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Some key issues
- Less-developed countries (LDCs)
- countries with low levels of per capita output
- Why have LDCs remained poor?
- The potential roles of:
- comparative advantage
- industrialization
- international debt
- structural adjustment
- aid
The world distribution of income
- In 1998 there were 3.5 billion people living in low-income countries
- with average annual income of about £313 per person.
- In 1998, there were 0.9 billion people living in high-income countries
- with average annual income of about £15,367 per person.
- Welfare indicators by country group
Problems of LDCs (1)
- Resource scarcity
- LDCs lack natural resources
- or the means to exploit them
- Capital
- few domestic resources available for investment
- multinationals may repatriate profits, rather than reinvesting.
Problems of LDCs (2)
- Social investment in infrastructure
- LDCs may not be able to achieve scale economies in
- power generation
- roads
- telephone systems
- urban housing
- Customs and ideology
- in SOME cases, traditional attitudes may inhibit development
- but this argument is often over-stated
Problems of LDCs (3)
- Human capital
- LDCs lack resources to invest in
- health
- nutrition
- education
- industrial training
- so workers in LDCs tend to be less productive than workers using
the same technology in HICs.
- Low productivity agriculture
- Many LDCs have a high proportion of their labour force engaged
in low productivity agriculture.
Possible paths to development?
- Trade in primary products
- Industrialization
- Borrowing
- Structural adjustment
- Aid
Development:
through trade in primary products?
- Primary products are agricultural goods and minerals.
- Comparative advantage suggests that LDCs should specialize in primary
production, BUT:
- some evidence suggests the terms of trade have been moving against
primary products and towards manufactures
- prices of primary products tend to be volatile
- export concentration can be destabilizing
Development:
through import substitution?
- Import substitution is a policy of replacing imports by domestic production
- under the protection of high tariffs or import quotas
- in the short run this involves inefficient use of resources
- in the long run, domestic market may not be large enough to allow
scale economies
- and it fosters an inward-looking attitude
- and promotes activities in which the country begins with a comparative
disadvantage
Development:
through export promotion?
- Export-led growth stresses production and income growth through exports
rather than the displacement of imports
- The most successful economies of the last 3 decades have followed
this route
- especially countries in South East Asia
- But for other countries to follow, co-operation is needed from the
industrial countries to avoid over-protectionism
Development:
through borrowing?
- LDCs have traditionally been borrowers in world markets
- funds used to import capital goods to supplement domestic investment
- borrowing finances a current account deficit
- Borrowing increased after the first OPEC oil-price shock of 1973/74
- notably borrowing by non-oil developing countries ...
Development:
through borrowing? (2)
- Countries were reluctant to borrow from the IMF under stringent conditions
- so borrowed from commercial sources
- often at variable interest rates
- high real interest rates in the early 1980s created debt servicing
problems for many borrowers
- raising the possibility of default
- the HIPC initiative of the late 1990s attempted to tackle the debt
burden which many LDCs found unsustainable
Development:
through structural adjustment?
- Structural adjustment programmes
- the pursuit of supply-side policies aimed at increasing potential
output by increasing efficiency, e.g.:
- reductions in government subsidies to industry
- privatization
- trade liberalization
- price reforms
- monetary and fiscal discipline
Development:
through aid?
- Aid is an international transfer payment from rich countries to poor
countries.
- takes many forms:
- subsidized loans
- gifts of food or machinery
- technical help
- justified on grounds of equity?
- but may create dependency
- allowing freer trade is an alternative
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