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CHAPTER 21 Economic Growth in Developing and Transitional Economies
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PowerPoint Lectures for
Principles of
Macroeconomics, 9e
; ;
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
Principles of Macroeconomics 9e by Case, Fair and Oster
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
PART V THE WORLD ECONOMY
Economic Growth in
Developing and
Transitional Economies
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CHAPTER OUTLINE
Life in the Developing Nations:
Population and Poverty
Economic Development: Sources and
Strategies
The Sources of Economic Development
Strategies for Economic Development
Growth versus Development: The Policy
Cycle
Two Examples of Development: China
and India
Issues in Economic Development
Population Growth
The Transition to a Market Economy
Six Basic Requirements for Successful
Transition
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Growth in Developing and Transitional Economies
All economic analysis deals with the problem of
making choices under conditions of scarcity, and
the problem of satisfying people’s wants and
needs is as real for Somalia and Haiti as it is for
the United States, Germany, and Japan. The
universality of scarcity is what makes economic
analysis relevant to all nations, regardless of their
level of material well-being or ruling political
ideology.
Even though economic problems and the policy
instruments available to tackle them vary across
nations, economic thinking about these problems
can be transferred easily from one setting to
another.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Life in the Developing Nations: Population and Poverty
TABLE 21.1 Indicators of Economic Development
Country
Group
Population,
2006
Gross
National
Income per
Capita,
2006
(dollars)
Literacy Rate
(percent over
15 years
of age)
Infant
Mortality,
2006
(deaths
Internet
before age 5
Users per
per 1,000
1,000 people,
births)
2005
Low-income
2.3 billion
510
29
122.0
30
Lower middleincome
2.4 billion
1,580
75
42.0
47
Upper middleincome
575.9 million
4,770
243
29.7
72
1.0 billion
32,040
2,977
7.0
76
High-income
Source: World Bank, www.worldbank.org
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Life in the Developing Nations: Population and Poverty
While the developed nations account for only
about one quarter of the world’s population, they
are estimated to consume three-quarters of the
world’s output.
This leaves the developing countries with about
three-fourths of the world’s people but only onefourth of the world’s income.
The simple result is that most of our planet’s
population is poor.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
The Sources of Economic Development
Capital Formation
vicious-circle-of-poverty hypothesis Suggests
that poverty is self-perpetuating because poor
nations are unable to save and invest enough to
accumulate the capital stock that would help them
grow.
capital flight The tendency for both human
capital and financial capital to leave developing
countries in search of higher expected rates of
return elsewhere with less risk.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
The Sources of Economic Development
Human Resources and Entrepreneurial Ability
brain drain The tendency for talented people
from developing countries to become educated in
a developed country and remain there after
graduation.
Social Overhead Capital
social overhead capital Basic infrastructure
projects such as roads, power generation, and
irrigation systems.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
The Sources of Economic Development
Social Overhead Capital
Corruption
The following chart shows the
World Bank’s rating of corruption
levels in a number of countries
around the world. The countries
are ranked from those with the
strongest controls on corruption—
Germany and France—to those
with the lowest controls—Pakistan
and Nigeria. Indonesia, as you
can see, is near the bottom of the
list.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
Strategies for Economic Development
Agriculture or Industry?
TABLE 21.2 The Structure of Production in Selected Developed and Developing
Economies, 2003
Country
Per-Capita
Gross National
Income (GNI)
Percentage of Gross Domestic Product
Agriculture
Industry
Services
375
45
17
37
480
20
28
52
China
2,010
12
47
41
Colombia
2,740
12
34
54
Thailand
2,990
10
46
44
Brazil
4,730
5
31
64
Korea (Rep.)
17,690
2
23
75
Japan
38,410
2
30
68
United States
44,970
2
23
75
Tanzania
Bangladesh
$
Source: World Bank, World Development Indicators, 2008; Sectoral numbers for U.S. and Japan are for 2003.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
Strategies for Economic Development
Exports or Import Substitution?
import substitution An industrial trade strategy
that favors developing local industries that can
manufacture goods to replace imports.
export promotion A trade policy designed to
encourage exports.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
Strategies for Economic Development
Central Planning or the Market?
International Monetary Fund (IMF) An
international agency whose primary goals are to
stabilize international exchange rates and to lend
money to countries that have problems financing
their international transactions.
World Bank An international agency that lends
money to individual countries for projects that
promote economic development.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
Strategies for Economic Development
Microfinance: A New Idea
In the mid 1970s, Muhammad Yunus, a young
Bangladeshi economist created the Grameen
Bank in Bangladesh.
Microfinance is the practice of lending very small
amounts of money, with no collateral, and
accepting very small savings deposits. It is aimed
at introducing entrepreneurs in the poorest parts of
the developing world to the capital market.
Relative to traditional bank loans, microfinance
loans are much smaller, repayment begins very
quickly, and the vast majority of the loans are
made to women (who, in many cases, have been
underserved by mainstream banks).
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
Growth versus Development: The Policy Cycle
structural adjustment A series of programs in
developing nations designed to: (1) reduce the
size of their public sectors through privatization
and/or expenditure reductions, (2) decrease their
budget deficits, (3) control inflation, and (4)
encourage private saving and investment through
tax reform.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
Growth versus Development: The Policy Cycle
Cell Phones Increase
Profits for Fishermen
in India
Kerala is a poor state in a region
of India.
Beginning in 1997 and continuing
for the next several years, mobile
phone service was introduced to this region of India.
Once the phones were introduced, waste, which had averaged 5
to 8 percent of the total catch, was virtually eliminated.
In fact, cell phones are improving the way markets in less
developed countries work by providing price and quantity
information so that both producers and consumers can make
better economic decisions.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Economic Development: Sources and Strategies
Two Examples of Development: China and India
China and India provide two interesting examples
of rapidly developing economies. While low percapita incomes still mean that both countries are
typically labeled developing as opposed to
developed countries, many expect that to change
in the near future.
Many commentators expect India and China to
dominate the world economy in the twenty-first
century.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Issues in Economic Development
Population Growth
The populations of the developing nations are
estimated to be growing at about 1.7 percent per
year.
Concern over world population growth is not new.
The Reverend Thomas Malthus (who became
England’s first professor of political economy)
expressed his fears about the population
increases he observed 200 years ago. Malthus
believed that populations grow geometrically at a
constant growth rate—thus the absolute size of the
increase each year gets larger and larger—but
that food supplies grow more slowly because of
the diminishing marginal productivity of land.
These two phenomena led Malthus to predict the
increasing impoverishment of the world’s people
unless population growth could be slowed.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Issues in Economic Development
Population Growth
The Consequences of Rapid Population Growth
 FIGURE 21.1 The Growth of
World Population, Projected to
A.D. 2020
For thousands of years,
population grew slowly. From
A.D. 1 until the mid-1600s,
population grew at about .04
percent per year. Since the
Industrial Revolution, population
growth has occurred at an
unprecedented rate.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
Issues in Economic Development
Population Growth
Causes of Rapid Population Growth
fertility rate The birth rate. Equal to (the number
of births per year divided by the population) × 100.
mortality rate The death rate. Equal to (the
number of deaths per year divided by the
population) × 100.
natural rate of population increase The
difference between the birth rate and the death
rate.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Economists generally agree on six basic
requirements for a successful transition to a
market-based system:
(1) macroeconomic stabilization,
(2) deregulation of prices and liberalization of
(3)
(4)
(5)
(6)
trade,
privatization of state-owned enterprises and
development of new private industry,
establishment of market-supporting
institutions such as property and contract laws
and accounting systems,
a social safety net to deal with unemployment
and poverty, and
external assistance.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Macroeconomic Stabilization
To achieve a properly functioning market system,
prices must be stabilized.
Deregulation of Prices and Liberalization of Trade
An unregulated price mechanism ensures an
efficient allocation of resources across industries.
Privatization
Private ownership provides a strong incentive for
efficient operation, innovation, and hard work that
is lacking when ownership is centralized and
profits are distributed to the people.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Market-Supporting Institutions
The capital market, which channels private saving
into productive capital investment in developed
capitalist economies, is made up of hundreds of
different institutions.
Social Safety Net
This social safety net might include unemployment
insurance, aid for the poor, and food and housing
assistance.
External Assistance
Very few believe that the transition to a market
system can be achieved without outside support
and some outside financing.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Shock Therapy or Gradualism?
shock therapy The approach to transition from
socialism to market capitalism that advocates
rapid deregulation of prices, liberalization of trade,
and privatization.
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CHAPTER 21 Economic Growth in Developing and Transitional Economies
REVIEW TERMS AND CONCEPTS
brain drain
natural rate of population increase
capital flight
shock therapy
export promotion
social overhead capital
fertility rate
structural adjustment
import substitution
tragedy of commons
International Monetary Fund
(IMF)
vicious-circle-of-poverty
hypothesis
mortality rate
World Bank
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