ECONOMICS:
EXPLORE & APPLY
by Ayers and Collinge
Chapter 29
“Economic Development”
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Learning Objectives
1. Discuss the problems that are a priority
for developing countries.
2. Describe the goals on the United
Nations’ development agenda.
3. Point out the incentives for population
growth.
4. Explain the connection between
economic development and property
rights.
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Learning Objectives
5. Identify the roles of the International
Monetary fund and the World Bank in
economic development.
6. Describe how insecure property rights have
hindered economic development in Russia.
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29.1
DEVELOPING COUNTRIES AND
POVERTY
o There are approximately 6.2 billion people in
the world living in 207 countries.
o The International Monetary Fund (IMF)
classifies these countries into three groups:
o Developed countries – free market high income
countries
o Less developed countries – a person in one of these
128 countries may earn as little as $170 a year.
o Transitional economies – moving away from central
economies towards market economies.
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Developing Countries and Poverty
 Economic development is a field within
economics that studies why some countries
remain mired deep in poverty, while other
countries prosper.
 The data that describes a country’s economic
development are called economic indicators.
 Per capita income is probably the indicator
referred to most frequently.
 Often a set of indicators is needed to assess the
level of development in a country.
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Problems of the Developing
Countries
While there are significant differences in the
problems LDC’s face, they do share several
problems:
Poverty.
Deficiencies in infrastructure.
Low life expectancy rates.
High population growth.
The extreme poverty of the LDC’s has
enormous consequences for the people living in
those countries, including the prospect of an
early death.
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Problems of the Developing
Countries
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Problems of the Developing
Countries
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Rostow’s Stages of
Economic Development
In 1960 Economic historian Walter W.
Rostow suggested that countries pass
through 5 stages in their development.
Stage 1: Traditional society.
Stage 2: Preconditions for takeoff.
Stage 3: Takeoff.
Stage 4: Drive to maturity.
Stage 5: High Mass Consumption.
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Problems of the Developing
Countries
LOW-INCOME COUNTRIES COMPARED TO THE UNITED
STATES
LOW-INCOME
UNITED
DEVELOPMENT INDICATOR
COUNTRIES
STATES
Under-five mortality rate (per 1,000)
114.9
8.7
Infant mortality rate
76.1
7.1
Access to improved water source (% of
population)
75.7
100
Access to improved sanitation (% of
population)
45.1
100
Fixed line and mobile telephones (per 1,000
people)
28.7
1,097.60
Personal computers (per 1,000 people)
5.1
585.2
Gross national income per capita
$410
$34,100
Life expectancy at birth (years)
58.9
77.1
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A Development Agenda
The stated mission of the United Nations (UN)
is to promote world peace and prosperity
through international cooperation.
The UN has set eight economic development
goals.
The U.N. plans to achieve these goals by 2015.
The goals are associated with targets, specific
results that when achieved will mean each goal
has been met.
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Problems of the Developing
Countries
UNITED NATIONS GOALS AND SELECTED TARGETS FOR ECONOMIC DEVELOPMENT
GOAL
SELECTED TARGET
1. Eradicate extreme poverty and hunger.
Halve the proportion of people whose income is less than a dollar a day.
2. Achieve universal primary education.
Ensure that boys and girls have access to primary schooling.
3. Promote gender equality and empower women. Eliminate gender disparity in all levels of education.
4. Reduce child mortality.
Reduce by two-thirds the under-five child mortality rate.
5. Improve maternal health.
Reduce by three-quarters the maternal mortality rate.
6. Combat HIV/AIDS, malaria, and other diseases. Halt the spread of HIV/AIDS.
7. Ensure environmental sustainability.
Reverse the loss of environmental resources.
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United Nations Development
Indicators for the World
UNITED NATIONS DEVELOPMENT INDICATORS FOR THE WORLD
INDICATOR
1. Sanitation, percentage of population with access to improved sanitation, rural
2. Sanitation, percentage of population with access to improved sanitation, total
3. Sanitation, percentage of population with access to improved sanitation, urban
4. Water, percentage of population with access to improved drinking water sources, rural
5. Water, percentage of population with access to improved drinking water sources, total
6. Water, percentage of population with access to improved drinking water sources, urban
7. Children one-year-old immunized against measles, percent
8. Children under five mortality rate per 1,000 live births
9. Infant mortality rate (zero to one year) per 1,000 live births
10. Internet users
11. Internet users per 100 population
12. Personal computers
13. Personal computers per 100 population
14. Telephone main lines in use and cellular subscribers
15. Telephone lines and cellular subscribers per 100 population
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VALUE
40%
61%
85%
71%
82%
95%
72%
83
57
550 million
8.14
575 million
9.37
2 billion
32.27
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29.2
POPULATION GROWTH
 The world has seen its population grow rapidly.
 From just over 3 billion in 1960, to over 6 billion
today.
 Part of the reasons for this growth is that
advances in medicine and hygiene have lowered
death rates, thereby increasing longevity.
 Birthrates have also been high, especially
among the segments og the population least
able to afford raising children.
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World Population Growth
Billions of
people
10
Population
8
6
4
2
0
1650
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1750
1850 1900 1950 2002 2020
Years
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The Dismal Science
 Economics was once called the dismal science.
 Thomas Robert Malthus popularized the notion in
the 1800’s that economics could only hope to delay
the day when the world’s population finds itself at
the brink of starvation.
 According to this view, starvation is the only force
that can keep population in check.
 The world has come a long way since the 1800’s
and both population and living standards have
increased dramatically.
 Since population is growing geometrically,
there is still room for concern.
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Population Growth
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Subsidizing Population Growth
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Problems with the Price Signal
• One group that frequently does not bear
the cost of its decisions is parents.
• Efficiency would suggest that parents
should pay all of the cost that rearing
children.
• Equity suggest that children children should
have comparable opportunities.
• Since a child born into poverty does not
choose to be there, to promote equity, it
makes since for taxpayers to subsidize less
fortunate children.
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Problems with the Price Signal
o To the extent that the cost of rearing children
are paid by others, parents face a marginal cost
of rearing children that does not reflect the full
cost of those children to society.
o Government subsidies can influence parents to
choose to have more children than they would
were the marginal cost not subsidized.
o The result is that government subsidies tend to
increase population growth.
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Problems with the Price Signal
o In order to receive extra government aid or
tax write-offs.
o These are children that children would
prefer to have, except for the extra they
cause.
o In other words, the parent’s demand curve
would be negative for these children
o Public assistance intended to help children
may in this way lead to more children who
need help.
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Problems with the Price Signal
o In less developed countries people have
children they don’t want for several
reasons.
o One is because they lack access to birth
control, or they may have customs or beliefs
that do not accept its use.
o A second reason is due to ineffective or nonexistent government programs such as social
security or other transfer programs.
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Problems with the Price Signal
A couple in a less developed country with
several children can rely on them for
assistance if they reach advanced ages.
Education, medical care, and stable
governments can help address population
growth issues.
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29.3
PRICES AND PROPERTY RIGHTS
For countries to develop they need capital.
Investments from private sources or
government is the source of this capital.
Because of the central importance of prices in
guiding consumption and investment spending
throughout the world, the market economy is
often called the price system.
Prices respond to scarcity.
Other things equal, the scarcer the resources,
the higher their prices.
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Prices and Property Rights
With the price of a non-renewable resource
like oil, when the resource price rises the
market is motivated to explore for more of it
and develop substitutes.
As the price of oil has risen, technology has
responded to prevent shortages.
Many developing countries’ exports are heavily
weighted toward natural resources.
The problem arises when the prices of these
commodities is not high enough to sustain
development.
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Prices and Property Rights
o The Prebisch-Singer thesis, which was advanced in
the 1950’s, states that developing countries will be
trapped in poverty because the price of their
exports will be driven down by increasing
commodity supplies as the price system responds.
o This can lead to immiserising growth, where
increasing supplies of commodities exported by
the LCD’s causes prices to drop so far that these
countries end up worse off because of trade.
o This thesis is not generally accepted by economist
for the ills of these countries.
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Prices and Property Rights
o Secure property rights, meaning rights of
ownership, are lacking in many LDC’s.
o Investors need to know that they will be able to
retain the fruits of their investments, or they
will not invest.
o They must not fear that government action in
the future will prevent them from reaping the
rewards that they envision when they make
their investments in the present.
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Economic Growth
Economic incentives can put a brake on
population growth.
Specifically, as countries become
wealthier, the opportunity cost of people’s
time rises.
Fertility rates, the number of children
born per woman, reflect economic
incentives and traditions such as attitudes
towards family size.
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Economic Growth
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29.4
COUNTRIES HELPING COUNTRIES:
Foreign Aid
o When one country helps another country, the
mechanism is often foreign aid.
o Foreign aid consist of donated money or
capital.
o Countries provide foreign aid on their own and
through membership in the two most
important organizations that channel resources
to the poorer countries.
o World Bank
o International Monetary Fund
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Foreign Aid – An Answer to
Scarcity?
 Polls show that people in the developed
countries support the principles of giving
aid to the LDC’s.
 The amount of that aid is the subject of
debate.
 To provide relief to the world’s most
heavily indebted countries the U.S. and
other countries help pay for the debt
through a program established by the
IMF and the World Bank.
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Purposes of U.S. Foreign Aid
Humanitarian
Assistance
Broad-based
economic
growth &
agricultural
devlopment
Democracy &
governance
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Environment
Human
capacity
development
Population,
health &
nutrition
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The International Monetary Fund
(IMF)
 The purposes of the IMF are to:
1. Promote international monetary
cooperation
2. Facilitate the expansion of international
trade.
3. Encourage exchange rate stability.
4. Further the establishment of a multilateral
(multicountry) payment system.
5. Provide resources to member countries
experiencing balance of payments
problems.
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The World Bank
World Bank loans to less-developed member
countries are intended to further their
economic development.
World Bank loans only go to developing
countries, and must be repaid.
Lending is of two types.
The first is lending to countries that are able to
pay near-market interest on loans they receive.
The second is to countries that cannot afford to
pay interest at all. These loans are called credits.
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29.5
MACROECONOMIC INDICATORS FOR
RUSSIA
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Terms Along the Way
• developed countries
• less-developed
countries
• Transitional economies
• economic development
• Rostow’s stages of
economic development
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•
•
•
•
•
•
•
“the dismal science”
price signals
Prebisch-Singer thesis
immiserizing growth
property rights
World Bank
International
Monetary Fund
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Test Yourself
1. Life expectancy in in the LDC’s is
generally
a. about the same as developing countries.
b. higher than in developed countries
because people eat healthier foods.
c. higher than in developed countries
because the people eat less frequently.
d. lower than in the developed countries.
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Test Yourself
2. The fourth stage in Rostow’s stage
model is
a. traditional society
b. takeoff.
c. drive to maturity.
d. high mass consumption.
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Test Yourself
3.
a.
b.
c.
The price system
hinders economic development.
has no effect on economic development.
promotes economic development by offering
people incentives to find and develop new
resources.
d. promotes economic development, but is
clearly inferior to central planning in that
role.
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Test Yourself
4. In recent years annual foreign aid from
all countries has totaled about
a. $10 billion.
b. $40 billion.
c. $70 billion.
d. $100 billion.
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Test Yourself
5. The primary role of the International
monetary fund (IMF) is to
a. central planning of economies.
b. make sure that countries repay their loans to
the World Bank.
c. show farmers in LDC’s how to produce
enough food to avoid starvation.
d. strengthen the world monetary and financial
system.
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Test Yourself
6. As Russia develops its market economy
by reducing taxes and securing
property rights, the underground
economy in Russia will likely
a. expand.
b. diminish.
c. remain the same.
d. be legalized by the government.
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The End!
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