DevelopmentDevelopmentKey Issue #4: “Why do less developed

countries face obstacles to development?”

Improvement in PINGsImprovement in PINGs

To promote development, PINGs seek to improve the indicators…economic, social, and demographic

PINGs are improving, but the gap is growing◦Example: PINGs have improved income by

$4,000, but PEDs have improved by $20,000

Differences in consumptionDifferences in consumption

1/5 of the world’s population living in PEDs consume 5/6 of the world’s goods

14% of the world’s people living in Africa only consume about 1%

Two fundamental obstacles to Two fundamental obstacles to PINGs trying to developPINGs trying to develop

1. Adopting policies that successfully promote development

2. Finding funds to pay for development

Development through self-Development through self-sufficiencysufficiency

For most of the 20th century, self-sufficiency was the more popular of the development alternatives

Key elements:1. Investment is spread across all economic

sectors2. Focus is on promoting wealth across

income levels, not just the rich3. Barriers are set on imports (tariffs, taxes,

quotas, requiring licenses)

Example of Self-Sufficiency: IndiaExample of Self-Sufficiency: India

India made efficient use of barriers to trade

Indian businesses were discouraged from producing goods for export

Businesses produce for IndiaIf private companies were unable to make

a profit by selling only to India, then the government would provide a subsidy

Problems with self-sufficiencyProblems with self-sufficiency

1. Inefficiency: self-sufficiency protects inefficient industries

• Business has little incentive to improve quality, lower production costs, reduce prices, or increase production

2. Large Bureaucracy: self-sufficiency requires large bureaucracy to administer the controls

• A complex administrative system encouraged abuse and corruption

Development through Development through international tradeinternational trade

A country identifies its distinctive/unique assets

What product can the country manufacture and distribute at a higher quality and a lower cost than other countries?

Rostow’s Development ModelRostow’s Development Model

1. The traditional society – a country that has not started development; large amounts of people in agriculture and “nonproductive” activities (religion and military)

2. The preconditions for takeoff – the process of development begins when an elite group begins to invest in technology and infrastructure

Rostow’s Development Model Rostow’s Development Model cont…cont…

3. The takeoff – rapid growth is promoted in a few number of activities (i.e. textiles, food products)

4. The drive to maturity – modern technology diffuses to more industries which experience rapid growth and workers become more skilled

5. The age of mass consumption – the economy shifts from heavy industry to consumer goods

More on Rostow’s ModelMore on Rostow’s Model

Each country is in one of the five stages.

PINGs will achieve development by moving through the stages

Two factors that encouraged Rostow’s optimism:

1. Europe and Anglo-America have achieved stage five and have been joined by Eastern Europe and Japan

2. PINGs have raw materials

Examples of the International Examples of the International Trade ApproachTrade Approach

The Four Asian Dragons: South Korea, Singapore, Taiwan, and Hong Kong◦Influenced by Japan◦Concentrated on clothing

and electronicsPetroleum Rich

Arabian Peninsula States:◦The increase in

petroleum prices in the 1970s greatly enriched these countries

Problems with the International Problems with the International Trade AlternativeTrade Alternative

1. Uneven resource distribution2. Market stagnation3. Increased dependence on PEDs

Recent Triumph of International Recent Triumph of International Trade ApproachTrade Approach

This approach has been adopted by most in recent years

India switched to an international trade approach

India’s GDP grew 7% per year in the 1990s

Manufactured goods accounted for more than 4/5 of exports from PINGs in 2000

World Trade OrganizationWorld Trade Organization

Established in 1995 by countries representing 97% of world trade

Reduces barriers to trade:◦Countries negotiate reduction or elimination of

international trade restrictions◦The WTO enforces agreements

Financing DevelopmentFinancing Development

PINGs lack money!Loans – mainly for infrastructure

◦The World Bank◦International Monetary Fund

Structural Adjustment Programs – in exchange for repaying debt, lending agencies require PINGs to create conditions favorable for international trade

Fair TradeFair Trade

Fair trade – products are made and traded according to standards that protect workers and small businesses in PINGs

Producer StandardsWorker Standards