Ch. 9 Key Issue 4
Why Do LDCs Face Obstacles to
Development?
Economic Systems
• Capitalism: market forces of supply and demand
dictate prices. Profits are encouraged. Large gaps
between rich and poor. Meshes well with
democracies (both have freedoms)- US, West
Europe
• Socialism: government control of basic items (food,
energy, transportation, health care)- higher taxes
needed to pay for these = redistribution of wealthSwitzerland
• Communism: total govt control over everything!
Same salary for everyone- no incentive to succeed;
govt determines your profession. China and SU!
How to Develop?
• LDCs must develop faster to reduce
disparity between MDCs
– Need to increase GDP so they have $ to
spend
• LDCs face two problems:
– 1. Which development policy (model)
should we adopt?
– 2. Where do we find the funds for
development?
Models for Development
• Development can be achieved through:
– Self-sufficiency approach
– International Trade approach
• Rostow’s Modernization Model (5
stages)
– World Systems Theory
– Sustainable development
• We will discuss pros and cons of each
Self–sufficiency Model
• Popular in first part of 20th century; India
• Depending on themselves, not other
countries
– Limiting imports and exports with barriers
(tariffs, quotas, licenses) to protect domestic
businesses
• “Balanced growth”
– Funds equally distributed to all sectors of the
economy and in all regions
– Only modest gains made in development, but it
was equal across country (no islands of dev.)
International Trade Approach*
• What animal, vegetable, or mineral
resource does the country have in
abundance that other countries are
willing to buy?
• What product can we manufacture and
distribute at a higher quality and lower
cost than any other countries?
International Trade Approach
• Allows for a country to specialize in
relatively few local industries (oil, food,
etc = commodities) to sell to the rest of
the world
– Money brought in from sales goes toward
improving development
• Trade with the international market for
all other needs
• Cheap labor is exploited (China)
Rostow’s Development Model (1960’s)
• With decolonization of Asia and Africa, he
looked at how currently developed countries
developed- what “stages” did they go through?
• Assumes that each country will follow the
same path to “development” – is this possible?
1.
2.
3.
4.
5.
The traditional economy
The preconditions for takeoff
The takeoff
The drive to maturity
The age of mass consumption
Each country is in one of these 5 stages
Start Here!!!!!!
Problems with S-S Approach
• Inefficient businesses
– Little incentive to improve business since they
sell at high government-set prices (the gov’t
guarantees demand); lack of competition stalled
innovations
• Large bureaucracy needed
– Many gov’t agencies needed to regulate
businesses
– Entrepreneurs learned how to get around
barriers and sell illegal imported products on
black market
Problems with I.T Approach
• Uneven resource distribution across Earth
– Not all countries have commodities that other
countries want to buy or prices/demand have
decreased for their commodity
• Increased dependence on MDCs
– Since resources go to developing goods to sell to
MDCs, money is diverted away from domestic needs
(clothes, food)  Funds from selling commodities may
be used to buy these needs back from MDCs
• Market decline
– Slow growth in MDCs = no new customers for LDCs
Success in International Trade
• These countries employed Rostow’s model
• 4 Asian Dragons
– S.K., Taiwan, Singapore, Hong Kong
– Manufactured goods and sold/traded them on world
market
• Low labor costs = cheap goods for MDCs
• Petroleum-rich Arabian Peninsula
– Booming oil market led to increased wealth; will this
money spur development (remember Islamic cultural
issues)?
I.T. Approach Triumphs
• Most popular model by second half of 20th
century; India removes barriers
• World Trade Organization (WTO)
– Established to promote the IT model
• Foreign Direct Investment (FDI)
– Transnational corporations
Dependency Theory
• Countries face different problems that won’t
allow for Rostow’s theory
• Poor countries are dependent on wealthier
ones
– Poor countries today are experiencing neo(new)colonialism: wealthy countries
controlling/exploiting economies of poorer ones
• Dollarization in Latin America
• MDCs remain dominant, LDCs remain
dependent
Immanuel Wallerstein and Dependency
Theory
• World is one system- no country is independent of
another
• World systems theory has a three tier structure core, periphery, semi-periphery
• Periphery dependent upon the core
– *Not all tadpoles can survive into toads
– Capitalist’s drive for profit = domination of “weaker”
countries
– Capitalists will move production around the world to
enhance profits, places that lose production facilities
suffer
Wallerstein’s World-Systems Theory
• International division of Labor!
• Core countries
– Higher education, salaries, technology = more
wealth in world economy
• Periphery countries
– Lower levels than in core countries = less wealth
• Semi-periphery counties
– Processes of both are occurring; buffer zone
Wallerstein’s World-Systems Theory
• Leads to a capitalist world economy
where:
– The world is “one big market”
– Global division of labor between the 3 tiers
– Capitalism (trade goods/services for profit;
find cheap labor)
– Commodification (buying/selling/trading
everything)
Capitalist World Economy
• Created by colonialism- intertwining the
economies of the world; taking resources and
putting colonies in a position of subservience
• Is composed of “dots” (individual countries)
but we must also understand the “whole.”
(the world) = scale (zooming out)
– Sunday Afternoon on the Island of La Grande
Jatte
Importance of Development
• LDCs must develop faster to reduce disparity
between MDCs
– Need to increase GDP so they have $ to spend
• LDCs face two problems:
– 1. Which development policy (model) should we
adopt?
– 2. Where do we find the funds for development?
Financing Development
• LDCs lack money for development, so they
get funds from MDCs in two primary ways:
1. Loans from banks and International
organizations
2. Direct Investment from transnational
corporations (FDI)
• Neoliberalism:
– Loans → better infrastructure → more
businesses → more taxes to repay loan
Creating Funding Programs
• World Bank and IMF were created by UN to promote
stability and development after WWII and to avoid
another Great Depression
– WB: main source of loans
– IMF: loans are not for specific projects
• Idea is that LDCs will take money to improve their
infrastructure (schools, roads, public services/goods)
which will attract more foreign businesses to open or
domestic business to expand
• LDCs can then repay the loans through taxes collected
for supplying pubic services/goods
Problems with Funding LDCs
• Most LDCs have been unable to repay loans,
especially in Africa.
• Reasons for failure include:
– Structured Adjustment Loans (neoliberalism):
Loan with strings attached; must be used on
specific project/program
– Aid is wasted, stolen or used on armaments
– New businesses are not attracted to country
• The failure to repay loans causes:
– MDCs to refuse to make further loans
– Financial instability of banks in the MDCs
Fair Trade
• Is a sustainable variation of the I.T. approach
• Intended to protect small business and workers in
LDCs
– Cut out exploitive middle men who want to maximize
profits. Work directly with the producers and workers
so more profits can be returned to them.
– Producer standards
• Cooperative farms
– Worker standards
• Fair wages, rights
Barriers to Economic Development
• The World economy works to the disadvantage
of the periphery, but other obstacles exists:
• Social conditions- life expectancy, young
dependency ratio, human trafficking
• Debt- cant repay loans
• Disease- high death rates; sick workers
• Political corruption- using $ on other things
Costs to Economic Development
• With increased production, the environment
and culture are transformed.
• Industrialization: cheap labor exploited
– Export Processing Zones (EPZ): favorable tax and
trade arrangements for foreign businesses
• Maquiladoras in Mexico
• Special Economic Zones in China- Hong Kong
– North American Free Trade Agreement (NAFTA):
encourage trade and cooperation between US,
Canada and Mexico
• Agriculture: over farming
• Tourism: imposes Western culture on LDCs