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294 The Cultural Landscape
We will examine examples of countries that have tried each alter-native, successfully and unsuccessfully.
For most of the twentieth century, self-sufficiency, or bal-anced growth, was the more popular of the development alter-natives. The world’s two most populous countries, China andIndia, once adopted this strategy, as did most African and East-ern European countries.
Elements of Self-Sufficiency ApproachAccording to the self-sufficiency approach, a country shouldspread investment as equally as possible across all sectors ofits economy and in all regions. The pace of development maybe modest, but the system is fair because residents and enter-prises throughout the country share the benefits of develop-ment. Under self-sufficiency, incomes in the countryside keeppace with those in the city, and reducing poverty takes prece-dence over encouraging a few people to become wealthyconsumers.
The approach nurses fledgling businesses in an LDC by isolat-ing them from competition with large international corpora-tions. Such insulation from the potentially adverse impacts ofdecisions made by businesses and governments in the MDCsencourages a country’s fragile businesses to achieve independ-ence. Countries promote such self-sufficiency by setting barriersthat limit the import of goods from other places. Three widelyused barriers include setting high taxes (tariffs) on importedgoods to make them more expensive than domestic goods, fixingquotas to limit the quantity of imported goods, and requiringlicenses in order to restrict the number of legal importers. Theapproach also restricts local businesses from exporting to othercountries.
For many years India made effective use of many barriers totrade. For example:
• To import goods into India, most foreign companies had tosecure a license, a long and cumbersome process becauseseveral dozen government agencies had to approve therequest.
• Once a company received an import license, the govern-ment severely restricted the quantity it could sell in India.
• The government imposed heavy taxes on imported goods,which doubled or even tripled the price to consumers.
• Indian businesses were discouraged from producing goodsfor export; Indian money could not be converted to othercurrencies.
Businesses were supposed to produce goods for consump-tion inside India. Effectively cut off from the world economy,they required government permission to sell a new product,modernize a factory, expand production, set prices, hire or fireworkers, and change the job classification of existing workers.If private companies were unable to make a profit selling goodsonly inside India, the government provided subsidies, such ascheap electricity, or wiped out debts. The government ownednot just communications, transportation, and power compa-nies, a common feature around the world, but also businessessuch as insurance companies and automakers, left to the pri-vate sector in most countries.
KEY ISSUE 4
Why Do LDCs Face Obstacles to Development?
■ Development Through Self-Sufficiency■ Development Through International Trade■ International Trade Approach Triumphs■ Financing Development■ Fair Trade
To reduce disparities between rich and poor countries,LDCs must develop more rapidly. This means increasing percapita GDP more rapidly and using the additional funds tomake more rapid improvements in social and economicconditions. LDCs face two fundamental obstacles in tryingto encourage more rapid development:
■ Adopting policies that successfully promote develop-ment
■ Finding funds to pay for development ■
Development Through Self-SufficiencyTo promote development, LDCs choose one of two models:One emphasizes international trade; the other advocates self-sufficiency. Each has important advantages and serious problems.
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FIGURE 9-24 Political indicator of empowerment (one of two): administrators.The United Nations considers professional jobs to be a key measure of economicpower, whereas managerial jobs represent the ability to influence the process ofdecision making.
Chapter 9: Development 295
protected from international competition were not pres-sured to keep abreast of rapid technological changes.
2. Need for large bureaucracy. The complex administra-tive system needed to administer the controls encouragedabuse and corruption. Potential entrepreneurs found thatstruggling to produce goods or offer services was less reward-ing financially than advising others how to get around thecomplex government regulations. Other potential entrepre-neurs earned more money by illegally importing goods andselling them at inflated prices on the black market.
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FIGURE 9-25 Political indicator of empowerment (two of two): elected officials. No particular gender-specific skills are required to be elected as a representative and to serve effectively. Although more womenthan men vote in most places, no country has a national parliament or congress with a majority of women.The highest percentages are in Northern Europe, where women comprise approximately one-third ofmembers of national parliaments. In the United States, 15 percent of the U.S. Senate and House ofRepresentatives are women.
Problems with the Self-SufficiencyAlternativeThe experience of India and other LDCs with self-sufficiencyrevealed two major problems:
1. Protection of inefficient businesses. Businessescould sell all they made, at high government-controlledprices, to customers culled from long waiting lists, so theyhad little incentive to improve quality, lower productioncosts, reduce prices, or increase production. Companies
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FIGURE 9-26 Progress toward development. Key three indicators of development show that the gapbetween MDCs and LDCs remains wide. The natural increase rate has declined at about the same rate inMDCs and LDCs since 1970, and the infant mortality rate has declined at about the same rate since 1990.GDP per capita has increased more rapidly in MDCs than in LDCs.
296 The Cultural Landscape
Development ThroughInternational TradeThe international trade model of development calls for a coun-try to identify its distinctive or unique economic assets. Whatanimal, vegetable, or mineral resources does the country havein abundance that other countries are willing to buy? Whatproduct can the country manufacture and distribute at a higherquality and a lower cost than other countries? According to theinternational trade approach, a country can develop economi-cally by concentrating scarce resources on expansion of itsdistinctive local industries. The sale of these products in theworld market brings funds into the country that can be used tofinance other development.
Rostow’s Development ModelA pioneering advocate of this approach was W. W. Rostow, who inthe 1950s proposed a five-stage model of development. Severalcountries adopted this approach during the 1960s, although mostcontinued to follow the self-sufficiency approach. The five stageswere as follows:
1. The traditional society. A traditional society has notyet started a process of development. It contains a veryhigh percentage of people engaged in agriculture anda high percentage of national wealth allocated to what Ros-tow called “nonproductive” activities, such as the militaryand religion.
2. The preconditions for takeoff. An elite group initiatesinnovative economic activities. Under the influence ofthese well-educated leaders, the country starts to invest innew technology and infrastructure, such as water suppliesand transportation systems. These projects will ultimatelystimulate an increase in productivity.
3. The takeoff. Rapid growth is generated in a limitednumber of economic activities, such as textiles or foodproducts. These few takeoff industries achieve techni-cal advances and become productive, whereas other sec-tors of the economy remain dominated by traditionalpractices.
4. The drive to maturity. Modern technology, previouslyconfined to a few takeoff industries, diffuses to a widevariety of industries, which then experience rapid growthcomparable to the takeoff industries. Workers becomemore skilled and specialized.
5. The age of mass consumption. The economy shiftsfrom production of heavy industry, such as steel andenergy, to consumer goods, such as motor vehicles andrefrigerators.
According to the international trade model, each country isin one of these five stages of development. MDCs are in stage 4or 5, whereas LDCs are in one of the three earlier stages. Themodel assumes that LDCs will achieve development by movingalong from an earlier to a later stage. The model also asserts
that today’s MDCs passed through the early stages in the past.The United States, for example, was in stage 1 prior to inde-pendence, stage 2 during the first half of the nineteenth cen-tury, stage 3 during the middle of the nineteenth century, andstage 4 during the late nineteenth century, before entering stage5 during the early twentieth century.
A country that concentrates on international trade benefitsfrom exposure to consumers in other countries. To remaincompetitive, the takeoff industries must constantly evaluatechanges in international consumer preferences, marketingstrategies, production engineering, and design technologies.This concern for international competitiveness in the exportingtakeoff industries will filter through less advanced economicsectors.
Rostow’s optimistic development model was based on twofactors. First, in the second half of the twentieth century MDCsin Europe and North America were being joined by others inSouthern and Eastern Europe and Japan. If they could becomemore developed by following this model, why couldn’t othercountries? Second, many LDCs contained an abundant supplyof raw materials sought by manufacturers and producers inMDCs. In the past, European colonial powers extracted manyof these resources without paying compensation to thecolonies. In a global economy, the sale of these raw materialscould generate funds for LDCs with which they could promotedevelopment.
Examples of the International Trade ApproachWhen most LDCs were following the self-sufficiency approach,two groups of countries chose the international trade approachduring the mid-twentieth century.
THE FOUR ASIAN DRAGONS. Among the firstcountries to adopt the international trade alternative wereSouth Korea, Singapore, Taiwan, and the then-British colony ofHong Kong. These four areas were given several nicknames,including the “four dragons,” the “four little tigers,” and “thegang of four.”
Singapore and Hong Kong, British colonies until 1965 and1997, respectively, have virtually no natural resources. Bothcomprise large cities surrounded by very small amounts ofrural land. South Korea and Taiwan have traditionally takentheir lead from Japan, which occupied both countries untilafter World War II. Their adoption of the international tradeapproach was strongly influenced by Japan’s success. Lackingmany natural resources, the four dragons promoted develop-ment by concentrating on producing a handful of manufac-tured goods, especially clothing and electronics. Low laborcosts enabled these countries to sell products inexpensivelyin MDCs.
PETROLEUM-RICH ARABIAN PENINSULA STATES.The Arabian Peninsula includes Saudi Arabia, the region’s largestand most populous country, plus Kuwait, Bahrain, Oman, and
Chapter 9: Development 297
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the United Arab Emirates. Once among the world’s leastdeveloped countries, they were transformed overnight into someof the wealthiest thanks to escalating petroleum prices duringthe 1970s.
Arabian Peninsula countries have used petroleum revenuesto finance large-scale projects, such as housing, highways, air-ports, universities, and telecommunications networks. Theirsteel, aluminum, and petrochemical factories compete onworld markets with the help of government subsidies. Thelandscape has been further changed by the diffusion of con-sumer goods. Large motor vehicles, color TVs, audio equip-ment, and motorcycles are readily available and affordable.Supermarkets are stocked with food imported from Europe andNorth America.
Problems with the International Trade AlternativeThree problems have hindered countries outside the four Asiandragons and the Arabian Peninsula from developing throughthe international trade approach:
1. Uneven resource distribution. Arabian Peninsulacountries achieved successful development by means ofrising petroleum prices. Other countries found that theprices of their commodities did not increase and in somecases actually decreased. LDCs that depended on the saleof one product suffered because the price of their leadingcommodity did not rise as rapidly as the cost of the prod-ucts they needed to buy. For example, Zambia has exten-sive copper reserves, but it has been unable to use thisasset to promote development because of declining worldprices for copper.
2. Increased dependence on MDCs. Building up ahandful of takeoff industries that sell to people in MDCsmay force LDCs to cut back on production of food, cloth-ing, and other necessities for their own people. Ratherthan finance new development, funds generated from thesale of products to other countries may have to be used tobuy these necessities from MDCs for the employees of thetakeoff industries.
3. Market decline. Countries that depend on selling low-cost manufactured goods find that the world market formany products has declined sharply in recent years. Evenbefore the recent severe recession, MDCs had limitedgrowth in population and market size.
International Trade Approach TriumphsIn the late twentieth century, most countries embraced theinternational trade approach as the preferred alternative forstimulating development. Trade has increased more rapidlythan wealth (as measured by GDP), a measure of the growing
importance of the international trade approach, especially inLDCs (Figure 9-27).
Longtime advocates of the self-sufficiency approach con-verted to international trade during the 1990s. India, forexample, dismantled its formidable collection of barriers tointernational trade:
• Foreign companies were allowed to set up factories and sellin India.
• Tariffs and restrictions on the import and export of goodswere reduced or eliminated.
• Monopolies in communications, insurance, and other indus-tries were eliminated.
• With increased competition, Indian companies haveimproved the quality of their products.
During the self-sufficiency era, India’s auto industry was domi-nated by Maruti-Udyog Ltd., which was controlled by theIndian government. Nursed by import duties that rose from 15percent in 1984 to 66 percent in 1991, Maruti captured morethan 80 percent of the Indian market selling cars that would beconsidered out-of-date in other countries. In the internationaltrade era, the government sold control of Maruti to the Japan-ese company Suzuki, which now holds only 40 percent ofIndia’s market.
Countries like India converted from self-sufficiency to inter-national trade during the 1990s for one simple reason—over-whelming evidence that international trade better promoteddevelopment (Figure 9-28). The World Bank found that between1990 and 2005 per capita GDP increased more than 4 percentannually in countries strongly oriented toward internationaltrade, compared with less than 1 percent for countries stronglyoriented toward self-sufficiency.
298 The Cultural Landscape
World Trade OrganizationTo promote the international trade development model, coun-tries representing 97 percent of world trade established theWorld Trade Organization (WTO) in 1995. The WTO worksto reduce barriers to international trade in two principalways. First, through the WTO, countries negotiate reductionor elimination of international trade restrictions on manufac-tured goods, such as government subsidies for exports, quo-tas for imports, and tariffs on both imports and exports. Alsoreduced or eliminated are restrictions on the international
movement of money by banks, corporations, and wealthyindividuals.
The WTO also promotes international trade by enforcingagreements. One country can bring to the WTO an accusationthat another country has violated a WTO agreement. The WTOis authorized to rule on the validity of the charge and orderremedies. The WTO also protects intellectual property in theage of the Internet. An individual or corporation can also bringcharges to the WTO that someone in another country has vio-lated their copyright or patent, and the WTO can order illegalactions to stop.
The WTO has been sharply attacked by critics. Protesters rou-tinely gather in the streets outside high-level meetings of theWTO (Figure 9-29). Progressive critics charge that the WTO isantidemocratic, because decisions made behind closed doorspromote the interests of large corporations rather than the poor.Conservatives charge that the WTO compromises the power andsovereignty of individual countries because it can order changesin taxes and laws that it considers unfair trading practices.
Foreign Direct InvestmentInternational trade requires corporations based in a particularcountry to invest in other countries. Investment made by a for-eign company in the economy of another country is known asforeign direct investment (FDI).
Foreign direct investment grew rapidly during the 1990s,from $130 billion in 1990 to $1.5 trillion in 2000. The leveldeclined to $647 billion in 2003 in the wake of the 9/11 al-Qaeda attacks on the United States, before returning to $1.5trillion later in the decade. Foreign direct investment does not
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FIGURE 9-29 Anti-World Trade Organization (WTO) protest. Protesters oppose WTO meeting in Jakarta,Indonesia, in 2009.
Chapter 9: Development 299
flow equally around the world (Figure 9-30). Only one-fourthof foreign investment in 2007 went from an MDC to a LDC,whereas the other three-fourths went from one MDC toanother MDC. And FDI is not evenly distributed among LDCs.More than one-third of all FDI destined for LDCs went toChina in 2007, one-third to all other Asian countries, one-fifthto all Latin American countries, and one-tenth to all Africancountries.
The major sources of FDI are transnational corporations(TNCs). A transnational corporation invests and operates incountries other than the one in which its headquarters arelocated. Of the 500 largest TNCs in 2008, 140 had headquar-ters in the United States and 163 in Europe.
Financing DevelopmentLDCs lack money to fund development, so they obtain finan-cial support from MDCs. Finance comes from two primarysources—loans from banks and international organizations anddirect investment by transnational corporations.
LoansThe two major lenders to LDCs are the World Bank and theInternational Monetary Fund (IMF):
• The World Bank: Includes the International Bank forReconstruction and Development (IBRD) and the Interna-tional Development Association (IDA). The IBRD providesloans to countries to reform public administration and legalinstitutions, develop and strengthen financial institutions,and implement transportation and social service projects.The IDA provides support to poor countries considered too
risky to qualify for IBRD loans. The IBRD has loaned about$400 billion since 1945, primarily in Europe and LatinAmerica, and the IDA about $150 billion since 1960, pri-marily in Asia and Africa. The IBRD lends money raisedfrom sales of bonds to private investors; the IDA from gov-ernment contributions.
• The IMF: Provides loans to countries experiencing bal-ance-of-payments problems that threaten expansion of inter-national trade. IMF assistance is designed to help a countryrebuild international reserves, stabilize currency exchangerates, and pay for imports without having to impose harshtrade restrictions or capital controls that could hamper thegrowth of world trade. Unlike the development banks, theIMF does not lend for specific projects. Funding of the IMF isbased on each member country’s relative size in the worldeconomy.
The World Bank and IMF were conceived at a 1944 UnitedNations Monetary and Financial Conference in Bretton Woods,New Hampshire, to promote economic development and stabil-ity after the devastation of World War II and to avoid a repetitionof the disastrous economic policies contributing to the GreatDepression of the 1930s. The IMF and World Bank became spe-cialized agencies of the United Nations when it was establishedin 1945.
LDCs borrow money to build new infrastructure, such ashydroelectric dams, electric transmission lines, flood-protectionsystems, water supplies, roads, and hotels. The theory is thatnew infrastructure will make conditions more favorable fordomestic and foreign businesses to open or expand. After all, nobusiness wants to be located in a place that lacks paved roads,running water, and electricity.
In principle, new or expanded businesses are attracted to anarea because improved infrastructure will contribute additional
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300 The Cultural Landscape
taxes that the LDC will use in part to repay the loans and inpart to improve its citizens’ living conditions. In reality, theWorld Bank itself has judged half of the projects it has fundedin Africa to be failures. Common reasons include:
• Projects don’t function as intended because of faultyengineering.
• Aid is squandered, stolen, or spent on armaments by recipi-ent nations.
• New infrastructure does not attract other investment.
Many LDCs have been unable to repay the interest ontheir loans, let alone the principal (Figure 9-31). Debt actu-ally exceeds annual income in a dozen countries. When thesecountries cannot repay their debts, financial institutions inMDCs refuse to make further loans, so construction ofneeded infrastructure stops. The inability of many LDCs torepay loans also damages the financial stability of banks inthe MDCs.
Structural Adjustment ProgramsThe IMF, World Bank, and MDCs fear that granting, canceling,or refinancing debts without strings attached will perpetuatebad habits in LDCs. Therefore, before granting debt relief, anLDC is required to prepare a Policy Framework Paper (PFP)
outlining a structural adjustment program, which includeseconomic goals, strategies for achieving the objectives, andexternal financing requirements.
A structural adjustment program includes economic “reforms”or “adjustments.” Requirements placed on an LDC typicallyinclude:
• Spend only what it can afford• Direct benefits to the poor, not just the elite• Divert investment from military to health and education
spending• Invest scarce resources where they would have the most
impact• Encourage a more productive private sector• Reform the government, including a more efficient civil serv-
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Critics charge that poverty worsens under structural adjust-ment programs. By placing priority on reducing governmentspending and inflation, structural adjustment programs mayresult in:
• Cuts in health, education, and social services that benefitthe poor
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FIGURE 9-31 Debt as percentage of income. To finance development, some LDCs have accumulated largeforeign debts relative to their GDP. As a result, a large percentage of their national budgets must be used torepay loans. When LDCs cannot repay their debts, financial institutions in MDCs suffer because they were amajor source of the loans.
Chapter 9: Development 301
• Higher unemployment• Loss of jobs in state enterprises and the civil service• Less support for those most in need, such as poor preg-
nant women, nursing mothers, young children, and elderlypeople
In short, structural reforms allegedly punish Earth’s poorestpeople for actions they did not commit—waste, corruption,misappropriation, and military buildups.
International organizations respond that the poor suffermore when a country does not undertake reforms. Economicgrowth is what benefits the poor the most in the long run.Nevertheless, in response to criticisms, the IMF and the WorldBank now encourage innovative programs to reduce povertyand corruption and consult more with average citizens. A safetynet must be included to ease short-term pain experienced bypoor people.
Fair TradeFair trade has been proposed as a variation of the interna-tional trade model of development. Fair trade means thatproducts are made and traded according to standards thatprotect workers and small businesses in LDCs. Standards forfair trade are set internationally by Fairtrade Labelling Organ-isations International (FLO). A nonprofit organization, Trans-Fair USA, certifies the products sold in the United States thatare fair trade.
In North America, fair trade products have been primarilycraft products such as decorative home accessories, jewelry,textiles, and ceramics. Ten Thousand Villages is the largest fairtrade organization in North America, specializing in handi-crafts. In Europe, most fair trade sales are in food, includingcoffee, tea, banana, chocolate, cocoa, juice, sugar, and honeyproducts.
Two sets of standards distinguish fair trade: one set applies toworkers on farms and in factories and the other to producers.
Fair Trade Producer StandardsFair trade advocates work with small businesses, especiallyworker-owned and democratically run cooperatives. Small-scale farmers and artisans in LDCs are unable to borrow frombanks the money they need to invest in their businesses. Bybanding together, they can get credit, reduce their raw mate-rial costs, and maintain higher and fairer prices for their prod-ucts. Cooperatives thus benefit the local farmers and artisanswho are members, rather than absentee corporate ownersinterested only in maximizing profits. Because cooperativesare managed democratically, farmers and artisans learn lead-ership and organizational skills. The people who grew ormade the products thereby have a say in how local resourcesare utilized and sold. Safe and healthy working conditions canbe protected.
Consumers pay higher prices for fair trade coffee than for gro-cery store brands, but prices are comparable to those charged forgourmet brands. However, fair trade coffee producers receive asignificantly higher price per pound than traditional coffee pro-ducers. North American consumers pay $4 to $11 a pound forcoffee bought from growers for about 80 cents a pound. Growerswho sell to fair trade organizations earn $1.12 to $1.26 a pound.Because fair trade organizations bypass exploitative middlemenand work directly with producers, they are able to cut costs andreturn a greater percentage of the retail price to the producers. Insome cases, the quality is higher because fair traders factor in theenvironmental cost of production. For instance, in the case ofcoffee, fairly traded coffee is usually organic and shade grown,which results in a higher-quality coffee.
Fair Trade Worker StandardsCritics of international trade charge that only a tiny percentageof the price a consumer pays for a good reaches the individualin the LDC responsible for making or growing it. A Haitiansewing clothing for the U.S. market, for example, earns lessthan 1 percent of the retail price, according to the NationalLabor Committee. In contrast, fair trade returns on averageone-third of the price to the producer in the LDC. The rest goesto the wholesaler who imports the item and for the retailer’srent, wages, and other expenses.
Protection of workers’ rights is not a high priority in theinternational trade development approach, according to itscritics. With minimal oversight by governments and interna-tional lending agencies, workers in LDCs allegedly worklong hours in poor conditions for low pay. The workforcemay include children or forced labor. Health problems mayresult from poor sanitation and injuries from inadequatesafety precautions. Injured, ill, or laid-off workers are notcompensated.
In contrast, fair trade requires employers to pay workers fairwages, permit union organizing, and comply with minimumenvironmental and safety standards. Under fair trade, workersare paid at least the country’s minimum wage. Sixty to seventypercent of the artisans providing fair trade hand-crafted prod-ucts are women. Often these women are mothers and the solewage earners in the home. Because the minimum wage is oftennot enough for basic survival, whenever feasible, workers arepaid enough to cover food, shelter, education, health care, andother basic needs. Cooperatives are encouraged to reinvestprofits back into the community, such as by providing healthclinics, child care, and training.
Paying fair wages does not necessarily mean that productscost the consumer more. Because fair trade organizationsbypass exploitative middlemen and work directly with produc-ers, they are able to cut costs and return a greater percentage ofthe retail price to the producers. The cost remains the same astraditionally traded goods, but the distribution of the cost ofthe product is different, because the large percentage taken bymiddlemen is removed from the equation.
