1. Chapter 20
Economic Development

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

4. GNI continue
http://www.nationmaster.com/graph/eco_gro_
nat_inc-economy-gross-national-income

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

17. Capital Infrastructure
•
•
•
•
•
•
•
•
Roads
Bridges
Airports
Harbors
Reliable Mail Service
Telephone Communication
Clean Water
Electricity

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