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CHAPTER 32
THE MACROECONOMICS OF DEVELOPING
COUNTRIES
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LAUGHER CURVE
Did you hear about the economist who dove into his pool and broke his neck?
He forgot to seasonally adjust his pool.
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CHAPTER OVERVIEW: What’s It All About?
This chapter is sad reading for it lists a litany of obstacles facing less developed nations in their
struggle to create a better life for their people. These include: serious political problems that
stand in the way of development; dual economies -- a traditional one, and the one to which they
aspire -- inflation caused by the printing of too much money; balance of payments constraints;
currency convertibility issues; concerns with institutional policies and regime changes; and the
barriers to development itself: (1) political instability, (2) corruption, (3) lack of appropriate
institutions, (4) lack of investment, (5) inappropriate education, (6) overpopulation, and (7)
health and disease.
CHAPTER OBJECTIVES: Students Should Be Able To …
1. State some comparative statistics on rich and poor countries. See Table 32-1.
2. Explain why there might be a difference in normative goals between developing and
developed countries. In the U.S., generally accepted goals of macro policy include low
inflation, low unemployment, and an acceptable growth rate. In developing nations, when
people are starving and the economy fails to provide people’s basic needs – adequate food,
clothing and shelter – the main focus of macro policy will be on how to increase the
economy’s growth rate through development so that the economy can fulfill those basic needs.
3. Explain why economies at different stages in development have different institutional needs.
Developing nations differ from developed countries not only in their goals, but also in their
macroeconomic institutions. Western style property rights and contract law do not exist.
Instead, communal property rights and tradition structure economic relationships. It is hard to
talk about monetary policy run by a central banks when there is no central bank and hence, no
monetary policy. An economist in a Western setting who might favor activist government
policies might follow a laissez-faire policy in a developing nation because of a profound
distrust of government.
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4. Explain what is meant by the term “dual economy.” A developing nation’s economy is
generally characterized by a dual economy – the existence of two sectors: a traditional one
and an internationally-oriented one.
5. Distinguish between a regime change and a policy change. A regime change is a sudden
change in the entire atmosphere within which the government and the economy interrelate. A
policy change is a change in one aspect of government’s actions, such as monetary policy or
fiscal policy.
6. Explain why the statement that inflation is a problem of central bank issuing too much money
is not sufficient for developing countries. In developing nations, a broad-based domestic
government bond market often does not exist. So if the central banks in these countries must
buy government bonds, money supply increases causing increased inflation. Central bankers
feel they have no choice. So the debt is monetized – that is, money is printed to pay the debt.
7. Distinguish between convertibility on the current account and full convertibility. The U.S.
has full convertibility – individuals may change dollars into any currency they want for
whatever legal purpose they want. Most Western developed nations have full convertibility.
A second type of convertibility is convertibility on the current account – a system that
allows people to exchange currencies freely to buy goods and services, but not to buy assets in
other nations.
8. List seven obstacles facing developing countries. (1) political instability, (2) corruption, (3)
lack of appropriate institutions, (4) lack of investment, (5) inappropriate education, (6)
overpopulation, and (7) health and disease.
WHAT’S NEW? Revisions to This Edition
Back by request, this chapter is a combination of two development chapters from earlier editions.
DISCUSSION STARTERS: Get Your Class Rolling
1. Why do so many rich people in developing nations have accounts in foreign banks such as
the U.S., UK, and Switzerland?
2. Does this hurt their own country? How?
3. What kind of an education is appropriate for the development of poor nations, classical or
practical?
4. Why is the rate of savings and investment so low in developing nations?
5. If real GDP goes up in a nation, does that mean that everyone on average is better off?
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ON THE WEB: Integrating New Media into the Classroom
http://www.wto.org is the very elaborate Web site for the World Trade Organization. It is
available in English, Spanish, and French. Links to Trade Topics include: “goods, services,
intellectual property, environment, regionalism, dispute settlement, and ecommerce.” Links to
Resources include: “statistics, international trade, technical cooperation, trade policy courses,
legal texts, and documents on-line.” Politics: bureaucratic, self congratulatory.
http://www.imfsite.org is the Web site of the Hoover Institution on the Stanford University
campus in California, which deals with issues surrounding the IMF. Links include: “origins
[history of the IMF], operations, financing programs, conditionality, recent financing initiatives,
mission creep, reform proposals, and abolish the IMF?” Politics: scholarly, mildly conservative.
http://www.cia.gov is the Web site of the Central Intelligence Agency. One of its outstanding
features is its World Factbook 2002. This includes a map of each country, its geography, people,
government, economy, communications, transportation, military, and transnational issues.
Politics: neutral, scholarly.
http://www.ebrd.com is the Web site for the European Bank for Reconstruction and
Development, “investing in countries from central Europe to central Asia.” The site is available
in English, French, German, and Russian. Politics: none.
http://www.citizen.org/pctrade/nafta/ is a Ralph Nader Web site of Public Citizen Trade Watch.
This particular site gives a “report card” to NAFTA. Politics: polemic, liberal-left.
http://www.ita.doc.gov is the Web site of the U.S. Department of Agriculture’s International
Trade Administration. There are links to the U.S. Commercial Service, Trade Development,
Market Access and Compliance, and Import Administration. Politics: bureaucratic, proadministration.
http://www.olsen.ch is the Web site of Zurich-based Olsen Ltd., “a leading provider of e-finance
technology and services, including high-frequency market data, advanced forecasting models and
integrated risk management, investment decision support, and asset management.” Politics:
commercial.
STUDENT STUMBLING BLOCKS: Common Areas of Difficulty
One of the best and most current sources of information on foreign countries, especially
developing ones, is the Central Intelligence Agency’s The World Factbook 2002. See
www.cia.gov.
What follows is an Internet exercise. The exercise can be done on an individual- or class-wide
basis.
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First, select a developing nation from the CIA list. Then access the information on the economy.
You will be pleased to find that the information supplied not only follows this chapter perfectly
but also includes information from prior chapters such as real GDP, inflation rate, poverty data,
Gini index, imports, and exports. Selected economic data on Equador are furnished as an
example.
Economy overview: Ecuador has substantial oil reserves and rich agricultural areas. Because the
country exports primary products such as oil, bananas, and shrimp, fluctuations in world market
prices can have a substantial domestic impact. Ecuador joined the WTO in 1996, but has failed
to comply with many of its accession commitments. The aftermath of El Nino and the depressed
oil market of 1997-98 drove Ecuador’s economy into a free-fall in 1999. The beginning of 1999
saw the banking sector collapse, which helped precipitate an unprecedented default on external
loans later that year. Continued economic instability drove a 70% depreciation of the currency
throughout 1999, which forced a desperate government to “dollarize” the currency regime in
2000. The move stabilized the currency, but did not stave off the ouster of the government.
Gustavo Noboa, who assumed the presidency in January 2000, has managed to pass substantial
economic reforms and mend relations with international financial institutions. Ecuador
completed its first standby agreement since 1986 when the IMF Board approved a 10 December
2001 disbursement of $96 million, the final installment of a $300 million standby credit
agreement.
GDP: purchasing power parity, $39.6 billion (2001 est.)
GDP – real growth rate: 4.3% (2001 est.)
GDP – per capita: purchasing power parity, $3,000 (2001 est.)
GDP – composition by sector: agriculture: 11%; industry: 25%; services: 64% (2000 est.)
Population below poverty line: 70% (2001 est.)
Distribution of family income – Gini index: 43.7 (1995)
Inflation rate (consumer prices): 22% (2001 est.)
Unemployment rate: 14%; note – widespread underemployment (2001 est.)
Industries: petroleum, food processing, textiles, metal work, paper products, wood products,
chemical, plastics
Agriculture – products: bananas, coffee, cocoa, rice, potatoes, manioc (tapioca) plantains,
sugarcane, cattle, sheep, pigs, beef, pork, diary products, balsa wood, fish, shrimp
Exports: $4.8 billion (2001 est.)
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Exports – commodities: petroleum, bananas, shrimp, coffee, cocoa, cut flowers, fish.
Imports: $4.8 billion (2001 est.)
Imports – commodities: machinery and equipment, chemicals, raw materials, fuels; consumer
goods
Economic aid – recipient: $120 million (2001)
Currency: U.S. dollar
Exchange rates: sucres per US dollar –25,000 (January 2002), 25,000 (2001), 24,988.4 (2000),
11,786.8 (1999), 5,446 (1998), 3,998.3 (1997).
Note: on 13 March 2000, the National Congress approved a new exchange system whereby the
US dollar was adopted as the main legal tender in Ecuador for all purposes; on 20 March 2000,
the Central Bank of Ecuador started to exchange sucres for US dollars at a fixed rate of 25,000
sucres per US dollar; since 30 April 2000, all transactions are denominated in US dollars.
TIES TO THE TOOLS: Bringing the Boxes into the Classroom
Beyond the Tools: What To Call Developing Countries
In the 1950s they were called backward. Not PC enough. Then they were called
underdeveloped. Still not PC. Now they are called developing. But isn’t the U.S. developing?
So what do we call them?
Applying the Tools: The Odd Couple
The “odd couple” is U.S. Treasury Secretary Paul O’Neill and U-2 Irish rock star Bono. They
traveled to Africa to dramatize the importance of development and foreign aid to the continent.
LECTURE OUTLINE: A Map of the Chapter
I. Introduction.
A. Per capita income in developing nations is about $500 per year.
1. Some countries have a per capita income of only $200 per year, about 1/100th of the per
capita income in the U.S.
2. Americans and Europeans who are classified as poor find it hard to contemplate what
life is really like in a truly poor country.
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B. Don’t judge society by its income alone.
1. Poor people in developing countries survive and often find pleasure in their hard lives.
2. Often economically poor societies have cultures that provide individuals with a deep
sense of fulfillment and satisfaction.
3. You cannot judge an economy just by itself without considering the cultural context in
which it resides.
4. Would the poor in developing countries approve of increasing their standard of living?
Of course! But it comes at a price. The choice is between development, with its
attendant wrenching cultural transitions, and continuing poverty and wrenching cultural
transitions.
C. Some comparative statistics on rich and poor nations (Chapter Objective 1) Table 32-1.
1. Life expectancy in the U.S. is 77 years; in many very economically poor countries it is
55.
2. It is dangerous to simply compare income statistics blindly. For example, the cost of
goods relative to total income tends to be much lower for people in developing countries
than those in developed countries.
3. To allow for income difference, some economists, instead of working with exchange
rates, use purchasing power parity. Purchasing power parity compares income by
determining what a specific basket of consumer goods will cost in various nations.
4. Using this method, the differences between the poor and the developed is cut in half.
5. A similar adjustment can be made with life expectancy figures.
a. A major reason for low life expectancy is very high infant mortality rates.
b. Once the children survive to adulthood, their life expectancies are much closer to
adults in developed nations.
II. Growth vs. development.
A. Economists use the term “developing” rather than “growing,” to emphasize that the goals
of these countries involve more than simply an increase in output; these nations are
changing their underlying institutions.
B. Thus, development refers to an increase in productive capacity and output brought about
by a change in the underlying institutions.
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C. Growth refers to an increase in output brought about by an increase in inputs.
D. In the 1990s, the major Western economies have been restructuring their economies –
changing the underlying economic institutions – as they work to better compete in the
world economy.
E. The reason economists separate out developing economies is that these economies have:
1. Different institutional structures.
2. A different weighting of goals than do Western developed economies.
F. Differing goals (Chapter Objective 2).
1. In the U.S., generally accepted goals of macro policy include low inflation, low
unemployment, and an acceptable growth rate.
2. The U.S. economy has enough productive capacity to provide its citizens, on average
with a relatively high standard of living.
3. The problem facing Western societies is as much seeing that all members of those
societies share in that high standard of living as it is raising the standard.
4. In developing nations, when people are starving and the economy fails to provide
people’s basic needs – adequate food, clothing and shelter – the main focus of macro
policy will be on how to increase the economy’s growth rate through development so
that the economy can fulfill those basic needs.
G. Differing institutions (Chapter Objective 3).
1. Developing nations differ from developed countries not only in their goals, but also in
their macroeconomic institutions.
a. In some African nations, Western style property rights and contract law do not exist.
b. Instead, communal property rights and tradition structure economic relationships.
2. It is hard to talk about monetary policy run by a central banks when there is no central
bank and hence, no monetary policy.
3. Political differences and laissez-faire.
a. One of the scarcest commodities in developing nations is socially-minded leaders.
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b. An economist in a Western setting who might favor activist government policies
might follow a laissez-faire policy in a developing nation because of a profound
distrust of government.
4. The dual economy (Chapter Objective 4).
a. It makes sense to talk about a single economy in a developed Western nation.
b. A developing nation’s economy is generally characterized by a dual economy – the
existence of two sectors: a traditional one and an internationally-oriented one.
c. Usually, the largest percentage of the population participates in the traditional
economy, one with little or no currency.
5. Fiscal structure of developing and transitional economies.
a. A third institutional difference concerns developing countries’ fiscal systems.
b. How is it possible to have a national tax and expenditures plan when much of the
economy is run on a barter or cash-transaction basis?
c. Many of these nations lack the wherewithal to collect taxes That is why many
depend on tariffs as a primary source of revenue.
d. Many government expenditures in developing nations are mandated by political
considerations.
e. Occasionially, there is a regime change in these economies – a sudden change in the
entire atmosphere within which the government and the economy interrelate
(Chapter Objective 5).
f. A policy change is a change in one aspect of government’s actions, such as monetary
policy or fiscal policy.
6. Financial institutions of developing and transitional economies.
a. The primary difference between financial institutions in developing countries and
developed countries arises from the dual nature of developing countries’ economies.
b. In the modern international segment of developing economies, that is not the case.
c. Institutions with the same names in different nations can have quite different roles.
III. Monetary policy in developing countries.
A. Central banks are less independent (Chapter Objective 6).
1. While all central banks have goals, their primary goal is keeping the economy running.
a. In developed nations, inertia, institutions, and history hold economies together.
b. Central banks in developing nations cannot make that assumption.
2. In developing nations, a broad-based domestic government bond market often does not
exist.
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a. So if the central banks must buy government bonds, money supply increases with
increased inflation. Central bankers feel they have no choice.
b. Raising taxes might cause the government to fall.
c. So the debt is monetized – that is, money is printed to pay the debt.
d. This raises the inflation tax – an implicit tax on the holders of cash and the holder of
any obligations specified in nominal terms.
e. Faced with the prospect of a collapse of government, central banks choose to
increase money supply even if it means hyperinflation.
(1) The government gains from the inflation since they can pay off fixed-rate
government debt with funny money.
(2) The losers are those who hold fixed-rate government debt.
B. Focus on the international sector and the exchange rate constraint.
1. Developed nations are generally committed to full exchange rate convertibility on both
current and capital accounts.
2. Developing nations often do not have fully convertible currencies.
3. Various types of convertibility (Chapter Objective 7).
a. The U.S. has full convertibility – individuals may change dollars into any currency
they want for whatever legal purpose they want. Most Western developed nations
have full convertibility.
b. A second type of convertibility is convertibility on the current account – a system
that allows people to exchange currencies freely to buy goods and services, but not to
buy assets in other nations.
c. The third type of convertibility is limited capital account convertibility – a system
that allows full current account convertibility and partial capital account
convertibility.
d. Citizens in developing nations, especially wealthy ones, often keep significant
amounts of their savings outside their country, away from the hands of its own
government.
e. In the name of safety, many contracts are “dollarized,” that is, framed in the currency
of the U.S. rather than in that of the home country.
f. Nonconvertibility does not halt international trade; it merely makes it more difficult.
g. When developing nations have partially convertible exchange rates, exchange rate
policy – buying and selling foreign currencies in order to help stabilize the exchange
rate – often is an important central bank function.
4. Conditionality and the balance-of-payments constraint.
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a. In designing their policies, developing nations often rely on advice from the IMF.
(1) The IMF has economists familiar with these issues.
(2) The IMF is a major source of temporary loans that they need to stabilize their
currencies.
b. The loans come with conditions. IMF’s loan policy is often called conditionality –
the making of loans that are subject to certain conditions.
c. Even a partially flexible exchange rate regime presents the nation with a balance of
payments constraint – limitations on expansionary domestic macroeconomic policy
due to a shortage of international reserves.
IV. Obstacles to economic development.
A. Economists have yet to discover a magic formula that will make any nation develop.
Many of the institutions of developed nations do not exist in the less developed world.
B. There are, however, seven problems developing nations have to face:
1. Political instability.
a. All successful development strategies require the existence of a stable government.
b. The problem of political instability exists in all nations, but it is strongest in Africa.
c. The lack of political stability is often exacerbated by social and cultural differences
among groups within a nation.
d. The influence of political instability on development.
(1) Any serious potential investor takes political instability into account.
(2) This includes rich local citizens. In the face of political instability, they keep a
significant portion of their money outside the country in case they have to flee
when the government is overthrown.
e. Political instability and unequal distribution of income.
(1) The highly skewed distribution on income in most developing nations contributes
in another way to political instability.
(2) For people who have nothing, it is quite easy to follow a new leader who
promises a better life.
2. Corruption.
a. Graft, bribery, and corruption are ways of life in most developing nations.
b. The litigant who pays the judge the most wins the case.
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c. Societies decide what is right and wrong; economists don’t.
d. Knowing that graft must be paid, many investors simply walk away from a deal.
e. Limiting an activity makes the right to undertake that limited activity valuable to the
person making the limiting.
3. Lack of appropriate institutions.
a. Almost all economists agree that in order to develop, a country should establish
markets.
b. The establishment of markets requires the establishing of property rights.
c. Markets do not just exist; they are created, and their existence is meshed with the
cultural and social fabric of the society.
4. Lack of investment.
a. Even if a nation can overcome the political, social, and institutional constraints on
development, there are also economic constraints.
b. Investment funded by domestic savings.
(1) The poor don’t have any money to invest.
(2) The rich invest outside their own nation.
(3) The middle class is frightened to invest locally, especially in government bonds.
c. Investment funded from abroad.
(1) The easiest way to finance development is through foreign aid – funds that
developed nations lend or give to developing nations.
(2) But alas, they come with strings attached.
d. Foreign investment.
(1) If a global or multinational firm believes that a country has a motivated, cheap
workforce, a stable government supportive of business, and sufficient
infrastructure investment – investment in the underlying structure of the
economy, such as transportation or power facilities – it has a strong incentive to
invest in that country.
(2) If the investment is made, local critics often charge investor with imperialistic
exploitation, outside control, and significant outflows of profits.
(3) Competition for investment among developing countries.
(a) Developing nations often scramble to bring in foreign investment with offers
of free land, tax rebates, guarantees of labor peace, or loose regulatory
requirements.
(b) Competition for global company investment often leads to the benefits of that
investment being passed on to the Western consumer.
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(4) Focal points and takeoff.
(a) It takes time and money to know a country – its legal structure, political
structure, and infrastructure.
(b) Because of this informational requirement, developing countries that have
been successful in attracting investment often get further investment.
(c) Eventually they reach economic takeoff – a stage when the development
process becomes self-sustaining.
5. Inappropriate education.
a. Education systems in developing nations often resemble the education of Western
nations. This often ignores the fact that developing nations need basic education.
b. This leads to credentialism – the situation where the degrees, or credentials, become
more important than the knowledge learned.
c. Many students from developing nations complete their educations in the West and
choose not to return to their native lands. This results in a brain drain – the outflow
of the best and brightest students from developing countries to developed countries.
d. Without education, development is impossible. The question is how that education
should be structured.
6. Overpopulation.
a. A nation can increase per capita income by:
(1) Decreasing the number of persons in the country without decreasing the total
income in the country.
(2) Increasing the income without increasing the population.
b. Many developing economies have not avoided the Malthusian fate because
diminishing marginal productivity has exceeded technological change.
c. Population grows because:
(1) As public health measures are improved, infant mortality rates and death rates for
the population as a whole both decline.
(2) As people earn more income, they believe they can afford to have more children.
(3) In rural areas, children are valuable for working the fields.
d. So what to do about overpopulation?
(1) Coercion: the one-child policy in China, and forced sterilization.
(2) Advertising campaigns, free condoms, and economic incentives have been tried.
7. Health and disease.
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a. Before a nation can hope to develop, it must have a reasonably healthy population.
b. Maintaining public health is not just a humanitarian issue, but a key development
issue as well.
c. Even though most diseases can be cured with drugs, their cost is often out of reach of
most of the poor in less developed nations.
d. Drug manufacturers have little incentive to develop low-cost medicines for these
markets.
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POP QUIZ
NAME: __________________________________
COURSE: ________________________________
1. Comparing what a specified market basket of consumer goods will cost in various nations and
using these results to compare currencies’ values is known as:
a. per capita GDP.
b. full convertibility.
c. limited capital account convertibility.
d. purchasing power parity.
2. Changing the underlying economic institutions of an economy is the definition known as:
a. restructuring an economy.
b. a policy change.
c. a regime change.
d. conditionality.
3. A developing nation’s economy is generally characterized by a dual economy or the existence
of two sectors, a(n) ______________ sector and a(n) _______________.
a. traditional/internationally-oriented modern market.
b. traditional/laissez-faire.
c. command/internationally-oriented modern market.
d. restructured/ internationally-oriented modern market.
4. In issuing money to finance budget deficits, the inflation tax:
a. helps holders of cash in the home country.
b. helps holders of any obligations in the home country specified in nominal terms.
c. has nothing to do with monetizing the debt.
d. hurts those with savings accounts in the home country.
5. A system that allows people to exchange currencies freely to buy goods and services, but not
to buy assets in other nations is known as:
a. full convertibility.
b. convertibility on the current account.
c. limited capital account convertibility.
d. a change in a policy regime.
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6. All of the following are conditionalities except:
a. IMF loans do not contain conditionality requirements.
b. government deficits must be lowered.
c. money supply growth must be limited.
d. balance of payments must meet a certain standard.
7. Which of the following problems facing developing nations is reflected by credentialism?
a. Political instability.
b. Inappropriate education.
c. Corruption.
d. Overpopulation.
8. Which of the following problems facing developing nations is reflected by bribery?
a. Political instability.
b. Inappropriate education.
c. Corruption.
d. Overpopulation.
9. Which of the following problems facing developing nations can be overcome by
infrastructure investment?
a. Lack of appropriate institutions.
b. Lack of investment.
c. Health and disease.
d. Overpopulation.
10. Economic takeoff is:
a. Lack of appropriate institutions.
b. Self-sustaining development.
c. Accelerating population growth.
d. Hyperinflation.
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ANSWERS TO POP QUIZ
1. d 2. a 3. a 4. d 5. b 6. a 7. b 8. c 9. b 10. b
CASE STUDIES: Real-World Cases of Textbook Concepts
Case Study 32-1: Ecuador’s Switch to Dollars
On September 9, 2000, Ecuador adopted the U.S. dollar as it currency, making it the largest
officially dollarized nation in the world. Not knowing the full effect of such a radical move, the
government simply acted in desperation.
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The government had frozen most bank deposits to stem a bank run.
In September 1999, the country defaulted on its loans.
Over the previous year, the sucre, Equador’s money, had lost about two-thirds of its value
against the dollar.
The economy had shrunk more than 7 percent.
In early January 2000, there was panic selling of sucres, threatening a complete collapse
of the currency and the economy.
To the relief of the government and the public, things have calmed down considerably since then.
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The announcement was enough, by itself, to stabilize the foreign-currency exchange.
People finally realized that the nation’s foundering economy was due to inflation caused
by the central bank – simply printing too much sucres.
GDP is expected to grow 1.3 percent in 2000.
Employment has begun to increase, albeit slowly.
Short-term interest rates are about 10 percent of what they were just before the change.
The public has taken an estimated $400 million out of their mattresses and from abroad
and put it in the local banks, startling everyone.
The foreign debt was partly renegotiated.
The monthly rate of inflation has peaked and is decreasing.
Although there is still much to be done, the economy seems to have stabilized.
Source: Dora de Ampuero, “Ecuador’s Free Fall Ends Thanks to a Switch to Dollars,” The Wall
Street Journal, September 1, 2000, p.A11; and Mary Anastasia O’Grady, “Ecuador Has Survived
on a Dollar Diet, But Don’t Cheer Yet,” The Wall Street Journal, October 18, 2002, p. A22.
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Questions:
1. Why did Ecuadorians take money out of the country?
2. Why did they so quickly bring it back?
3. Although the article does not mention it, what sort of convertibility do you think Ecuadorians
have?
4. Does the article hint at conditionality?
5.
Check the statistics in Student Stumbling Blocks. According to the CIA, what is Ecuador’s
balance of trade?
Case Study 32-2: Small Is Profitable
In 1973, English economist-philosopher E. F. Schumacher published Small is Beautiful:
Economics as if People Mattered. In it he argued that instead of forcing people into an
industrialized model, people in developing nations should be able to get ahead by traditional
lifestyles. Forget megaprojects; encourage “human scale” industries. Stop thinking that science
can solve all the earth’s problems; encourage “appropriate technologies” that average people can
use without poisoning the earth.
The book was a hit on college campuses but widely viewed as a hopelessly impractical model for
economic development.
Times are now different with such multinational firms as Unilever, Philips, Coca-Cola, and
Motorola hailing Schumacher as a guru. They are finding that it is profitable to focus on
products with low prices, miniature sizes, and simple to use which may be the secret to business
success in developing nations, where most of the world’s population lives.
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In finance, banks specializing in micro-loans of as little $100 are the rage as a means of
spurring sustainable, grass-roots development.
Beginning in 1987, Hindustan Lever Ltd. began selling single-use sachets of shampoo for
2¢ to 4¢. Now the mini-packages account for $2.4 billion of sales in India.
Unilever’s Rexona brand deodorant sticks sell for 16¢ and up. They are successfully sold
in India, the Philippines, Bolivia, and Peru – where the company has 60 percent of the
deodorant market.
A nickel-size Vaseline package and a tube containing enough CloseUp toothpaste for 20
brushings sell for about 8¢ each.
Brooklyn, New York-based Scojo Vision, noticing a need for simple nonprescription
glasses began selling them in El Salvador, India, Haiti, and Guatemala for as little as $2 a
pair. The glasses come in three strengths. Scojo is training dozens of small entrepreneurs
and providing them with loans of about $75 so that they can buy a kit of eye charts,
brochures, and a stock of glasses.
Royal Philips Electronics retooled a windup radio for mountaineers and in March 2002,
began selling simple versions for $20 in India.
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It is predicted that multinationals of the future will have sophisticated global management of
marketing and supply chains. But they will also have roots firmly planted in the soil of the
village. One specialist noted: “The challenge will be to create large, virtual organizations in
developing economies that have the benefits of scale, but the uniqueness of small size.”
Source: Manjeet Kripalani and Pete Engardio, “Small is Profitable,” Business Week, August 26,
2002, p. 112.
Questions:
1. In spite of the hype, do you think this model will ever catch hold?
2. In what part of the dual economy would you place this trend?
3. In your opinion, which of the seven obstacles facing developing nations would this model
help solve?
4. What institutional needs are required to make this model work even better?
5. What barriers might stand in the way of making this a regime change in some
underdeveloped nations?
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Chapter 32 (16): The Macroeconomics of Developing Countries