Download Chapter 9 Key Issue 4

Chapter 9
Key Issue 4
Why Do Less Developed
Countries Face Obstacles to
Development?
Development Through SelfSufficiency
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For much of the 20th century selfsufficiency or balanced growth was the
most popular development alternative,
especially for LDCs.
It protects infant industries by setting
barriers and tariffs on imports, as well as
fixing quotas and requiring licenses to
restrict the number of legal importers.
India followed this model of development
in the decades after independence from
Britain.
It has two major problems. It protects
inefficient industries and creates a large
bureaucracy to administer the various
Development Through International
Trade
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In the 1950s W.W. Rostow proposed his development
model, which helped countries to move towards
development through international trade.
This was a five-stage model. Stage 1 is a traditional
society, in which a country is still predominantly
agricultural.
In Stage 2, a country reaches the preconditions for takeoff
when entrepreneurs initiate economic activities.
Infrastructure develops and productivity increases.
Stage 3 is takeoff, which is essentially the beginning of an
industrial revolution.
Stage 4, in the drive to maturity stage, industry diffuses
and results in rapid growth.
Stage 5, the final stage, is the age of mass consumption,
when the economy shifts from heavy industry to the
production of consumer goods.
Examples of International Trade
Approach
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The international trade approach has been
followed by numerous countries in Asia.
The most successful initially in Asia
included South Korea, Singapore, Taiwan
and Hong Kong. They concentrated on
the production of manufacturing goods
using cheap labor.
The petroleum-rich Arab countries
pursued the same approach. Saudi
Arabia, Kuwait, Bahrain, Oman, and the
United Arab Emirates have been very
successful, using petroleum revenues to
finance large-scale projects.
Problems and Triumphs with the
International Trade Alternative
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The international trade approach to development also has
problems. These include (1) uneven resource distribution,
(2) market stagnation, (3) and increased dependence on
MDCs.
But it has now been embraced by most countries. This
approach has been aided by the creation of the World Trade
Organization (WTO) in 1995, which helps to reduce barriers
to international trade.
The WTO helps to eliminate trade restrictions between
countries. It also enforces international trade agreements.
Investment made by transnational corporations (TNCs) in
foreign countries is known as foreign direct investment
(FDI). The headquarters of most TNCs are in the U.S. and
western Europe.
Financing Development
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LDCs borrow money for major projects from two major
international lenders.
The World Bank includes the International Bank for Reconstruction
and Development (IBRD) and the International Development
Association (IDA). They provide loans for the reform of public
administration and legal institutions.
The International Monetary Fund (IMF) provides loans to countries
that have balance-of-payment problems rather than for specific
projects.
There are numerous problems associated with all of these loans.
Many new projects in LDCs are expensive failures, and many LDCs
have been unable to repay interest and loans.
Neither of these organizations will cancel or refinance debts
without strings attached.
Before granting debt relief, an LDC is required to prepare a Policy
Framework Paper (PFP) outlining a structural adjustment program
that includes economic goals and strategies for achieving the
objectives.
Fair Trade
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Fair trade has been proposed as an alternative to
the international trade model of development.
Fair trade means that products are made and
traded according to standards that protect
workers and small businesses in LDCs.
Standards for fair trade are set internationally by
Fairtrade Labelling Organizations International
(FLO).
Ten Thousand Villages, which specializes in
handicrafts, is the largest fair trade organization
in North America.
Two sets of standards distinguish fair trade; one
set applies to workers on farms and in factories
and the other to producers.