Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Prospects for LDCs have improved in last 25 years; IMR dropped from 85
to 60; NIR dropped from 2.1 to 1.5; GDP per capita has risen $500 to
$4,500
• MDCs have also improved in last 25 years – the development gap is still
wide (gap in NIR & IMR is even compared to 25 years ago; the gap in
GDP per capita is wider than 25 years ago)
• 1/5 of the world’s pop. (MDCs) consume 5/6 of the world’s goods
• Americans spend more on cosmetics ($8 billion) per year than cost of
educating the 2 billion unschooled children around the world ($6 billion)
• Europeans spend more on ice cream ($11 billion) per year than cost of
providing working toilet to the 2 billion people without one ($9 billion)
• 2 major obstacles for LDCs in encouraging more rapid development:
① Adopting policies to successfully promote development:
② Finding funds to pay for development
• 2 major policies to promote development:
① International trade
② Self-sufficiency
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through Self-Sufficiency
– Balanced growth, more popular for most of the 20th century
– Adopted by China, India, most African countries, most Eastern
European countries; popular with Communist countries
– Elements of the Self-Sufficiency Approach
• Spread investment out as equally as possible (all sectors of the
economy & all regions of the country)
• Modest growth pace, but fair system for residents & businesses
• Income in countryside keeps pace with city
• Reducing poverty is more important goal than growing wealth among
the few elite
• Isolates domestic businesses from foreign competition (usually MDCbased transnational corporations)
• Impose barriers to limit import of goods/discourage foreign trade:
① Tariffs – high taxes on imported goods to make them more expensive than
domestic goods
② Quotas – limits to quantity of imported goods
③ Licenses – restrict the number of legal importers (registered with gov’t)
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through Self-Sufficiency
– India has used those barriers effectively
• Discouraged Indian businesses from producing exports
• Did not allow exchange of Indian currency (rupee) into other currencies
• Required permission from gov’t to sell new products, modernize
factories, expand production, set prices, hire or fire workers, or change
job classification of existing workers
• Provided subsidies if company could not make a profit from domestic
business (cheap electricity or canceling of debts)
• Government-owned communications, power, transportation,
automakers, & insurance
– Problems with the Self-Sufficiency Approach
• Inefficiency
– Protects inefficient industries (gov’t subsidies, no international competition,
controlled imports)
– Little incentive to improve quality, lower costs, reduce prices, or increase
production
– No pressure to improve technology
– Ex. India’s Maruti-Udyog automobiles – out of date compared to other autos
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through Self-Sufficiency
– Problems with the Self-Sufficiency Approach
• Large Bureaucracy
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Complex and large gov’t administration system
Difficult for entrepreneurs to produce goods or services
Stymies business creativity & innovation
More financially rewarding to guide others through the red-tape
process
– Illegal money on black market – selling illegally imported goods at
inflated prices
• Development through International Trade
– Identify most important, unique economic asset
(something in abundance and of value)
– Concentrate on selling scarce resources to fund
development
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Rostow’s Model of Economic Growth (Modernization
Model)
• Proposed by W.W. Rostow (1950)
• 5 stages:
① Traditional Society – not yet begun developing, highly agricultural,
high % of GDP spent on religion & military (non-productive)
② Preconditions for Takeoff – elite & well-educated leaders begin
development process, invest in technology & infrastructure to
increase production
③ Takeoff – rapid growth in some sectors (textiles, food, etc.),
technology advances, other sectors remain traditional
④ Drive to Maturity – technology & investment diffuses to other
sectors leading to rapid growth, workforce becomes more skilled &
specialized
⑤ Age of Mass Consumption – shift from heavy industry focus to
producer consumer goods & services
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Rostow’s Model of Economic Growth
• MDC’s in Stages 4 & 5; LDCs in Stages 1-3
• International trade exposes a country to consumers in other
countries, but also exposes a country to foreign business
competition (must remain competitive in a global market)
• Eastern Europe & Japan had achieved relative equality with
North America & Western Europe through trade by 1950, leading
to Rostow creating his model
• Rostow assumed that other countries could do the same
• Many LDCs have raw materials needed in MDCs for industries
– No more colonialism – MDCs must import/buy through trade
– Exporting should stimulate growth in LDCs
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Comparative Advantage
• A country has a comparative advantage over another
country if they can produce a product at a lower relative
cost prior to trade
• Causes countries to engage in international trade
(exporting products that they have a comparative
advantage for and importing those that they do not)
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Examples of International Trade Approach
• 4 Asian Dragons (Gang of 4, 4 Tigers)
– South Korea, Singapore (British colony until 1965), Taiwan, & Hong
Kong (British colony until 1997)
– South Korea & Taiwan have close trade ties with Japan – modeled
themselves after Japan’s successful development
– All 4 have limited natural resources, but have low labor costs and
focus on clothing & electronics to sell inexpensively in MDCs
– Singapore – very important trade port (one of world’s 5 busiest) on
Strait of Malacca connecting Pacific & Indian Oceans
– Entrepôt – trading post where goods are traded without import &
export duties; often used as middle-man on a long trade route
– Singapore, Hong Kong, Macau, & Dubai all utilize entrepôt trade
– Entrepôts are types of free ports (ports with relaxed jurisdiction of
customs and limited or no import/export duties)
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Examples of International Trade Approach
• Petroleum-Rich Arabian Peninsula States
– Saudi Arabia, Kuwait, Bahrain (island in Persian Gulf), Oman, Qatar,
& UAE
– 1970s – rapid rise in crude oil prices
– Oil revenue has financed large projects (housing, roads, airports,
universities, telecommunications, tourism, skyscrapers)
– Recently built steel, aluminum, & petrochemicals factories
– Diffusion of consumer goods (cars, color TVs, audio, motorcycles,
supermarkets, Western food & products)
– Islamic principles often at odds with Western business practices
» Women’s roles, appearance
» Business halts each time Muslims called to prayer
– Yemen has sizable oil reserves but a very corrupt government that
severely limits development (“kleptocracy”)
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Problems with the International Trade Alternative
• 3 major problems for LDCs outside 4 Asian Dragons & oil-rich Middle
East using the International Trade approach:
① Uneven Resources Distribution – prices did not increase on all products;
some prices declined; not all countries have access to same type & quantity
of resources
② Market Stagnation – world market experiencing a slower growth for many
products than when 4 Dragons began; MDCs have had a limited pop. growth
which limits their purchasing power & market size
③ Increased Dependence on MDCs – many LDCs may have to cut production in
other sectors to focus on a handful of takeoff industries – then must import
from MDCs (ex. Food, clothing, etc.)
• Also, some LDCs often focus on raw materials and unfinished products
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MDCs often import raw materials & produce the final product
Sometimes the finished product is then sold back to consumers in LDCs
Results in a net loss
LDCs lack resources, funding, skilled labor to produce higher-value finished
products
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Problems with the International Trade Alternative
• Neo-colonialism (or Neo-imperialism)
– Indirect economic & cultural imperialism
– Influencing a country without having direct control over its
territory
– Transnational corporations of MDCs often still exploit the former
colonies for resources and labor
– LDCs are often reliant upon trade to MDCs for development
– Related to core-periphery model
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Recent Triumph of the International Trade Approach
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Recently embraced as preferred alternative (since 1990s)
World wealth in GDP has doubled in past 25 years
World trade has tripled in same time
India switched to international trade in 1990s
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Dismantled barriers
Increased product quality
Allowed foreign investment, competition, & imports
Maruti-Udyog autos now a wholly-owned subsidiary of Suzuki
India had a 4% GDP growth annually from 1960-1990
Thailand (7%), Taiwan (8%), South Korea (9%) over same time period
using international trade
Overwhelming evidence that international trade better promoted
development
In 1990s with international trade, India has had 7% annual growth
1980 – ¾ of exports from LDCs were agricultural or mineral products
2000 – 4/5 of exports form LDCs were manufactured goods
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– World Trade Organization (WTO)
• Formed in 1995 to help reduce barriers to international trade
– Negotiate reduction or elimination of restrictions (subsidies, tariffs, quotas,
movement of money)
– Enforcing trade agreements & protecting intellectual property (copyrights,
trademarks, patents, etc.)
• Attacked by liberals – accuse promotion of corporations, hurts poor,
hurts small-business
• Attacked by conservatives – compromises power & sovereignty of
countries
– Transnational Corporations (or Multinational Corporations)
• Foreign Direct Investment (FDI) – investment by a foreign company in
the economy of another country
• FDI has grown rapidly since 1970 ($13 billion) to $1.4 trillion in 2004
(declined after 9/11/2001 but has bounced back since)
• Unequal flow & distribution of FDI
– 1/3 from MDC to LDC in 2004, 2/3 from MDC to MDC in 2004
– ½ of all FDI to LDCs went to China in 2004, ¼ to other Asian countries, ¼ to
Latin America; less than 10% to Africa
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Development through International Trade
– Transnational Corporations
• Major source of FDI – transnational corporations (TNCs)
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Headquartered (HQ) in one country (almost all are HQ’d in MDCs)
Invest & operate in multiple countries
¼ of largest TNCs HQ’d in U.S.
2/3 in Western Europe (mostly France, Germany, & U.K.)
Several in Japan as well
• Financing Development
– LDC’s lack money regardless of which alternative chosen
(self-sufficiency or international trade)
– Must rely on loans (banks & international organizations)
or from FDI from transnational corporations
– 2 major lenders of loans (both affiliated with the UN):
• International Monetary Fund (IMF)
• World Bank
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Financing Development
– International Monetary Fund (IMF)
• Loans to countries experiencing difficulty in international trade (help to
rebuild reserves, stabilize currency exchange rates, pay for imports
without heavy restrictions)
• Not for specific projects like the World Bank
• Funding for IMF based on each country’s share of world economy
• Development projects used to lure business & investment (new
infrastructure) – new/higher taxes to pay off loans
– World Bank
• Includes: International Bank for Reconstruction & Development (IBRD)
and International Development Association (IDA)
• IBRD – used to reform public administration institutions, develop &
strengthen financial institutions, and implement transportation/social
service projects
• IDA – used to support poor countries too risky for IBRD loans
• IBRD has provided over $400 billion since 1945, mostly to Europe &
Latin America
• IDA has provided over $150 billion since 1960, mostly to Asia & Africa
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Financing Development
– Problem – many projects are expensive failures
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Not working
Too expensive to maintain
Do not lure businesses
Cannot pay off debt/interest
Loans from MDC companies stop when debt cannot be repaid
Hurts banks in MDCs
World Bank considers ½ of projects approved in Africa to be failures
Very high debt in Africa (debt exceeds income in 18 African countries)
– Structural Adjustment Programs (SAP)
• Fear that if debts are canceled, more loans are granted, and/or
refinancing of existing loans that it will perpetuate bad habits in LDCs
• Before debt relief, LDCs prepare a Policy Framework Paper (PFP)
outlining an SAP
• SAP – describes economic goals, strategies for achieving objectives, &
external financing requirements
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Financing Development
– Structural Adjustment Programs (SAP)
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LDCs can only spend what they can afford
Must provide benefits to the poor (not just the elite)
Must divert military spending to health & education
Must invest in scarce resources
Must encourage a more productive private sector
Must reform gov’t – increased efficiency, fiscal accountability,
predictable rules & regulations, and more open information to
the public
• Critics – say poverty increases under SAP because gov’t makes
cuts to health, education, etc. to reduce spending & inflation;
also argue that unemployment may rise as gov’t cuts workers;
also argue that the poor are punished for gov’t waste &
mismanagement (corruption, high military spending, etc.)
• Supporters – argue poor suffer more when reforms are not
made; SAPs allow for goal of long-term economic growth
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Fair Trade (variation of International Trade model)
– Products made & traded to protect workers & businesses in LDCs
– Standards set by FairTrade Labeling Organizations International (FLO)
– TransFair USA – watchdog group that monitors fair trade Primarily
sold as craft products in North America (Ten Thousand Villages)
– Primarily food in Europe (coffee, tea, bananas, chocolate, sugar, etc)
– 2 sets of standards:
① For workers on farms or in factories
② For producers
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Fair Trade Producer Standards
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Advocates work with small businesses or worker-owned cooperatives
(co-ops)
Individuals in LDCs often cannot borrow money so they band together to
form co-ops (directly benefits farmers/artisans not corporate owners)
Fair trade goods are often higher priced (comparable to gourmet prices)
Bypass middle-men; businesses/co-ops earn higher price per unit
Often hand-made crafts or organically-grown food and higher quality
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Fair Trade (variation of International Trade model)
– Fair Trade Worker Standards
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Critics of International Trade Model argue that very little
money reaches workers in LDCs
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Limited technology, requires more workers to produce each good,
earnings are spread thin
Large % of money goes to middle-men (wholesalers, importers, &
retailers)
Critics of International Trade Model also argue that protection
of worker’s rights is not a high priority
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Minimal oversight by gov’t, international lending agencies, etc.
Workers work long hours
Poor working conditions
Unsafe working conditions, injuries
Low wages
Child labor, forced labor
No compensation to injured, ill, or laid-off workers
Key Issue #4: Why Do LDCs Face Obstacles to
Development?
• Fair Trade (variation of International Trade model)
– Fair Trade Worker Standards
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Fair Trade attempts to address these criticisms
Must provide fair wages (at least country’s minimum wage, if
one)
Must allow workers to unionize
Must comply with environmental & safety standards
Must employ women & pay fair wages (60-70% of fair trade
workers are women)
Fair Trade prefers over minimum wage to cover food, shelter,
education, health care, & other basic needs
Co-ops are encouraged to invest back in the community
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Health clinics, child care, training
Better working conditions does not necessarily drive up costs:
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Bypass middle-men to cut costs (return larger % of profit to
producers & workers in LDCs)
Cost is the same, but the distribution of the cost is different