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Chapter 20
Economic Development
How to classify economies
• The World Bank (an economic development
institution affiliated with the UN) estimates
gross national income (GNI)
– GNI measures the market value of all goods and
services produced by resources supplied by the
countries’ residents and firms, regardless of the
location of the resource.
– It measures both the value of output produced
and the income that output generates.
GNI continue
• It measures income per capita, then adjusts
figures across countries based on the purchasing
power of that income in each country.
• The World Bank then sorts into three major
groups:
– High-income economies

• About one-sixth of the world’s population produces threefourths of the world’s output

– Middle-income economies

• About 64% of the world’s population and account for about
25% of the world output

– Low-income economies

• About 20% of the world’s population and account for only
1% of the world output
GNI continue
http://www.nationmaster.com/graph/eco_gro_
nat_inc-economy-gross-national-income
Developing and Industrial Economies
• Developing countries: the low- and middleincome economies
– 50% of their labor force in agriculture

• Industrial Economies: the high-income
economies
– 84% of the world’s population in 2007 but
produce only 26% of the output
Health and Nutrition
• Malnutrition
– In the poorest countries they consume only half
the calories of those in high-income countries.
– Contributes to more than half of the deaths of
children under the age of 5 in low-income
countries.
– Safe drinking water is often hard to find; thus,
causing many diseases
Health and Nutrition
• Infant Mortality
– The rate is much greater in low-income countries
than in high-income countries.
High Birth Rates
• Developing countries also have high birth
rates
• This year, more than the 80 million of the 90
million births will be added to developing
countries.
– WHY??
Women in Developing Countries
• Poverty is greater among women than men,
this is true for the world as a whole (on the
average that is)
• Women in developing countries tend to be
less educated than men.
– WHY???
Why are poor countries poor?
• The simple answer:
– They are poor because they produce few goods
and services.
Low Labor Productivity
• Labor Productivity: output measured by
worker
• Labor Productivity tends to be low in
developing countries.
– WHY??
• Quality of the labor
• Capital
• Natural resources
What to do?
• Invest in Capital:
– How?
• Foreign Aid
• Private Investment in Capital
Technology and Education
• Education helps people make better use of
the resources available.
• It also makes people more receptive to new
ideas and methods
Inefficient Use of Labor
• Developing countries use labor less efficiently
than do industrial nation.
– Underemployment and Unemployment
– Low productivity= Low Income= Less Saving= Less
Investment in human and physical capital
• Creating a “cycle of poverty”
Natural Resources
• Many developing countries have little in
natural resources.
– The exceptions are the oil-rich countries
Financial Institutions
• An important source of funds for investment
is the savings of household and firms
• In some developing countries, the people
have little confidence in the country’s
currency
– Governments finance a large fraction of outlays by
printing money
• Hyperinflation
– Zimbabwe
Capital Infrastructure
•
•
•
•
•
•
•
•

Roads
Bridges
Airports
Harbors
Reliable Mail Service
Telephone Communication
Clean Water
Electricity
Entrepreneurial Ability
• Entrepreneurs are needed to bring together
resources and take the risk of profit or loss in
order for development to get off the ground
• Sometimes government officials create what
they believe the free market can do
– Favors for friends and relatives of the government
Rules of the Game
•
•
•
•

Laws
Customs
Conventions
Property Rights
Social Capital
• Social capital consists of the shared values
and trust that promote cooperation in the
economy
– Lower economies typically have poorly defined
property rights, and less social capital
– Bribery is often commonplace
– Government corruption in everyday practice
Trade Problems for Developing
Countries
• What makes up exports for developing
countries?
– Agricultural goods and other raw materials (about
half compared to about 20% from high-income
countries)
– Problem with this?
• Fluctuates in prices= cut in imported capital items
Migration and the Brain Drain
• Migrants send money home to invest in their
country
– $238 billion in 2008
– Problems?
• “Brain Drain” from their home country
Import Substitution Versus Export
Promotion
• An economy’s progress:
– Agriculture to manufacturing to services

• Import Substitution: a development strategy
that emphasizes domestic manufacturing of
products that had been imported
– Tariffs and quotas
Import Substitution Versus Export
Promotion

• Why do this?

– The “What to Produce” question is answered
– To protect “Infant Industries”
– Favored domestic industries

• Problems?
– Erases specialization and comparative advantage
– Replace low-cost foreign goods with high-cost
domestic goods
– Often domestic production failed to be successful
when shielded from foreign competition
Import Substitution Versus Export
Promotion
• Export promotion concentrates on producing
for the export market.
– The emphasis is on comparative advantage and
trade expansion rather than on trade restriction.
– The force is on producers becoming more efficient
in order to compete in world markets
Foreign Aid
• Foreign aid is any international transfer made
on concessional terms for the purposes of
promoting economic development
– Grants
– Loans
• Concessional Loan- low interest rates, longer
repayment periods, or grace periods during which
repayments are reduced or even waived
• Bilateral: Country-to-Country aid
• World Bank: multilateral infrastructure
• IMF: multilateral balance of payments
Does Foreign Aid Promote Economic
Development?
http://www.youtube.com/watch?v=CNWzYy186W8
OR
http://www.youtube.com/watch?v=8Y-E6sQ9DvI
Does Foreign Aid Promote Economic
Development?
• It does provide additional purchasing power,
but it is unclear if it supplements domestic
saving, thus increase investment!
Transitional Economies
• Types of Economic Systems
• Enterprises and Soft Budget Constraints
– Soft budget constraint: the budget condition faced
by socialist enterprises that are subsidized if they
lose money
• Inefficient uses of resources, non-responsive to
demand and supply changes, changes in prices by
central planners and not the market forces
Institutions and Economic Development
How do they work?
http://www.youtube.com/watch?v=XxERamRMt24
The Big Bang Versus Gradualism
• Gradualism ( the bottom-up approach): an
approach to moving gradually from a centrally
planned to a market economy by establishing
markets at the most decentralized level first,
such as on a small farms or in light industry
– China

• Big Bang Theory: the argument that the
transition from a centrally planned to a
market economy should be broad and swift,
taking place in a matter of months
Privatization
• Privatization is the process of turning public
enterprise into private enterprises.
– Cannot be accomplished overnight

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Chapter 20-Macro

  • 2. How to classify economies • The World Bank (an economic development institution affiliated with the UN) estimates gross national income (GNI) – GNI measures the market value of all goods and services produced by resources supplied by the countries’ residents and firms, regardless of the location of the resource. – It measures both the value of output produced and the income that output generates.
  • 3. GNI continue • It measures income per capita, then adjusts figures across countries based on the purchasing power of that income in each country. • The World Bank then sorts into three major groups: – High-income economies • About one-sixth of the world’s population produces threefourths of the world’s output – Middle-income economies • About 64% of the world’s population and account for about 25% of the world output – Low-income economies • About 20% of the world’s population and account for only 1% of the world output
  • 5. Developing and Industrial Economies • Developing countries: the low- and middleincome economies – 50% of their labor force in agriculture • Industrial Economies: the high-income economies – 84% of the world’s population in 2007 but produce only 26% of the output
  • 6. Health and Nutrition • Malnutrition – In the poorest countries they consume only half the calories of those in high-income countries. – Contributes to more than half of the deaths of children under the age of 5 in low-income countries. – Safe drinking water is often hard to find; thus, causing many diseases
  • 7. Health and Nutrition • Infant Mortality – The rate is much greater in low-income countries than in high-income countries.
  • 8. High Birth Rates • Developing countries also have high birth rates • This year, more than the 80 million of the 90 million births will be added to developing countries. – WHY??
  • 9. Women in Developing Countries • Poverty is greater among women than men, this is true for the world as a whole (on the average that is) • Women in developing countries tend to be less educated than men. – WHY???
  • 10. Why are poor countries poor? • The simple answer: – They are poor because they produce few goods and services.
  • 11. Low Labor Productivity • Labor Productivity: output measured by worker • Labor Productivity tends to be low in developing countries. – WHY?? • Quality of the labor • Capital • Natural resources
  • 12. What to do? • Invest in Capital: – How? • Foreign Aid • Private Investment in Capital
  • 13. Technology and Education • Education helps people make better use of the resources available. • It also makes people more receptive to new ideas and methods
  • 14. Inefficient Use of Labor • Developing countries use labor less efficiently than do industrial nation. – Underemployment and Unemployment – Low productivity= Low Income= Less Saving= Less Investment in human and physical capital • Creating a “cycle of poverty”
  • 15. Natural Resources • Many developing countries have little in natural resources. – The exceptions are the oil-rich countries
  • 16. Financial Institutions • An important source of funds for investment is the savings of household and firms • In some developing countries, the people have little confidence in the country’s currency – Governments finance a large fraction of outlays by printing money • Hyperinflation – Zimbabwe
  • 18. Entrepreneurial Ability • Entrepreneurs are needed to bring together resources and take the risk of profit or loss in order for development to get off the ground • Sometimes government officials create what they believe the free market can do – Favors for friends and relatives of the government
  • 19. Rules of the Game • • • • Laws Customs Conventions Property Rights
  • 20. Social Capital • Social capital consists of the shared values and trust that promote cooperation in the economy – Lower economies typically have poorly defined property rights, and less social capital – Bribery is often commonplace – Government corruption in everyday practice
  • 21. Trade Problems for Developing Countries • What makes up exports for developing countries? – Agricultural goods and other raw materials (about half compared to about 20% from high-income countries) – Problem with this? • Fluctuates in prices= cut in imported capital items
  • 22. Migration and the Brain Drain • Migrants send money home to invest in their country – $238 billion in 2008 – Problems? • “Brain Drain” from their home country
  • 23. Import Substitution Versus Export Promotion • An economy’s progress: – Agriculture to manufacturing to services • Import Substitution: a development strategy that emphasizes domestic manufacturing of products that had been imported – Tariffs and quotas
  • 24. Import Substitution Versus Export Promotion • Why do this? – The “What to Produce” question is answered – To protect “Infant Industries” – Favored domestic industries • Problems? – Erases specialization and comparative advantage – Replace low-cost foreign goods with high-cost domestic goods – Often domestic production failed to be successful when shielded from foreign competition
  • 25. Import Substitution Versus Export Promotion • Export promotion concentrates on producing for the export market. – The emphasis is on comparative advantage and trade expansion rather than on trade restriction. – The force is on producers becoming more efficient in order to compete in world markets
  • 26. Foreign Aid • Foreign aid is any international transfer made on concessional terms for the purposes of promoting economic development – Grants – Loans • Concessional Loan- low interest rates, longer repayment periods, or grace periods during which repayments are reduced or even waived • Bilateral: Country-to-Country aid • World Bank: multilateral infrastructure • IMF: multilateral balance of payments
  • 27. Does Foreign Aid Promote Economic Development? http://www.youtube.com/watch?v=CNWzYy186W8 OR http://www.youtube.com/watch?v=8Y-E6sQ9DvI
  • 28. Does Foreign Aid Promote Economic Development? • It does provide additional purchasing power, but it is unclear if it supplements domestic saving, thus increase investment!
  • 29. Transitional Economies • Types of Economic Systems • Enterprises and Soft Budget Constraints – Soft budget constraint: the budget condition faced by socialist enterprises that are subsidized if they lose money • Inefficient uses of resources, non-responsive to demand and supply changes, changes in prices by central planners and not the market forces
  • 30. Institutions and Economic Development How do they work? http://www.youtube.com/watch?v=XxERamRMt24
  • 31. The Big Bang Versus Gradualism • Gradualism ( the bottom-up approach): an approach to moving gradually from a centrally planned to a market economy by establishing markets at the most decentralized level first, such as on a small farms or in light industry – China • Big Bang Theory: the argument that the transition from a centrally planned to a market economy should be broad and swift, taking place in a matter of months
  • 32. Privatization • Privatization is the process of turning public enterprise into private enterprises. – Cannot be accomplished overnight

Notas do Editor

  1. Youtube video of Hernando De Soto “The Power of the Poor”