Developed and Less Developed Countries Developed country has

Developed and Less Developed Countries • Developed country – has a relatively high per capita GDP. • Less developed country (LDC) – has a relatively low per capita GDP. • In 2017, about 54% of the world’s population lived in LDCs. • See the Table on page 15 -4.

Common Hardships for LDCs • 1. High infant mortality rates. • See Example 1 on page 15 -1. • 2. Inadequate diets. • See Examples 2, 3 A, and 3 B on page -1. 15

Common Hardships for LDCs • 3. Unsafe drinking water and inadequate sanitation. • See Examples 4 A and 4 B on page 15 -2. • 4. Inadequate medical services. • See Examples 5 and 6 on page 15 -2.

The Rule of 70 • The Rule of 70 is a rule of thumb for calculating the approximate time required for any variable to double at a given growth rate. • Time to double = 70 ÷ Growth Rate • See Examples 7 A, 7 B, 7 C, and 7 D on page 15 -2.

The Importance of Economic Growth Rates • Economic growth rates are very important. • Even a small difference in economic growth rates can make a large difference in standard of living over a long period of time. • See Examples 8, 9, and 10 on page 15 -3.

Economic Freedom and Economic Growth • Most economists believe that economic freedom is important for economic growth. • Economic freedom is measured by such factors as property rights, relative size of government, level of taxation, degree of government regulation, international trade policy, etc.

Economic Freedom and Economic Growth • According to the “Economic Freedom of the World, 2018 Annual Report”, the twenty-five percent of nations with the freest economies had an average per capita GDP of $40, 376 in 2016 while the twenty-five percent of nations with the least free economies had an average per capita GDP in 2016 of $5, 649.

Obstacles to Economic Development • 1. Rapid population growth. • Population growth rates tend to be higher in LDCs than in developed countries. • See Example 12 on page 15 -5. • The problem is not overpopulation. • See Example 13 on page 15 -5.

High Dependency Ratio • The problem created by a rapid population growth rate is a high dependency ratio. • A high dependency ratio means that a large percentage of the population consists of children and the elderly. • See Example 14 on page 15 -5.

Obstacles to Economic Development • 2. Low savings rate. • Low standards of living in LDCs make it difficult to save (delay consumption). • Saving is necessary if investments in physical capital and human capital are to be made.

Obstacles to Economic Development • 3. Cultural norms that hinder economic development. • LDCs often have cultural norms that are hostile to economic development. • Examples of counterproductive cultural norms are traditionalism and fatalism.

Obstacles to Economic Development • 4. Counterproductive governmental policies. • Certain governmental policies are a hindrance to economic development. • Governments in LDCs often follow some or all of the counterproductive policies.

Counterproductive Governmental Policies • • • 1. Weak private property rights. 2. Restrictions on competitive markets. 3. Restrictions on international trade. 4. Excessive inflation. 5. A large government. 6. Poor provision of public services.

Weak Private Property Rights • Governments of LDCs often weaken private property rights by: • 1. Failing to enforce private property rights through criminal and civil law. • 2. Imposing high tax rates. • 3. Imposing excessive government regulations. • 4. Permitting excessive government corruption.

“The Resource Curse” • Abundant natural resources: • 1. May lead to counterproductive governmental policies. • 2. May hinder the development of other sectors of the economy. • 3. May cause an underinvestment in human capital. • 4. May cause civil wars.

“The Resource Curse” • The ten largest oil importing countries have experienced more economic growth than the ten largest oil exporting countries. • See Example 17 on page 15 -7.

Corruption and Standard of Living • A high degree of corruption is associated with a low standard of living. • A low degree of corruption is associated with a high standard of living. • See the table on page 15 -8.

“Why Nations Fail” • The central thesis of the book is that economic growth and prosperity are associated with inclusive political and economic institutions, while extractive political and economic institutions typically lead to stagnation and poverty.

“Why Nations Fail” • Under absolutist political institutions, those who have political power will be able to set up extractive economic institutions to enrich themselves at the expense of society. • See Example 18 on page 15 -9.

“Why Nations Fail” • Those in control of extractive political institutions may fear inclusive economic institutions. • Even though extractive institutions can generate some economic growth, they will usually not generate sustained economic growth.

“Why Nations Fail” • Extractive political and economic institutions tend to create a vicious circle, making it more likely that these institutions will persist and even expand. • See Example 20 on page 15 -9.

“Why Nations Fail” • Inclusive political institutions lead to inclusive economic institutions. • See Example 21 on page 15 -10.

“Why Nations Fail” • Inclusive political and economic institutions tend to create a virtuous circle, making it more likely that these institutions will persist and even expand. • See Example 22 on page 15 -10.

Foreign Aid Curse • Research has found no significant correlation between the amount of foreign aid received and the economic growth rates of the recipient countries. • Foreign aid may hinder economic growth. This “foreign aid curse” may be similar to “the resource curse”.

“Sweatshops” in LDCs • American multinational corporations are often criticized for operating “sweatshops” in less developed countries. • When workers in LDCs voluntarily choose jobs in “sweatshops”, it is because these are the most attractive jobs available.

Think Like an Economist • You work in an American-owned sweatshop, where you are paid $6 for a 12 -hour day. • Do you hope that a $15 per eight-hour day global minimum wage is imposed?