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Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms 27 The Economics Of Developing Countries End Show 27-1 Copyright 2008 The McGraw-Hill Companies Chapter Objectives In this chapter you will learn: Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-2 • How the World Bank distinguishes between industrial advanced countries (high-income nations) and developing countries (middleincome and low-income nations). • Some of the obstacles to economic development. • About the vicious cycle of poverty that afflicts low-income nations. • The role of government in promoting economic development within low-income nations. • How industrial nations attempt to aid low-income countries. Copyright 2008 The McGraw-Hill Companies The Rich and the Poor Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-3 • Classifications –Industrially Advanced Countries (IACs) • High Income Nations –Developing Countries (DVCs) • Low Income Nations • Middle Income Nations Copyright 2008 The McGraw-Hill Companies The Rich and the Poor • 2004 Comparisons: Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-4 –U.S. GDP $12 Trillion –All DVCs $5.5 Trillion –U.S. has 5% of Population but Produces 31% of World’s Output –U.S. Per Capita GDP Many Times Greater than DVCs –Wal-Mart Sales Greater Than All But 19 Nations Copyright 2008 The McGraw-Hill Companies The Rich and the Poor Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms • Growth, Decline, and Income Gaps –Differences in Ability to Improve Positions Over Time –Some Increase and Reach IAC Status –Some Decline –Income Gap is Widening Between Rich and Poor • Human Realities of Poverty End Show 27-5 Copyright 2008 The McGraw-Hill Companies Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-6 Obstacles to Economic Development • DVCs Must Use Existing Supplies of Resources More Efficiently • DVCs Must Expand Their Available Supplies of Resources –Natural Resources –Human Resources Copyright 2008 The McGraw-Hill Companies Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Obstacles to Economic Development • Overpopulation • Standard of Living –Saving and Investment –Productivity –Resource Overuse –Urban Problems Standard Of Living Key Terms End Show 27-7 = Consumer Goods (Food) Production Copyright 2008 The McGraw-Hill Companies Population Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-8 Obstacles to Economic Development • Qualifications –Demographic Transition View • Unemployment • Underemployment • Low Labor Productivity • Brain Drain Copyright 2008 The McGraw-Hill Companies Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Capital Accumulation • Domestic Capital Formation –Savings Potential –Capital Flight –Investment Obstacles •Infrastructure Key Terms End Show 27-9 Copyright 2008 The McGraw-Hill Companies Capital Accumulation • Technological Advance Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-10 –Capital-Saving Technology –Capital-Using Technology • Sociocultural and Institutional Factors –The Will to Develop –Capricious Universe View –Land Reform Copyright 2008 The McGraw-Hill Companies The Vicious Circle The Vicious Circle of Poverty Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms LOW PER CAPITA INCOME RAPID POPULATION GROWTH LOW PRODUCTIVITY LOW LEVEL OF SAVING LOW LEVEL OF DEMAND LOW LEVELS OF INVESTMENT IN PHYSICAL AND HUMAN CAPITAL End Show 27.1 27-11 Copyright 2008 The McGraw-Hill Companies Role of Government • A Positive Role Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word –Law and Order –Lack of Entrepreneurship –Infrastructure –Forced Saving and Investment –Social-Institutional Problems • Public Sector Problems –Corruption Key Terms End Show 27-12 Copyright 2008 The McGraw-Hill Companies Role of Government GLOBAL PERSPECTIVE Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show The Corruption Perception Index Corruption Index Value, 2005 0 Finland New Zealand Denmark United States China India Moldova Madagascar Ecuador Russia Azerbaijan Cameroon Paraguay Nigeria Haiti Bangladesh 1 2 3 4 5 6 7 8 9 10 9.6 9.6 9.5 7.6 3.2 2.9 2.9 2.8 2.5 2.4 2.2 2.2 2.1 1.9 1.8 1.7 Source: Transparency International 27-13 Copyright 2008 The McGraw-Hill Companies Role of Advanced Nations Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms • Expanding Trade • Foreign Aid – Direct Aid – The World Bank Group – Foreign Harm • Dependency and Incentives • Bureaucracy and Centralized Government • Corruption and Misuse – The Decline in Foreign Aid – Flows of Private Capital • Direct Foreign Investment End Show 27-14 Copyright 2008 The McGraw-Hill Companies Role of Advanced Nations GLOBAL PERSPECTIVE Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Development Assistance as a Percentage of GDP Percentage of GDP, 2003 0 .20 .40 Netherlands United Kingdom Germany Canada Key Terms Japan End Show United States .80 1.00 .80 .79 Sweden France .60 .41 .34 .28 .24 .20 .15 Source: U. N. Human Development Report, 2006 27-15 Copyright 2008 The McGraw-Hill Companies Where From Here? Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-16 • DVC Policies for Promoting Growth –Establishing and Implementing the Rule of Law –Opening Economies to International Trade –Controlling Population Growth –Encouraging Foreign Direct Investment –Building Human Capital Copyright 2008 The McGraw-Hill Companies Where From Here? Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-17 • DVC Policies for Promoting Growth –Making Peace With Neighbors –Establishing Independent Central Banks –Establishing Realistic Exchange-Rate Policies –Privatizing State Industries Copyright 2008 The McGraw-Hill Companies Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-18 IAC Policies for Fostering DVC Growth • Directing Foreign Aid to the Poorest DVCs • Reducing Tariffs, Import Quotas, and Farm Subsidies • Providing Debt Forgiveness to the Poorest DVCs • Admitting in Temporary Workers and Discouraging Brain Drains • Discouraging Arms Sales to the DVCs Copyright 2008 The McGraw-Hill Companies Food Shortages in Africa Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word • Root Causes – Both Natural and Human Causes • Droughts – Lack of Rainfall – Overuse of Land • Civil Strife – Rebellions, Civil Wars, Wars with Neighbors, Anarchy • Population Growth • Ecological Degradation Key Terms End Show 27-19 Copyright 2008 The McGraw-Hill Companies Food Shortages in Africa Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word • Public Policies – Neglected Agriculture for Military Uses – Channeling Aid to Military and Ignoring Civilians – Setting Agricultural Prices Low Decreasing Incentive to Grow – Land Seizures that Collapsed the Food Supply • External Debt Key Terms – Required Austerity End Show 27-20 Copyright 2008 The McGraw-Hill Companies Key Terms Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-21 • industrially advanced countries (IACs) • developing countries (DVCs) • demographic transition view • underemployment • brain drain • capital flight • infrastructure • capital-saving technology Copyright 2008 The McGraw-Hill Companies • capital-using technology • the will to develop • capricious universe view • land reform • vicious circle of poverty • corruption • World Bank • direct foreign investment THIS IS IT!!!!! Rich and Poor Obstacles to Economic Development Capital Accumulation Vicious Circle of Poverty Role of Government Role of Advanced Nations Where from Here? IAC Policies for Fostering DVC Growth Last Word Key Terms End Show 27-22 Copyright 2008 The McGraw-Hill Companies