1/6 Chapter 49 – MDCs and LDCs As I’ve frequently pointed out, simply by virtue of being in this school you are part of the 2% richest human beings ever to walk the face of the earth. Most of you in fact belong to the 0.2%! What separates you from the people in the warungs? Well, money obviously. So why the division? Good question… Objectives of the chapter • Define and outline the characteristics of less developed nations in terms of income, poverty, population growth, export markets, infrastructure…etc. i. Define: key characteristics of LDCs (see HDI); ii. Describe/outline: high/middle and low income countries as classified by UNDP; iii. Explain/distinguish/draw: why trade in a narrow range of exports disenables growth and development in many LDCs; how “moving up the V.A. chain” can help LDC growth (and the difficulties herein!); Evaluate/discuss: trade/FDI and development; the effects of MDCs trade barriers on LDCs development process • Outline various ways to measure development, e.g. HDI. • Explain the basic trade patterns in LDCs vs MDCs over the past 50 years. • Explain how LDCs might benefit from increased and/or free trade – and what the main barriers are in terms of LDC trade. • Explain how FDI flows to LDCs can be pro-developmental iv. – and that there are negative aspects also! • Evaluate the extent to which aid, trade and FDI have had positive impacts on development. Key content Characteristics of LDCs UNDP classification of countries High income countries (GNP/ capita over USD9,266 in2000) Middle income countries (GNP/ capita of USD756 – 9,265 in 2000) Low income countries (GNP/ capita of USD75 or less in 2000) 35 countries 79 countries 59 countries Australia Algeria Angola Canada Bolivia Cambodia Denmark Ecuador Haiti Ireland Honduras Indonesia Japan Russian Fed. Nepal USA Turkey Ukraine 2/6 o Low GDP/capita (often put in PPP terms) Country name 2007 2008 2009 2010 Afghanistan 307 367 425 501 Congo, Dem. Rep. 164 187 175 199 Denmark 57,021 62,157 55,933 55,891 Indonesia 1,859 2,172 2,272 2,946 Korea, Rep. 21,653 19,162 17,110 20,757 Mexico 9,485 9,893 7,852 9,123 Namibia 4,079 4,075 4,096 5,330 o Low life expectancy Country name Afghanistan Congo, Dem. Rep. Denmark Indonesia Korea, Rep. Mexico Namibia (Data is for females.) 2007 47 49 81 69 83 79 61 2008 48 49 81 70 83 79 62 2009 48 49 81 70 84 79 62 o Low level of literacy (percentage literate, 15 years and above) Country name 2007 2008 2009 2010 Afghanistan No data Congo, Dem. Rep. 67 Denmark No data Indonesia 92 Korea, Rep. No data Mexico 93 93 93 Namibia 89 o High population growth (% growth per year) Country name 2007 2008 2009 2010 Afghanistan Congo, Dem. Rep. Denmark Indonesia Korea, Rep. Mexico Namibia o 2.8 2.8 0.4 1.1 0.3 1.3 1.9 2.8 2.8 0.6 1.1 0.3 1.3 1.9 2.8 2.7 0.5 1.0 0.3 1.3 1.9 2.8 2.7 0.4 1.0 0.3 1.2 1.8 Poor infrastructure (consumption of electricity per capita in kWh) Country name Afghanistan Congo, Dem. Rep. Denmark 2007 2008 2009 No data 101 98 104 6,668 6,562 6,246 3/6 Indonesia Korea, Dem. Rep. Korea, Rep. Luxembourg Mexico Namibia Iceland Norway o 547 572 590 755 810 733 8,502 8,853 8,980 16,350 15,938 14,424 1,974 1,983 1,943 1,491 1,740 1,576 36,853 50,067 51,259 24,855 24,866 23,550 Poor health (percentage of pop infected by HIV) Country name Afghanistan Congo, Dem. Rep. Denmark Indonesia Korea, Rep. Mexico Namibia South Africa Swaziland Zimbabwe 2007 2008 No data No data 0.2 0.2 0.1 0.2 0.1 0.1 0.3 0.3 14.3 13.7 18.0 17.9 25.8 25.9 16.1 15.1 2009 0.2 0.2 0.1 0.3 13.1 17.8 25.9 14.3 Comparisons in human development, selected countries (2006) Country (HDI value/rank ) INDIA (0.609/132) BOTSWANA (0.664/126) Life expectancy (years) Adult literacy (% of population) Real GDP per capita (PPP$) 1960 2006 1960 2006 1960 2006 44 64.1 34 65.2 617 2,489 45.5 48.9 41 82.1 474 12,744 4/6 INDONESIA (0.726/109) 41.2 70.1 54 91 490 3,455 CHINA (0.762/94) 47.1 72.7 .. 93 723 4,682 Trade in LDCs o High level of dependency on a few single export goods (often primary goods) – narrow range of exports o Ever worsening ToT (e.g. LDCs must export more iron ore to be able to import a refrigerator) Px / Pm…e.g. one tonne of coffee equals ten imported pairs of jeans When P commodities (coffee, tea, iron…) fall…ToT for LDCs falls! (LDCs need to ‘pay’ more coffee to buy any given Q of jeans.) o FDI has increased rampantly in the past 20 years Def: increase in physical cap…by foreign firms Good; this stimulates AD and creates jobs, transfers knowledge and technology Bad; dependency on MDCs for capital, much of the profits are repatriated, Source: Globalization, growth and poverty; World Bank 2002, page 42 o o More and more trade is in secondary goods rather than primary (LDCs are moving up the value-added chain) Debt crisis of 1980s and ‘90s has abated (18 HIPC and debt relief 5/6 o Visible BTT have gone down…but what did you learn about “sneaky BTT”? E.g. what has happened to MDC subsidies?! Benefits of trade for MDCs o Increase in export revenue: Increased exports as seen in the NICs have had an immense impact on the domestic economy. Exports grew at an average rate of between 8% and 20% between the 1960s and 2000 in the NICs (Newly Industrialised Countries), and most of the exports are manufactures.1 This has been a tremendous boon to the domestic economies – for example, the proportion of exports to GDP in Korea went from just 2.4% in 1962 to 42% in 1999.2 o Benefits of scale: When the size of the market increases due to open markets, then it becomes possible for small countries to establish economically viable plant sizes to compete internationally. Longer production runs, better use of resources and the spreading of fixed costs are examples of how the average costs fall for firms increasing the scale of operation. o Increased competition: When a country competes internationally, there will be far more incentive for domestic suppliers to increase efficiency and product quality goods, rendering dynamic gains over time. o Additional resources: An outward oriented country stands to benefit not only from increased exports but from increased imports, i.e. raw material, components and intermediary goods needed in production. About two thirds of all manufacturing output is sold as inputs to other firms, which means that access to global networks of suppliers lowers production costs. o Technology transfers: In addition to this, there is technological transfer, both in the form of capital and in the form of knowledge and experience imparted by foreign firms’ direct investment inflows. It’s pretty clear actually: 1World Development Indicators, World Bank 2002 2Legrain, page 69 6/6 It would be wonderful if I could just stop right here, but there is, of course, another side. A number of issues have been raised in opposition to outward oriented policies: low wage and environmental policies might be intentionally set by developing countries in order to attract foreign investment, leading to exploitation of labour and environmental degradation; dependency on multinational companies could lead to the empowerment of foreign businesses over domestic policies; the domestic economy for a strongly export oriented country would be dependent on international business cycles; and speculative inflows can have devastating effects on the economy such as the 1997 Asian Crisis. Questions: 1. Outline three distinct characteristics of an LDC – use real life examples in your answer. 2. Why is “moving up the value-added chain” pro-growth and prodevelopmental? 3. Evaluate FDI for an LDC. (Two pros and two cons – then take a stance!) 4. Explain why an exporting LDC would benefit from MDCs growing richer.