Ch. 9 Key Issue 4
Why Do LDCs Face Obstacles to
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
• 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
• LDCs face two problems:
– 1. Which development policy (model)
should we adopt?
– 2. Where do we find the funds for
Models for Development
• Development can be achieved through:
– Self-sufficiency approach
– International Trade approach
• Rostow’s Modernization Model (5
– 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
– Limiting imports and exports with barriers
(tariffs, quotas, licenses) to protect domestic
• “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?
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
• Large bureaucracy needed
– Many gov’t agencies needed to regulate
– 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
• 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
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
– 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
Immanuel Wallerstein and Dependency
• World is one system- no country is independent of
• 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”
– Capitalists will move production around the world to
enhance profits, places that lose production facilities
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
– 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
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
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
– 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
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
– 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