Download Chapter 16

Chapter 16
I. Development
A. Developing Nations
1. Economic Development is defined as the long-term process of significantly
increasing the material well-being of a society’s people.
2. Material well-being is the measure of economic development because an increase in a
society’s consumption is generally associated with more choices. Economic freedom,
the choice of many alternative goods, improves social and political freedoms.
3. For the poorest countries whose people have barely enough to survive, it is not hard
to imagine that social and political freedoms are secondary to issues of having enough
basic necessities.
4. Causes and effects of development are both economic and non-economic. This is one
reason why simply adapting technology and processes from developed nations for use
in developing countries does not yield identical results. Another way of saying this is
“pure economic determinism” does not exist. If it did, people would respond only to
changes in economic reality and a cookie-cutter cure for a low GDP per capita could
be easily prescribed.
5. Real GDP/population or “real per capita GDP” is the best measure of material wellbeing, however it is far from perfect, because:
a. It is an average, so an imbalanced income distribution could appear as a healthy
real per capita GDP.
b. Socially destructive but expensive projects increase GDP but may decrease wellbeing
c. Unpaid (volunteer, in-home)labor is uncounted although it increases well-being.
While some economists have proposed methods of eliminating these distortions, real
per capita GDP (aka real per capita national income) remains the most widely
accepted measure of well-being. Note that “real” means adjusted to eliminate price
changes that would otherwise (typically) overstate GDP.
6. Important disadvantages relative to developed countries – listed on p.401 and
elaborated in the pages that follow (the majority of the chapter)
II. Incremental Capital-Output
1. Lower Incremental Capital-Output ratio relative to developed nations, due to:
A. The output resulting from an additional (“incremental”) machine or other unit of
physical capital (e.g. irrigation pump) is presumed greater than the output one
would expect if the same capital was implemented in the developed country.
B. Importation of capital can be from a variety of developed countries, so the
developing nation does not have to invent the machine.
2. However, several factors prevent the full output from this supposedly advantageous
incremental k/Y ratio from being realized.
A. Investment in Human Capital is required. 1929-57 US growth is estimated to be
only 15% due to increased physical capital while 42% of the growth came fro
increased human capital (increased education, technical, and managerial
knowledge in the labor force).
B. Complimentary investment in physical capital is required to make the
“incremental” unit fully productive. It is not sufficient to simply introduce a unit
of capital for, example, resource extraction. That raw material must then be
processed for industrial use, manufactured for consumer use, and sold in through
an appropriate industry, all of which represent complimentary investment that will
be costly relative to the developed country, particularly since the developed
country will often have those things already in place.
Infrastructure overlaps with complimentary investment and is also essential to make the capital
produce output as desired. This refers to roads, bridges, ports, economic institutions, schools
III. Common aspects of developing economies
A. Lack of full controvertibility of currency
1. Current account controvertibility allows purchase of foreign goods and
services but not assets.
2. Partial Capital account controvertibility puts a limit on the amount of
capital abroad that can be purchased by citizens.
B. Dual economy: one with a significant traditional sector, often highly
agricultural but not engaged in modern market activity, and the market sector that has
monetized trade.
Central banks lack independence from the government.
IV. The list on p.401 shows the obstacles to development. They are many, and vary by
nation in the degree of severity of each.
Political Instability
Corruption
Lack of appropriate institutions
Lack of Investment
Inappropriate Education
Overpopulation
Health & Disease
V. IMF makes loans and has a planning role in developing countries. Participating with
the plan the IMF designs, which has austerity measures that can worsen a contraction aiming to
strengthen the country (induce long-term real per-capita growth), is the “Conditionality” the
loans carry.
The problem the IMF is solving (with the loans) is called a “balance of payments constraint,” the
difficulties nations face in trying to achieve growth with a shortage of international reserves.
This also is a solution when a country needs to stabilize it’s domestic currency (when
plummeting in its global valuation) by the influx of IMF dollars, some of which can be used to
buy (Increase Demand for) it’s domestic currency on the open market.