The Developing World Why are some countries Rich

The Developing World

Why are some countries Rich and some countries Poor? • Natural Environmental Endowments of Raw Materials etc. DO NOT explain National Wealth • Theory of Environmental Determinism has problems with this • ‘Adding Value’ to raw material is key to Wealth • ‘Downstream Activities’ are key to wealth creation because they are nearer the source of money. • Processing, Manufacturing, Transporting, Advertising, Insuring, Marketing, and Financing the flow of goods is more profitable than extracting the raw materials they are derived from.

Characteristics of the Developing World

I. Poverty is widespread. A. People are often malnourished which leaves them with little energy and little resistance to disease. B. Unsanitary conditions, polluted water, little health care. C. Many unemployed or underemployed: long hours, manual labor, little pay ($1 a day) – no jobs available to improve their lives.

II. Agriculture A. In developing countries, 50 -80% farmers. In the U. S. , only 1% are farmers. B. Simple methods, handmade tools, animate energy (people or animals), poor, overused soil C. SUBSISTENCE FARMERS: just enough to survive, not for profit

III. Rapid Population Growth A. ¾ of the world’s population lives in developing or transitional economic situations. B. Many children to help on the farm and to take care of parents. Free time is spent with family. C. Poor health care means more infant deaths. BUT, improving health care means people live longer, leads to D. OVERPOPULATION: Too many people for the available resources.

Population Density, 2006

World Population Cartogram, 2008 "Out of every 100 persons added to the population in the coming decade, 97 will live in developing countries. " Hania Zlotnik, 2005

Total Births, 2008 More children are born each year in Africa than are born in the Americas, all of Europe and Japan put together. Worldwide, more than a third of a million new people will be born on your birthday this year.

Illiterate Women The biggest gaps between male and female literacy are in Southern Asia, Northern Africa and Southeastern Africa. In Pakistan, when the number of illiterate boys is subtracted from illiterate girls, the result is 2. 6 million ‘extra’ girls who cannot read or write; that is 24% of women aged 15 -24 there.

IV. Capital is scarce A. Capital is anything that produces wealth. B. machines, factories, roads, harbors, communications = INFRASTRUCTURE C. Imports are limited – great need but no $.

Factors of Industrialization A. Industrialization is needed for development. It provides jobs and exports. B. To succeed, countries need land, labor, capital, infrastructure, and a STABLE GOVERNMENT. Paraguay

Latin America: a case study Benefits to industrialization: 1. New jobs 2. Growing middle class 3. Development of manufacturing centers 4. National pride

Challenges of development: 1. Pollution 2. Urban squalor – increase in crime 3. Foreign debt – money borrowed to start businesses plus interest 4. Neglect of agricultural exports 5. Unemployment of rural workers

What do countries need to develop? SHEFIE! S – Stable government H – Health care E – Economic F – Freedom I – Infrastructure E - Education

Improvement in PINGs • To promote development, PINGs seek to improve the indicators…economic, social, and demographic • PINGs are improving, but the gap is growing – Example: PINGs have improved income by $4, 000, but PEDs have improved by $20, 000

2 fundamental obstacles to PINGs trying to develop 1. Adopting policies that successfully promote development 2. Finding funds to pay for development

Development Strategies • Development through self-sufficiency – Elements of self-sufficiency approach – Problems with self-sufficiency • Development through international trade – Rostow’s development model – Examples of international trade approach – Problems with international trade • Financing development

• Models of Development – – Liberal: 1) Assume all countries are capable of developing economically in the same way, and 2) disparities b/w countries & regions are the result of short-term inefficiencies in local or regional markets Structuralist: Economic disparities are the result of historically derived power relations w/in the global economic system; cannot be changed easily (misleading to assume all areas will go through the same process of development)

Development through self-sufficiency • • For most of the 20 th century, self-sufficiency was the more popular of the development alternatives Key elements: 1. 2. 3. Investment is spread across all economic sectors Focus is on promoting wealth across income levels, not just the rich Barriers are set on imports (tariffs, taxes, quotas, requiring licenses)

Example of Self-Sufficiency: India • India made much use of barriers to trade • Indian businesses were discouraged from producing goods for export • Businesses produced goods for India • If private companies were unable to make a profit by selling only to India, then the government would provide a subsidy • Led to bloated and inefficient companies, low economic growth, policy reversed in early 1990 s and growth has accelerated

Problems with self-sufficiency 1. Inefficient: self-sufficiency protects inefficient industries • Business has little incentive to improve quality, lower production costs, reduce prices, or increase production if it doesn’t have to compete with firms from other countries 2. Large Bureaucracy: self-sufficiency requires a large bureaucracy to administer the controls • • A complex administrative system encouraged abuse and corruption Many resources were wasted on paying government employees who would have been unnecessary in a free-market economy

Rostow - Stages of Growth • • The work of American Walt W. Rostow is an economic historian This is a liberal model Suggests that all countries follow a similar path to development • Countries can be placed in one of five categories in terms of its stage of growth:

Rostow - Stages of Growth 1. Traditional Society: a country • Village in Lesotho. 86% of the resident workforce in Lesotho is engaged in subsistence agriculture. Copyright: Tracy Wade, http: //www. sxc. hu/ that has not started development; large amounts of people in agriculture and “nonproductive” activities (religion and military) Characterised by – subsistence economy – output not traded or recorded – existence of barter – high levels of agriculture and labour intensive agriculture – dominant activity is subsistence farming – Rigid social structure, resistance to change

Rostow - Stages of Growth 2. Pre-conditions (of takeoff): the process of development begins when an elite group begins to invest in technology and infrastructure The use of some capital equipment can help increase productivity and generate small surpluses which can be traded. Copyright: Tim & Annette, http: //www. sxc. hu – Development of mining industries – Increase in capital use in agriculture and some commercial farming – Necessity of external funding – Some growth in savings and investment – progressive leadership moves the country toward openness and diversification

Rostow - Stages of Growth 3. Take off: rapid growth is promoted in a small number of activities (i. e. textiles, food products) At this stage, industrial growth may be linked to primary industries. The level of technology required will be low. Copyright: Ramon Venne, http: //www. sxc. hu – Increasing industrialisation – Further growth in savings and investment – Some regional growth – Number employed in agriculture declines – Industrial Revolution, Urbanization, Mass-Production

Rostow - Stages of Growth 4. Drive to Maturity: modern technology diffuses to more industries which experience rapid growth and workers become more skilled As the economy matures, technology plays an increasing role in developing high value added products. Copyright: Joao de Freitas, http: //www. sxc. hu – Growth becomes self-sustaining – wealth generation enables further investment in value adding industry and development – Industry more diversified – Increase in levels of technology utilised – Tech. Diffusion, industrial specialization, international trade, modernization of core, population decline

Rostow - Stages of Growth 5. High mass consumption: the economy shifts from heavy industry to consumer goods Service industry dominates the economy – banking, insurance, finance, marketing, entertainment, leisure and so on. Copyright: Elliott Tompkins, http: //www. sxc. hu – High output levels – Mass consumption of consumer durables – High proportion of employment in service sector – high income, widespread production of goods and services, Service Sector

Criticisms: • Too simplistic – based on experience of western Europe and American development, but might not be the same for other countries • Necessity of a financial infrastructure to channel any savings that are made into investment • Will such investment yield growth? Not necessarily • Need for other infrastructure – human resources (education), roads, rail, communications networks • Efficiency of use of investment – in palaces or productive activities? • Rostow argued economies would learn from one another and reduce the time taken to develop – has this happened?

Rostow’s ‘Stages of Growth’ • The ‘natural’ evolution of peoples are to ‘evolve’ from ‘Hunter. Gatherer’ to ‘Agriculture’ to ‘Industrial’ to whatever. • Is this Social Darwinism? • Is it reasonable?

Walt Rostow’s Modernization Model Selected countries up to 1960

International Dependence

• Dependency Theory (“structuralist”) – – Political & economic relationships b/w countries & regions control & limit the developmental possibilities of less well-off areas (e. g. imperialism caused colonies to be dependent – this helps sustain the prosperity of dominant areas & poverty of other regions) Only at later stages of development does the core have a positive impact on the periphery (grants, loans, special economic zones, …)

International Dependence • International division of labour – rich countries have jobs in high value activites, poor countries have jobs in low value activities, can be traced back to colonial and imperial dominance • Dominance of political decision making in the hands of a few wealthy and powerful groups who aim to maintain the status quo • Such interest groups also exercise power over international institutions and initiatives such as the World Trade Organisation, International Monetary Fund, Kyoto talks, etc.

International Dependence • Advice given to poorer nations has been poor – e. g. lending to less developed countries, investment advice, etc. • Inability to solve the debt crisis and protectionism continues to prevent development of poorest countries The International Dependence model can perhaps be exemplified by the lack of progress on reducing emissions to restrict climate change and freeing up international trade. Copyright: Nikita Golovanov, http: //www. sxc. hu

Criticism: • Offers causes but no solutions Talks to move towards less restrictions on trade have been going on for many years; progress is slow. We know that protectionism is disadvantageous to developing countries but how do we go about putting in place solutions to help solve the problem? Copyright: Doug Wray, http: //www. sxc. hu

Development through international trade • A country identifies its distinctive/unique assets • What product can the country manufacture and distribute at a higher quality and a lower cost than other countries?

Examples of the International Trade Approach • The Four Asian Tigers (Dragons): South Korea, Singapore, Taiwan, and Hong Kong – Influenced by Japan – Concentrated on clothing and electronics • Petroleum Rich Arabian Peninsula States: – The increase in petroleum prices in the 1970 s greatly enriched these countries

Problems with the International Trade Alternative 1. Uneven resource distribution 2. Market stagnation 3. Increased dependence on PEDs

Recent Triumph of International Trade Approach • This approach has been adopted by most countries in recent years • India switched to an international trade approach • India’s GDP grew 7% per year in the 1990 s • Manufactured goods accounted for more than 4/5 of exports from PINGs in 2000

World Trade Organization • Established in 1995 by countries representing 97% of world trade • Reduces barriers to trade: – Countries negotiate reduction or elimination of international trade restrictions – The WTO enforces agreements

Financing Development • PINGs lack money! • Loans – mainly for infrastructure – The World Bank – International Monetary Fund • Structural Adjustment Programs – in exchange for repaying debt, lending agencies require PINGs to create conditions favorable for international trade

Fair Trade • Fair trade – products are made and traded according to standards that protect workers and small businesses in PINGs • Producer Standards • Worker Standards

Income and Demographic Change, 1980– 2004 Per capita GDP has increased more in MDCs than in LDCs during this period, while population growth and infant mortality have declined more rapidly in MDCs than in LDCs.

Foreign Investment Flows Three-quarters of foreign investment flows from one MDC to another. Only one-quarter goes from an MDC to an LDC.

Core and Periphery in World Economy This north polar projection of the world shows that most of the MDCs are in a core area north of 30° N latitude. The LDCs are mostly on the periphery of this map.