ECONOMIC DEVELOPMENT
AND TRANSITION
Chapter 18
Levels of Development
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Half the world’s population lives in extreme
poverty (less than $1 a day)
Measure well being of country on development
(process that nation meets economic, social and
political needs of people)
Developed nations (MDC’s)- above average
level of material well being
Less Developed Countries (LDC’s) worlds poorest
countries
Developing Countries- not poorest but not high
standard of living of MDC’s
Development is how well a nation provides food,
education, shelter, and levels of economic
production
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Developed,
Developing and
Least
Developed
Nations
Measuring Development
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1.
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2.
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Primary measure of development is GDP (total market
value of all goods and services produced in a year)
Per Capita GDP is GDP divided by total population
Does not account for distribution of wealth, in many
LDC’s gap between rich and poor very wide
Energy consumption- amounts of energy used are an
indication of industrialization (extensive organization
of an economy for manufacturing)
Low levels of energy consumption are a sign of little
industry, development
Worldwide Energy Consumption Per Capita
Measuring Development
3.
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4.
5.
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6.
7.
Labor Force- LDC’s most labor force devoted
to agriculture, little opportunity for workers to
specialize
Unable to produce specialized goods for sale,
unable to generate cash income
Consumer goods- large number of consumer
goods means people have disposable income
Literacy- higher in more developed countries
Higher levels of education mean population is
more productive
Life Expectancy- well nourished, well housed
population has longer life expectancy
Infant mortality rate- number of deaths in first
year of life per 1,000 births
Characteristics of Developed Nations
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Have high per capita GDPs
Higher degree of economic, political
freedom
Agricultural output high, but few farmers
(mechanization, industrialization of
agriculture)
Most of labor force in service industry or
manufacturing
High energy usage
Use of technology increases productivity
Infant mortality low, life expectancy high
Most of population urbanized
Solid infrastructure (services needed to keep
economy healthy- roads, communication
systems, financial institutions)
Characteristics of Less Developed Countries
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Low per capita GDP
Low energy usage
Most of population in agriculture
(subsistence farming)
Unemployment rates high
Education system inadequate, children
needed to work on farms; literacy
rates low
Most of population is rural (not always)
Poor diet, access to health care lead to
high infant mortality and lower life
expectancy
Levels of Development
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A.
B.
C.
D.
E.
Economic development occurs in the following stages
Primitive equilibrium- no economic system exists,
based on tradition
Transition- traditions crumble, new ways adopted
Takeoff- new industries grow and profits reinvested
Semi-developed- economy expands, enters
international market
Highly developed- basic needs easily met, economy
focused on consumer goods, public sector
Issues in Development
Rapid Population Growth
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Quality of life depends on productive population, LDCs can’t
meet needs of rapidly growing population
Many LDCs are experiencing increase in life expectancy and
no decrease in birth rates, leading to rapid population growth
Double population means need for more employment
opportunities, schoolrooms, agricultural production, industrial
output
Factors of Production
Physical geography makes
development difficult
 Uneven distributions of
resources, arable land
 Sometimes problem is how
to utilize resources,
technology and capital to
extract resources absent in
many LCDs
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Physical and Human Capital
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Lack of human made resources to
create goods and services
Subsistence agriculture does not give
families opportunity to save or
produce anything more than food
Means large portion of population
who don’t produce are supported by
others
Health, nutrition, education important
to develop human capital
Keeps investors away because they
don’t see profit if country lacks a
skilled, healthy workforce
Health and Education
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Health- Performance and productivity depend on good
nutrition, less developed countries suffer from chronic
food shortages
Education- To use technology and move beyond
subsistence educated workforce is necessary
LDCs have low rates of literacy and limited access to
education
Ideas about gender keep women out of education and
the workforce
Brain drain- best educated citizens leave many LDCs for
education opportunities, attracted to opportunities of
developed countries
Political Factors
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Limited or reduced development in LDCs
Colonial legacy
Many were former colonies with economies based on
extraction of raw materials
Shipped to colonizers, where they were turned into finished
products
Many had to rely on colonies for manufactured goods
After WWII many became independent and tried to
modernize their economies
At first they turned to central planning, many are now turning
to free enterprise
Corruption in government
Policies and political decisions to only benefit a small minority,
leaving many with needs unmet
Civil wars and social unrest have plagued many countries
Military leaders spend huge sums of money at the expense of
other societal needs
Debt
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1970’s and 1980’s many LDCs acquired debt from
foreign governments and private banks
Worldwide economic crises hindered countries from
paying back loans (Oil Crisis 1973 value of dollar
increased and made paying loans back more
difficult)
Some countries foreign debt is greater than annual
GDP
Financing Development
Investment
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Building infrastructure, developing
education, healthcare and creating
industry require large sums of money
Two methods to finance development:
Internal financing from the countries
citizens
Underdeveloped nations do not have
much money to invest
Those with money keep it in foreign banks
and overseas investments, many LDCs turn
to foreign investment
Foreign investment money from other
countries
Investment
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Foreign direct investment- business established in
country by foreign firm
Often formed by Multi-National Corporations (MNCs)
MNCs are large corporations that produce and sell
goods across the globe
Attracted to LDCs for profit, take advantage of cheap
labor and natural resources
Money not reinvested in country, goes to foreign owners
Potential for unethical treatment (low wages for
workers)
Positive effects provide jobs, introduce technology,
opportunity for related services to develop
Foreign portfolio investment- foreigners purchase
stocks and bonds in countries markets, funds lead
indirectly to increases in production
Foreign Aid
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Foreign governments give money and other forms of
aid to LDCs to aid development
Build schools, develop infrastructure
Reasons- humanitarian, military, economic, social
Examples- aid to Western Europe after WWII,
more recently aid to Middle Eastern countries
friendly to American democracy
These countries can provide new markets for
American goods
International Institutions
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International institutions promote development
Most prominent are the World Bank, United
Nations Development Program, International
Monetary Fund
World Bank- largest provider of development
assistance, raises money in financial markets
and takes contributions from member nations
UN Development Program- elimination of
poverty through development, provides grants
for economic and social development, funded
by voluntary contributions from UN members
World Bank Income Groups
Blue – high Income
Green- uppermiddle
income
Purple- lower middle
income
Red -poor
International Institutions
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International Monetary Fund (IMF)- facilitates
development through policy advice, technical
assistance
Often viewed as the last resort for struggling LDCs
Uses debt rescheduling ( giving more time,
forgiving, dismissing borrowed money); stabilization
programs (IMF tries to help change economic
policies of debtor nation)
Stabilization programs have negative impact on
poor; cuts in government services, cutting wages
while prices rise
Cause decrease in domestic consumption while
country tries to export more to make money
Transition to Free Enterprise
Toward a Market Economy
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A.
B.
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LDCs began to see limitations of centrally planned economies
Many have begun to replace them with market based systems
Some are modifying their centrally planned economies to
incorporate some free market practices
Huge adjustment for economy and nation
One of the first steps is privatization (sale or transfer of
government owned business to private individuals)
Can sell business to one owner
Sell shares in business
Privatization means only profitable business will continue to
operate
Means secure life long employment for some is over because
competition weeds out the weak
Other Issues in Transition
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The Legal System and Government
Establishment of a legal system
protecting property rights
Laws that ensure the transfer of
property
Law and order prevent criminals and
government from interfering with the
day to day business of the economy
Laws need to provide a framework
of regulation
Workers need to develop a different
work ethic based on incentive to
influence labor
Russia in Transition
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USSR Once dominant communist nation, late 1980’s
lagging economy brought social and economic
reform
Most land, labor and capital devoted to heavy
industry and the military, little left to produce
consumer goods
1980’s new leader Mikhail Gorbachev began series
of economic reforms (perestroika) to gradually
change over to a free market economy
Workers, factory managers had more control over
production
Introduced a more open government policy
(glasnost)where citizens could do what they wish
without government reprisal
Policy changes led to collapse of communism in 1991
Russia in Transition
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By 1992 government lifted price
controls, prices tripled
Wealth was unevenly distributed
and organized crime and
corruption infiltrated society and
the economy
Financial aid from the World
Bank and the IMF was
mismanaged and not used
efficiently
Recently Russia has started to tap
into their vast oil, natural gas and
mineral resources to sell on the
world market