Download economic dualism

Chapter 33
The Economic Problems of
Less-Developed Economies
© 2002 South-Western
Economic Principles
• Poverty in the Less-Developed
Countries (LDCs)
• Economic Dualism
• The Big-Push Strategy for
Economic Development
2
Economic Principles
• The Unbalanced Growth
Strategy for Economic
Development
• Foreign Investment in the
LDCs.
• Economic Aid to the LDCs.
3
Confronting National
Poverty
Beginning in the 1950s
economists began seeing the
economies of Asia, Africa, and
Latin America as something more
than trading posts for our raw
materials.
4
Confronting National
Poverty
Complete the sentence:
In the 1960s economists dropped
the terms _____ and _____ in
favor of newly developing
countries or less-developed
countries.
5
Confronting National
Poverty
Complete the sentence:
In the 1960s economists dropped
the terms backwardness and
underdevelopment in favor of
newly developing countries or
less-developed countries.
6
Confronting National
Poverty
Backwardness and
underdevelopment were seen as
being much too prejudicial.
7
Less-Developed Countries
(LDCs)
Less-developed countries (LDCs)
The economies of Asia, Africa,
and Latin America
8
Less-Developed Countries
(LDCs)
True or false: Decade after decade, the
economies of LDCs have been stalled,
generating at best only subsistence-level
incomes.
• False. The economies of some LDCs have
grown and modernized, while others have
languished.
9
EXHIBIT 1 PER CAPITA INCOME, PER CAPITA INCOME
GROWTH RATE, AND POPULATION GROWTH
RATE IN SELECTED LDCs: 1990–98
Source: The World Bank, World Bank Atlas, 2000 (Washington, D.C.: World Bank, 2000).
10
Exhibit 1: Per Capita Income, Per Capita
Income Growth Rate, and Population
Growth Rate in Selected LDCs: 1990-98
1. Which of the following upper-middleincome LDCs has experienced the most
rapid growth in per capita income
between 1990 and 1998?
a. Algeria.
b. Venezuela.
c. Brazil.
11
Exhibit 1: Per Capita Income, Per Capita
Income Growth Rate, and Population
Growth Rate in Selected LDCs: 1990-98
1. Which of the following upper-middleincome LDCs has experienced the most
rapid growth in per capita income
between 1990 and 1998?
c. Brazil.
12
Exhibit 1: Per Capita Income, Per Capita
Income Growth Rate, and Population
Growth Rate in Selected LDCs: 1990-98
2. Which of the following LDCs had the
slowest annual rate of population growth
between 1990 and 1998?
a. Sri Lanka.
b. Ghana.
c. Syria.
13
Exhibit 1: Per Capita Income, Per Capita
Income Growth Rate, and Population
Growth Rate in Selected LDCs: 1990-98
2. Which of the following LDCs had the
slowest annual rate of population growth
between 1990 and 1998?
a. Sri Lanka.
14
EXHIBIT 2 PERCENTAGE OF POPULATION UNDER
15 YEARS OF AGE FOR SELECTED
COUNTRIES: 1997
Source: Statistical Abstract of the United States, 1999 (Washington, D.C.: U.S. Department of Commerce, 1999), p. 835.
15
Exhibit 2: Percentage of Population Under
15 Years of Age for Selected Countries:
1997
1. Which of the following countries had
the highest percentage of its population
under 15 years of age in 1997?
a. Ethiopia.
b. Philippines.
c. Germany.
16
Exhibit 2: Percentage of Population Under
15 Years of Age for Selected Countries:
1997
1. Which of the following countries had
the highest percentage of its population
under 15 years of age in 1997?
a. Ethiopia.
17
Exhibit 2: Percentage of Population Under
15 Years of Age for Selected Countries:
1997
2. Do countries with low population
growth rates tend to have a high
percentage of their population under 15
years of age?
• No.
18
Exhibit 2: Percentage of Population Under
15 Years of Age for Selected Countries:
1997
2. Do countries with low population
growth rates tend to have a high
percentage of their population under 15
years of age?
• In countries with low population growth
rates, such as Germany, France, and the
Netherlands, typically less than 25 percent
of the population is under 15 years of age.
19
Exhibit 2: Percentage of Population Under
15 Years of Age for Selected Countries:
1997
2. Do countries with low population
growth rates tend to have a high
percentage of their population under 15
years of age?
• In contrast, in countries with high
population growth rates, such as Nigeria
and Kenya, typically more than 40 percent
of the population is under 15 years of age.
20
LDC Per Capita Incomes
1. How is per capita income
growth related to income growth
and population growth?
• Per capita income growth is equal to
income growth divided by population
growth.
21
LDC Per Capita Incomes
2. What happens to per capita
income if population grows faster
than income?
• Since per capita income growth is equal
to income growth divided by population
growth, if population grows faster than
income, then per capita income must fall.
22
LDC Per Capita Incomes
3. What is the vicious cycle of
poverty?
• People are poor because they can’t invest
in capital goods, and they can’t invest in
capital goods because they are poor.
23
LDC Per Capita Incomes
4. Why is the vicious cycle of poverty
more likely to occur in countries that have
a large percentage of their population
under 15 years of age?
• Most people under age 15, and
particularly those under 10, are unable to
produce enough to meet their own
consumption needs.
24
LDC Per Capita Incomes
4. Why is the vicious cycle of poverty
more likely to occur in countries that have
a large percentage of their population
under 15 years of age?
• If almost one-half of a country’s
population consumes more than it
produces, there are few resources that can
be shifted from producing consumer goods
to producing capital goods.
25
EXHIBIT 3 THE VICIOUS CIRCLE OF POVERTY
26
Exhibit 3: The Vicious Cycle
of Poverty
What is the consequence of
Ethiopia producing at point a
rather than point b in Exhibit 3?
• Slower economic growth rates and lower
per-capita incomes in the future.
27
Human Capital
Human capital
The investment in workers’
health and knowledge, acquired
through education, training,
and/or experience that enhances
their productivity.
28
Other Indicators of the LDCs’ Lack of
Economic Well-Being
1. True or false: The capital investments
that yield the highest payoffs in an
economy are those made in machinery
and factories.
• False.
29
Other Indicators of the LDCs’ Lack of
Economic Well-Being
1. True or false: The capital investments
that yield the highest payoffs in an
economy are those made in machinery
and factories.
• Investments in human capital—in the
form of education and health care—rank
among the most important of the capital
goods contributing to national economic
growth.
30
Other Indicators of the LDCs’ Lack of
Economic Well-Being
2. Which of the following best describes
the timeframe between investment in
human capital and the realization of
payoffs in the form of improvements in a
person’s working efficiency?
a. Immediate.
b. Brief.
c. Relatively long.
31
Other Indicators of the LDCs’ Lack of
Economic Well-Being
2. Which of the following best describes
the timeframe between investment in
human capital and the realization of
payoffs in the form of improvements in a
person’s working efficiency?
c. Relatively long.
32
EXHIBIT 4 LIFE EXPECTANCY, INFANT MORTALITY, PEOPLE
PER PHYSICIAN, PERCENTAGE OF CHILDREN IN
SCHOOL, AND PERCENTAGE OF PEOPLE WITH
SAFE WATER FOR SELECTED COUNTRIES: 1998 OR
LATEST YEAR AVAILABLE
Source: Ruth Leger Sivard, World Military and Social Expenditures, 1966 (Washington, D.C.: World Priorities, 1966), pp. 30–
52, and The World Bank, World Bank Atlas, 2000 (Washington, D.C.: World Bank, 2000).
33
Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician,
etc.
1. What is the relationship
between per capita income and
life expectancy?
• Life expectancy tends to be directly
related to per capita income.
34
Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician,
etc.
2. Do low-income LDCs tend to
have more people per physician
than higher-income LDCs?
• Yes. With a few exceptions, there are
usually many thousands of people per
physician in low-income LDCs.
35
Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician,
etc.
3. Based on the percentage of children in
school, how well are Ethiopia and Kenya
doing at investing in human capital when
compared to Botswana and South Africa?
• Very poorly.
36
Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician,
etc.
3. Based on the percentage of children in
school, how well are Ethiopia and Kenya
doing at investing in human capital when
compared to Botswana and South Africa?
• Fewer than one-half of the children in
Ethiopia and Kenya are receiving a school
education, while this figure exceeds 90
percent in Botswana and South Africa.
37
Exhibit 4: Life Expectancy, Infant
Mortality, People Per Physician,
etc.
4. Are people in low-income LDCs very
much more likely to risk exposure to
waterborne diseases such as dysentery
and cholera than in higher-income LDCs?
• In general as per capita income rises, the
percentage of people with access to safe
water also rises.
38
Economic Dualism
True or false: While conditions in lowincome LDCs are poor, there is a high
degree of equality in these societies, and
all people bear a roughly equal share of
the burden of poor living conditions.
• False.
39
Economic Dualism
True or false: While conditions in lowincome LDCs are poor, there is a high
degree of equality in these societies, and
all people bear a roughly equal share of
the burden of poor living conditions.
• Many LDC doctors, lawyers, merchants,
accountants, and exporters and importers,
among others, have access to safe water,
hospitals, education, and decent housing. 40
Economic Dualism
Economic dualism
The coexistence of two separate
and distinct economies within an
LDC; one modern, primarily
urban, and export-driven, the
other traditional, agricultural,
and self-sustaining.
41
EXHIBIT 5 ECONOMIC DUALISM
42
Exhibit 5: Economic
Dualism
1. What are the characteristics of
the labor market in the
traditional sector of an LDC
economy?
• The labor market for the traditional
sector is shown in panel a.
43
Exhibit 5: Economic
Dualism
1. What are the characteristics of
the labor market in the
traditional sector of an LDC
economy?
• The labor market in the traditional
sector features a relatively low and flat
demand curve.
44
Exhibit 5: Economic
Dualism
1. What are the characteristics of
the labor market in the
traditional sector of an LDC
economy?
• The relatively low opportunity costs
associated with traditional labor produce a
relatively flat supply curve for labor.
45
Exhibit 5: Economic
Dualism
1. What are the characteristics of
the labor market in the
traditional sector of an LDC
economy?
• As a result, the labor market in the
traditional sector of an LDC economy
yields low wages.
46
Exhibit 5: Economic
Dualism
2. What are the characteristics of
the labor market in the modern
sector of an LDC economy?
• The labor market for the modern sector
is shown in panel b.
47
Exhibit 5: Economic
Dualism
2. What are the characteristics of
the labor market in the modern
sector of an LDC economy?
• The labor market in the modern sector
features a higher and steeper demand.
48
Exhibit 5: Economic
Dualism
2. What are the characteristics of
the labor market in the modern
sector of an LDC economy?
• The higher opportunity costs associated
with skilled workers in this sector
generates a steeper supply curve.
49
Exhibit 5: Economic
Dualism
2. What are the characteristics of
the labor market in the modern
sector of an LDC economy?
• As a result, the equilibrium wage rate in
the modern sector is considerably higher
than in the traditional sector.
50
Exhibit 5: Economic
Dualism
3. What factors might cause
economic dualism to persist?
• The vicious cycle of poverty prevents the
parents of children living in poverty from
investing in their children’s human
capital. These children forego an
education and begin working at an early
age.
51
Exhibit 5: Economic
Dualism
3. What factors might cause
economic dualism to persist?
• In contrast, people earning a high income
in the modern sector can afford tutors,
private education, health care, and
adequate food for their children.
52
Exhibit 5: Economic
Dualism
3. What factors might cause
economic dualism to persist?
• When they become adults, the children of
the elite can prosper and succeed in the
modern sector. The children of workers in
the traditional sector may never get the
education necessary to enter the labor
force in the modern sector.
53
The Absence of Basic
Prerequisites
1. In what way is political
stability important to the proper
functioning of an economy?
• Laws become meaningless when
governments that displace each other too
frequently and by force are inclined to set
aside past government commitments and,
54
at times, even basic property rights.
The Absence of Basic
Prerequisites
1. In what way is political
stability important to the proper
functioning of an economy?
• Such political discontinuities interfere
with routine economic decision making.
For example, businesses will be more
hesitant to make new capital investments.
55
The Absence of Basic
Prerequisites
2. How might economic development be
inhibited by the psychological, religious,
and cultural character of LDCs?
• Cultural traditionalism can inhibit
economic development by promoting large
families, inhibiting the use of new
technologies, and denying women access to
education and work outside the home.
56
The Absence of Basic
Prerequisites
3. Are there difficulties
transplanting modern production
technologies and facilities in an
LDC?
• Modern production requires an extensive
support system.
57
The Absence of Basic
Prerequisites
3. Are there difficulties
transplanting modern production
technologies and facilities in an
LDC?
• This support system includes workforce
training, sources of credit, and networks of
telecommunications, power, and
transportation.
58
Infrastructure
Infrastructure
The basic institutions and public
facilities upon which an economy’s
development depends.
59
The Big Push Strategy
Big push
The development strategy that
relies on an integrated network of
government-sponsored and financed investments introduced
into the economy all at once.
60
The Big Push Strategy
1. What is the argument in favor of
the big push strategy?
• Each potential investment’s success
depends upon there being a market for
its output.
61
The Big Push Strategy
1. What is the argument in favor of
the big push strategy?
• For example, in order for an
automobile plant to succeed, there must
be input producers, a road system, and
gasoline stations, as well as people with
sufficient income to purchase the cars.
62
The Big Push Strategy
1. What is the argument in favor of
the big push strategy?
• Therefore the big push strategy builds
everything at once so that all necessary
infrastructure and markets are in place.
63
The Big Push Strategy
2. What are some possible
problems with the big push
strategy?
• Skills and materials may get spread
too thinly, and the tax burden needed to
finance the big push may be
destabilizing.
64
The Unbalanced
Development Strategy
What is the basic idea underlying
the unbalanced development
strategy?
• Government triggers the process by
funding and putting into place key
infrastructure investments.
65
The Unbalanced
Development Strategy
What is the basic idea underlying
the unbalanced development
strategy?
• Private entrepreneurs initiate
investments that are funded from the
entrepreneur’s own savings or from the
private banking system.
66
Forward Linkages
Forward linkages
Investments in one industry that
create opportunities for profitable
investments in other industries,
using the goods produced in the
first as inputs.
67
Backward Linkages
Backward linkages
Investments in one industry that
create demands for inputs,
inducing investment in other
industries to produce those inputs.
68
EXHIBIT 6 PRODUCTION POSSIBILITIES CURVE WITH
FOREIGN INVESTMENT
69
Exhibit 6: Production Possibilities
Curve with Foreign Investment
How does foreign investment
affect the production possibilities
curve for consumption and
capital goods?
• It shifts out the production possibilities
curve.
70
EXHIBIT 7 U.S. FOREIGN ECONOMIC AID: 1970–99
($ MILLIONS)
Source: Statistical Abstract of the United States, 1999 (Washington, D.C.: U.S. Department of Commerce, 1999), p. 800.
71
Exhibit 7: U.S. Foreign Economic
Aid: 1970-97 ($ Millions)
What accounts for the increase in
total U.S. foreign economic aid?
• Most of the increase can be attributed to
an increase in grants.
72