004 Comparisons:
–U.S. GDP $12 Trillion–All DVCs $5.5 Trillion–U.S. has 5% of Population
but Produces 31% of World’s Output
–U.S. Per Capita GDP Many Times Greater than DVCs
–Wal-Mart Sales Greater Than All But 19 Nations
Copyright 2008 The McGraw-Hill Companies27-5
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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The Rich and the Poor• Growth, Decline, and
Income Gaps–Differences in Ability to
Improve Positions Over Time
–Some Increase and Reach IAC Status
–Some Decline –Income Gap is Widening
Between Rich and Poor • Human Realities of Poverty
Copyright 2008 The McGraw-Hill Companies27-6
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Obstacles to Economic Development
• DVCs Must Use Existing Supplies of Resources More Efficiently
• DVCs Must Expand Their Available Supplies of Resources–Natural Resources–Human Resources
Copyright 2008 The McGraw-Hill Companies27-7
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Obstacles to Economic Development
• Overpopulation• Standard of Living
–Saving and Investment–Productivity–Resource Overuse–Urban Problems
StandardOf Living =
Consumer Goods (Food) Production
Population
Copyright 2008 The McGraw-Hill Companies27-8
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Obstacles to Economic Development
• Qualifications–Demographic Transition
View
• Unemployment• Underemployment• Low Labor Productivity• Brain Drain
Copyright 2008 The McGraw-Hill Companies27-9
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Capital Accumulation• Domestic Capital Formation–Savings Potential–Capital Flight–Investment Obstacles
•Infrastructure
Copyright 2008 The McGraw-Hill Companies27-10
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Capital Accumulation• Technological Advance
–Capital-Saving Technology
–Capital-Using Technology
• Sociocultural and Institutional Factors–The Will to Develop–Capricious Universe
View–Land Reform
Copyright 2008 The McGraw-Hill Companies27-11
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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The Vicious CircleThe Vicious Circle of Poverty
RAPIDPOPULATION
GROWTH
LOW LEVELOF DEMAND
LOW LEVELOF SAVING
LOWPRODUCTIVITY
LOW LEVELS OFINVESTMENT INPHYSICAL AND
HUMAN CAPITAL
LOWPER CAPITA
INCOME
27.1
Copyright 2008 The McGraw-Hill Companies27-12
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Role of Government• A Positive Role
–Law and Order–Lack of Entrepreneurship–Infrastructure–Forced Saving and
Investment–Social-Institutional
Problems• Public Sector Problems
–Corruption
Copyright 2008 The McGraw-Hill Companies27-13
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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GLOBAL PERSPECTIVE
Role of Government
The Corruption Perception Index
Source: Transparency International
Corruption Index Value, 2005
FinlandNew Zealand
DenmarkUnited States
ChinaIndia
MoldovaMadagascar
EcuadorRussia
AzerbaijanCameroonParaguay
NigeriaHaiti
Bangladesh
0 1 2 3 4 5 6 7 8 9 10
9.69.69.5
7.63.2
2.92.92.8
2.52.4
2.22.22.1
1.91.81.7
Copyright 2008 The McGraw-Hill Companies27-14
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Role of Advanced Nations• Expanding Trade• Foreign Aid
– Direct Aid– The World Bank Group– Foreign Harm
• Dependency and Incentives• Bureaucracy and Centralized
Government• Corruption and Misuse
– The Decline in Foreign Aid– Flows of Private Capital
• Direct Foreign Investment
Copyright 2008 The McGraw-Hill Companies27-15
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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GLOBAL PERSPECTIVE
Role of Advanced Nations
Development Assistance as a Percentage of GDP
Source: U. N. Human Development Report, 2006
0 .20 .40 .60 .80 1.00
Netherlands
Sweden
France
United Kingdom
Germany
Canada
Japan
United States
.80
.79
.34
.28
.41
Percentage of GDP, 2003
.20
.15
.24
Copyright 2008 The McGraw-Hill Companies27-16
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Where From Here?• DVC Policies for Promoting
Growth–Establishing and
Implementing the Rule of Law
–Opening Economies to International Trade
–Controlling Population Growth
–Encouraging Foreign Direct Investment
–Building Human Capital
Copyright 2008 The McGraw-Hill Companies27-17
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Where From Here?• DVC Policies for
Promoting Growth–Making Peace With
Neighbors
–Establishing Independent Central Banks
–Establishing Realistic Exchange-Rate Policies
–Privatizing State Industries
Copyright 2008 The McGraw-Hill Companies27-18
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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IAC Policies for Fostering DVC Growth
• Directing Foreign Aid to the Poorest DVCs
• Reducing Tariffs, Import Quotas, and Farm Subsidies
• Providing Debt Forgiveness to the Poorest DVCs
• Admitting in Temporary Workers and Discouraging Brain Drains
• Discouraging Arms Sales to the DVCs
Copyright 2008 The McGraw-Hill Companies27-19
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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Food Shortages in Africa
• Root Causes – Both Natural and Human Causes
• Droughts– Lack of Rainfall– Overuse of Land
• Civil Strife– Rebellions, Civil Wars, Wars
with Neighbors, Anarchy• Population Growth• Ecological Degradation
Last
Word
Copyright 2008 The McGraw-Hill Companies27-20
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
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• Public Policies– Neglected Agriculture for
Military Uses– Channeling Aid to Military and
Ignoring Civilians– Setting Agricultural Prices Low
Decreasing Incentive to Grow– Land Seizures that Collapsed
the Food Supply• External Debt
– Required Austerity
Food Shortages in AfricaLast
Word
Copyright 2008 The McGraw-Hill Companies27-21
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
Key Terms
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Key Terms• industrially advance
d countries (IACs)
• developing countries (DVCs)
• demographic transition view
• underemployment• brain drain• capital flight• infrastructure• capital-saving
technology
• capital-using technology
• the will to develop• capricious universe
view• land reform• vicious circle of
poverty• corruption• World Bank• direct foreign
investment
Copyright 2008 The McGraw-Hill Companies27-22
Rich and PoorObstacles to Economic DevelopmentCapital AccumulationVicious Circle of PovertyRole of GovernmentRole of Advanced NationsWhere from Here?IAC Policies for Fostering DVC GrowthLast Word
Key Terms
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THIS IS IT!!!!!
