Download Key Issue 4: OBSTACLES TO DEVELOPMENT

Key Issue 4:
OBSTACLES
TO DEVELOPMENT
DEVELOPMENT
OBSTACLES
In order to close the
gap between rich and
poor countries, LDCs
must develop.
This means increasing
the per capita GDP and
then using wealth to
improve social and
economic conditions.
The two obstacles to
rapid development are:
• policies that
promote
development.
• funds to pay for the
development.
SELF-SUFFICIENCY
MODEL FOR
DEVELOPMENT
Countries will choose one of two models to promote development.
For most of the 20th century the SELF-SUFFICIENCY MODEL (aka balanced growth) was the most popular.
THE MODEL
Spread investment equally over all sectors in all regions.
Incomes in the country keep pace with those in the
city[Growth is modest but fair as residents everywhere share
in benefits. Reducing overall poverty takes precedence over
creating a wealthy upper class.]
Isolate domestic business from large international
competition. [Isolation allows domestic businesses to become
profitable without the potentially adverse impacts by
developed countries in a global market. Encourages a
country’s fragile businesses to achieve independence.]
Set barriers (tariffs on imports to make more expensive than
domestic goods, import quotas, requiring import licenses to
restrict the number of legal importers. [Improves domestic
economy by forcing people to buy local]
Restrict domestic businesses from exporting to foreign states.
[Forces all sectors of the economy to focus on goods that
improve local quality of life.]
THE DRAWBACKS
System protects inefficient businesses.
[Because businesses can sell all their inventory at fixed prices,
there is no incentive to improve quality, lower costs, reduce
prices or increase production, and without international
competition, companies do not need to follow technological
advances or give high priority to sustainable development and
environmental protection.]
System creates massive bureaucracy.
[Running the system requires a complex administration and
fosters corruption– it becomes more lucrative to be an official
than a businessman and the system creates a black market
trade.]
SELF-SUFFICIENCY PATH TO DEVELOPMENT
The self-sufficiency path often involves heavy
government spending on welfare programs
and other efforts to ‘level the field’ between
haves and have-nots.
SELF-SUFFICIENCY PATH TO DEVELOPMENT
EXAMPLE: Post- Independence INDIA
After India achieved independence from
Britain in 1947, it became a leading example
in self-sufficiency and made effective use of
many barriers to trade.
During this period in India, the following policies were
implemented:
• Licenses had to be secured by foreign countries to
import goods. The process was long and extensive.
Several agencies had to approve.
• Once licenses were received restrictions placed on the
quantity of goods that could be sold.
•
Taxes on imported goods increased 2-3 X’s.
•
India businesses discouraged from exported goods.
•
Indian currency could not be converted to other
currencies.
Cut off from the World economy, businesses were supposed to
produce goods for consumption inside India.
•
Government owned communications, transportation, power
companies, and auto-makers
private sector in most
countries.
•
Government gave subsidies= cheap electricity/wiped out debts
if companies were unable to make a profit.
•
Government permission was need to sell new products,
modernize the factory, expand production set prices, hire and
fire workers, and change job classifications for existing
employees.
Following this path India achieved modest development
The INEFFICIENCY of SELF-SUFFICIENCY:
INDIA’S MARUTI MOTORCARS
Near-identical models of the ‘Maruti 800’ were made for
decades with few improvements. During International
trade era, they sold to Japanese Suzuki which now holds
45% of India's market.
DEVELOPMENT
THROUGH
INTERNATIONAL
TRADE MODEL
What product can the country manufacture
and distribute at a higher quality and
a lower cost than other countries?
The second model for development is the INTERNATIONAL TRADE
MODEL. In it a country:
--develops by expanding a distinct local industry for global export.
--focuses on BASIC INDUSTRIES (basic industries manufacture a good for
export and brings money into a community from the sale of the good. A
non-basic industry is one that supports a basic industry but does not
bring in outside money.)
--attempts to find a COMPARATIVE ADVANTAGE (ability of an individual,
firm, or country to produce a good or service at a lower opportunity cost
than other producers).
The wealth generated from exporting can then be reinvested in
other, internal development.
Therefore, the model banks on THE TRICKLE DOWN EFFECT (the
theory that increased wealth for one class/industry/sector will
benefit other classes/industries/sectors as the wealthy direct money
to others through the purchase of goods and services, the expansion
of business, and the reinvestment of profits in the community
DEVELOPMENT
THROUGH
INTERNATIONAL
TRADE MODEL
ROSTOW’S DEVELOPMENT MODEL
Rostow’s model for international trade is a five step approach:
Developed in 1950’s, several countries adopted in 1960’s, still
most followed the self-sufficiency approach.
1. THE TRADITIONAL SOCIETY
An undeveloped society in which the majority of people are
involved in subsistence agriculture and the majority of wealth is
allocated to “non-productive” activities like religion and the
military. Also called a SUBSISTENCE ECONOMY
2. PRECONDITIONS FOR TAKEOFF
An elite group initiates innovative economic activities and the
country invests in new technologies and infrastructure
(transportation, power, public safety and water systems).
3. THE TAKEOFF
Rapid growth in limited number of activities such as textiles and
food products. Takeoff industries achieve technological
advancement and production while other sectors stagnate.
4. DRIVE TO MATURITY
Modern technology diffuses to other industries/sectors which
also experience rapid growth. Workers become
skilled/specialized.
5. AGE OF MASS CONSUMPTION
Economy shifts from HEAVY INDUSTRY (industrial goods like
steel, energy, industrial machinery) to consumer goods such as
automobiles and refrigerators.
INTERNATIONAL TRADE EXAMPLES while most counties
followed the self-Sufficiency model.
THE FOUR ASIAN DRAGONS : Singapore and Hong Kong, British
Colonies until 1965 & 1997. Small amounts of Rural land and no
natural resources. [South Korea, Singapore, Taiwan and Hong
Kong all adopted approach with great success due to low labor
costs and focusing on clothing/electronics]
OIL-RICH ARABIAN PENINSULA STATES : Once least developed
countries transformed in 1970’s due to high oil prices.
[Saudi Arabia, Kuwait, Bahrain, Oman and the UAE succeeded by
focusing on oil.] Financed highways, infrastructure, universities.
THE DRAWBACKS
INCREASED DEPENDENCE ON MDCs
[ by selling products to developed countries, developing countries
may scale back on production of necessities (food, clothes, etc.).
Gov then uses takeoff profits to buy consumer goods from MDCs
instead of reinvesting profits in their own country.]
UNEVEN RESOURCE DISTRIBUTION
[Developing countries focus on the sale of one product & prices of
the sold commodity do not increase but decrease; therefore, the
country does not make enough revenue to buy products they need.
Resources/money from takeoff do not “trickle down” and islands of
development appear. Also certain resource-poor areas of the
country have no way to enter the economy.]
MARKET DECLINE[World market for low-cost consumer goods has
declined since MDCs have limited population growth/market size.]
Uneven Resource Distribution: Low market prices
have long kept ZAMBIA from fully benefitting
from its massive copper reserves.
AND THE
WINNER IS…
INTERNATIONAL TRADE MODEL
In the late 1900s, most countries embraced the international
trade approach.
Many longtime advocates of the self-sufficiency method (like
India) even switched their systems and dismantled their trade
protections (discussed earlier).
India’s GNI increased an average of 6.5% per year compared
to 1.8% in the self-sufficiency model.
Between 1990 and 2005 countries oriented toward
international trade saw GDP increases of over 4% per year.
DEVELOPMENT
THROUGH
INTERNATIONAL
TRADE MODEL
WORLD
TRADE
ORGANIZATION
In 1995, countries representing 97% of world trade founded
the WTO to promote the international trade model.
The WTO reduces international trade barriers in two ways:
--negotiating reduction/elimination international trade
restrictions (subsidies for exports, quotas for imports, tariffs)
on manufactured goods
--enforcing agreements between states and international laws
EX: Bringing charges against another country, protection of
intellectual property-patent-copyright-illegal actions.
The WTO is a highly controversial organization.
Critics say it is anti-democratic, favors wealthy corporations over the
common man and compromises state sovereignty.
Because they lack money for development, LDCs obtain money from MDCs in two ways: Foreign Direct Investment (FDI) and Loans
FOREIGN DIRECT
INVESTMENT
The international trade model requires countries to invest in take-off industries in other countries.
Investment by a company in the economy of a foreign country is called FOREIGN DIRECT INVESTMENT (FDI).
FDI does not flow equally… in 2010, only 2/5th went from an MDC to an LDC, whereas the other 3/5th went from an MDC to another MDC.
FDI is also not evenly distributed between LDCs… in 2010
40% of all FDI went to China, and 20% went to Brazil, Russia and Singapore.
The major source of FDI are TRANSNATIONAL CORPORATIONS (a company that operates in countries other than just the one where its
headquarters are located (over half are headquartered in the US and Europe).
FOREIGN DIRECT INVESTMENT
Of the 500 largest transnational corporations
in 2011, 384 had headquarters in developed
countries.
133 in the US and 164 in Europe
China=location of 61 of the 116 headquarters
in developing countries.
LOANS TO
FINANCE
DEVELOPMENT
LDCs do not have the money to develop their own take-of industries, so they often obtain money from MDCs.
That money comes in two form: FDI and loans from banks/international organizations.
The World Bank and the
International Monetary Fund
(IMF) are the two biggest
lenders. Read up on them.
LDCs borrow money from
them to build new
infrastructure, and that new
infrastructure encourages
domestic business to expand
and attracts FDI.
STRUCTURAL ADJUSTMENT PROGRAMS
Many loans fail (faulty
engineering, bilked funds,
failure to attract investment).
Many LDCs are unable to
repay loans and debt begins
to exceed income.
The inability to repay loans causes a chain reaction of problems. So, before granting debt relief, the IMF
and World Bank will require a country to undergo a STRUCTURAL ADJUSTMENT PROGAM (an economic
reform):
THE DRAWBACKS TO SAPs
--spend within budget
--direct benefits to poor as well as wealthy
Critics say SAPs increase poverty by focusing on
--invest in education/health (not military)
cutting government spending, therefore:
--invest resources where profits will be greatest
--cuts in healthcare, education, social services (jobs)
--encourage private sector
--higher unemployment
--reform government
--less support for the needy
DEBT as a proportion of GNI
WORLD BANK DEVELOPMENT ASSISTANCE Iraq
and Afghanistan have been the leading recipients of aid.
FINANCIAL CHALLENGES IN DEVELOPED COUNTRIES
The 2008 financial crisis hit the developed world
hard, with nearly every country seeing a sharp
decline in GDP.
Countries have been divided as to how to best
respond to this crisis.
FINANCIAL CHALLENGES IN DEVELOPED COUNTRIES
WIDENING INEQUALITY
• Most of the 20th century, the gap between the rich and poor
narrowed
• Developed countries used their wealth to extend healthcare and
education to more people and provide assistance to the poor.
• Since 1980 the inequality has increased=US and UK
• In 2010 the richest 1% of Americans held 20% of the wealth,
and 421 billionaires held more than 10% of the wealth in the
US.
• Many Americans felt it was unfair for large banks to be rescued
while still making substantial profits at a time when most
Americans incomes were stagnant or declining.
FINACNIAL CHALLENGES IN DEVELOPING COUNTRIES
Two responses have emerged for
dealing with financial crises:
STIMULUS – Increase gov’t spending to
prop up economy; provide direct relief to
increase spendable income.
AUSTERITY – Cut ‘wasteful’ gov’t
spending & social programs, use available
money to pay down nat’l debt.
Deep divisions exist between those promoting
austerity or stimulus.
In the US, Republicans tend to align with
austerity, and Democrats with stimulus.
Divisions are even deeper in Europe, where
many countries have major debt issues.
Wealthy northern countries favor austerity
approaches for indebted countries, while poorer
southern countries believe they should be
provided stimulus relief.
At the heart of recent financial crises has
been the growth/pop of ‘bubbles’- rapid
growth and then decline of prices of a
commodity.
A housing bubble caused the 2008 crisis.
The world’s first bubble occurred in the
Netherlands in 1637, when the price of
TULIPS skyrocketed due to a blight and
rampant speculation.
MDC
PROBS…
First of all, life isn’t always sunny in MDCs unforeseen financial problems or unsound financial practices can weaken or destroy your economy and stifle continued
development.
To boot, since 1980, most MDCs have seen a widening inequality between the wealthy and the middle class and poor in their countries.
US Housing Bubble
Due to the economic boom of the 1990s and early 2000s, a number of countries
around the world were flush with cash and looking for safe places to invest it.
Many countries decided to invest their money in the growing US housing market.
As more investors bought into the market, property values rose. As property values
rose, many US banks encouraged both corporate and individual investors to take out
loans to buy houses. This additional investment into the housing market caused US
property values to rise even more, well beyond the reasonable value of the homes.
As balloon payments on the houses came due, many investors could not make
payments, and the value of the grossly overvalued houses rapidly declined.
Since investors from all over the world were involved, a global recession ensued.
Europe’s Sovereign Debt Crisis
In 1999, many European countries adopted the Euro (remember from Chap 8!)
believing that doing so would strengthen trade and economic development across
the region.
When the US Housing Bubble burst, it set of a recession in the US which then
created a domino effect and turned into a global recession.
This recession brought to light the unsound financial crisis and debts of a handful of
EU member states (The PIIGS). Since those EU member countries were also on the
Euro, their debt threatened to destabilize the Euro, the Eurozone and the Eu.
THE US HOUSING BUBBLE
BURSTING
FAIR TRADE
In order to combat uneven development, FAIR
TRADE practices have greatly expanded.
FAIR TRADE is commerce where products are
made/traded according to standards which protect
workers and small businesses in the LDC’s.
AN ALTERNATE
TO ROSTOW’S
MODEL
Standards are set by Fair Trade Organizations International (FLO) and certified in the US by TransFair USA.
PRODUCER STANDARDS
In LDCs, producers form worker-owned,
democratically run cooperatives
Cooperatives allow farmers to get loans, reduce
costs and maintain high/fair prices
Cooperatives benefit farmers, not absentee
corporate owners
Fair Trade Organizations return a higher
percentage of the sale price to the farmers by
bypassing middlemen.
WORKER STANDARDS
At least 1/3 of sale price is returned to the
producer in the LDC, the rest to the wholesaler
and retailer.
Employers must pay workers fair wages, allow
unions and comply with environmental and
safety standards
60-70% of fair trade workers are women
Cooperatives reinvest profits into their own
communities
The biggest Fair Trade retailer in the US
is 10 Thousand Villages.
Because fair trade organizations bypass
costly distributors, a greater percentage of
the retail price makes it to producers in the
developing world
2/3 of artisanal products are made by
WOMEN. Fair trade gives them a say in their
livelihood and a voice in their community.
MICROCREDIT
Another development method improving
lives in the developing world is MICROCREDIT
– the issuance of very small loans (on average
$60).
Microcredit loans have a 99% repayment rate.
The GRAMEEN BANK, based in Bangladesh, is the
world’s largest microcredit organization.
Its smallest loan was just $1, to a woman who
wanted to sell rubber bracelets to tourists.
MAKING PROGRESS
The world has made progress with regard to several
important metrics since 1980.
Infant Mortality Rate has decreased universally.
• From 17 to 6/1,000 in developed world; from 107
to 104 in developing.
Life Expectancy increased, though gaps remain.
• +8 years in developing, +7 years in developed
GNI Per Capita increased but major gaps remain
• From $20k to $33k developed, from $1k to $5k
developing
RISING GLOBAL HDI SINCE 1980
DECLINING INFANT MORTALITY SINCE
1980
RISING LIFE EXPECTANCY SINCE 1980
RISING GNI PER CAPITA SINCE 1980 (HIGHLY
UNEVEN)
MILLENIUM
DEVELOMPENT
GOALS
MILLENIUM DEVELOPMENT GOALS
Adopted by world leaders in the year 2000 and set to be
achieved by 2015, the UN developed the Millennium
Development Goals (MDGs) provide eight concrete
benchmarks for tackling extreme poverty:
1. eradicate extreme poverty and hunger
2. achieve universal primary education
3. promote gender equality and empower women
4. reduce child mortality
5. improve maternal health
6. combat HIV / AIDS, malaria and other diseases
7. ensure environmental sustainability
8. develop a global partnership for development.
To describe the complicated relationship between
the developed/developing world, WALLERSTEIN
created the ‘core/periphery.’
Resources flow primarily from LDCs to MDCs,
leading to UNEVEN DEVELOPMENT.
DEVELOPMENT
V. STASIS
Both Rostow and the Self-Sufficiency model propose that continued development for all countries is possible.
However, some argue that all countries are static in their level of development.
CORE-PERIPHERY
WALLERSTEIN’S CORE-PERIPHERY MODEL
•
Also called World Systems Theory (VIDEO) Core-Periphery considers broad regional groups of countries, not
specific countries.
•
Countries exist on one of three tiers: the core (wealthy and developed), the semi-periphery (industrializing) and
the periphery (poor and undeveloped)
•
These levels are static… countries stay at their levels (or perhaps move downwards)
•
Wallerstein focuses on the relationship between the tiers: resources flow from a "periphery" of poor and
underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former.
•
Poor states are impoverished and rich ones enriched by the way poor states are integrated into the "world
system.”
•
Therefore UNEVEN DEVELOPMENT is a basic characteristic of the global economy.
•
From Wallerstein comes DEPENDENCY THEORY: peripheral countries are “dependent” on FDI from core
countries in order to have economic growth. These relationships both control and limit the extent to which
regions can develop
NEOCOLONIALISM
MDCs still control their former colonies through the economic pressures of the global market they have created
Both the Dependency Theory and neocolonialism add up to high levels of
poverty and underdevelopment in countries (thus LDCs).
NORTH-SOUTH SPLIT
CORE-PERIPHERY MODEL