economic development and transition
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Economic Development and Transition. Chapter 18. Levels of Development. Half the world’s population lives in extreme poverty (less than $1 a day) Measure well being of country on development (process that nation meets economic, social and political needs of people) - PowerPoint PPT PresentationTRANSCRIPT
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ECONOMIC DEVELOPMENT AND TRANSITIONChapter 18
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Levels of Development Half the world’s population lives in extreme
poverty (less than $1 a day) Measure well being of country on
development (process that nation meets economic, social and political needs of people)
Developed nations (MDC’s)- above average level of material well being
Less Developed Countries (LDC’s) worlds poorest countries
Developing Countries- not poorest but not high standard of living of MDC’s
Development is how well a nation provides food, education, shelter, and levels of economic production
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Developed, Developing and Least Developed Nations
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Measuring Development Primary measure of development is GDP (total
market value of all goods and services produced in a year)
1. Per Capita GDP is GDP divided by total population Does not account for distribution of wealth, in many
LDC’s gap between rich and poor very wide2. Energy consumption- amounts of energy used
are an indication of industrialization (extensive organization of an economy for manufacturing)
Low levels of energy consumption are a sign of little industry, development
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Worldwide Energy Consumption Per Capita
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Measuring Development3. Labor Force- LDC’s most labor force
devoted to agriculture, little opportunity for workers to specialize
Unable to produce specialized goods for sale, unable to generate cash income
4. Consumer goods- large number of consumer goods means people have disposable income
5. Literacy- higher in more developed countries
Higher levels of education mean population is more productive
6. Life Expectancy- well nourished, well housed population has longer life expectancy
7. Infant mortality rate- number of deaths in first year of life per 1,000 births
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Characteristics of Developed Nations
Have high per capita GDPs Higher degree of economic, political freedom Agricultural output high, but few farmers
(mechanization, industrialization of agriculture)
Most of labor force in service industry or manufacturing
High energy usage Use of technology increases productivity Infant mortality low, life expectancy high Most of population urbanized Solid infrastructure (services needed to keep
economy healthy- roads, communication systems, financial institutions)
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Characteristics of Less Developed Countries
Low per capita GDP Low energy usage Most of population in agriculture
(subsistence farming) Unemployment rates high Education system inadequate,
children needed to work on farms; literacy rates low
Most of population is rural (not always)
Poor diet, access to health care lead to high infant mortality and lower life expectancy
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Levels of Development Economic development occurs in the following
stagesA. Primitive equilibrium- no economic system
exists, based on traditionB. Transition- traditions crumble, new ways adoptedC. Takeoff- new industries grow and profits reinvestedD. Semi-developed- economy expands, enters
international marketE. Highly developed- basic needs easily met,
economy focused on consumer goods, public sector
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Issues in Development
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Rapid Population Growth Quality of life depends on productive population, LDCs can’t
meet needs of rapidly growing population Many LDCs are experiencing increase in life expectancy and
no decrease in birth rates, leading to rapid population growth Double population means need for more employment
opportunities, schoolrooms, agricultural production, industrial output
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Factors of Production Physical geography
makes development difficult
Uneven distributions of resources, arable land
Sometimes problem is how to utilize resources, technology and capital to extract resources absent in many LCDs
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Physical and Human Capital Lack of human made resources to
create goods and services Subsistence agriculture does not
give families opportunity to save or produce anything more than food
Means large portion of population who don’t produce are supported by others
Health, nutrition, education important to develop human capital
Keeps investors away because they don’t see profit if country lacks a skilled, healthy workforce
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Health and Education Health- Performance and productivity depend on
good nutrition, less developed countries suffer from chronic food shortages
Education- To use technology and move beyond subsistence educated workforce is necessary
LDCs have low rates of literacy and limited access to education
Ideas about gender keep women out of education and the workforce
Brain drain- best educated citizens leave many LDCs for education opportunities, attracted to opportunities of developed countries
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Political Factors Limited or reduced development in LDCs Colonial legacy Many were former colonies with economies based on
extraction of raw materials Shipped to colonizers, where they were turned into
finished products Many had to rely on colonies for manufactured goods After WWII many became independent and tried to
modernize their economies At first they turned to central planning, many are now
turning to free enterprise Corruption in government Policies and political decisions to only benefit a small
minority, leaving many with needs unmet Civil wars and social unrest have plagued many countries Military leaders spend huge sums of money at the
expense of other societal needs
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Debt 1970’s and 1980’s many LDCs acquired
debt from foreign governments and private banks
Worldwide economic crises hindered countries from paying back loans (Oil Crisis 1973 value of dollar increased and made paying loans back more difficult)
Some countries foreign debt is greater than annual GDP
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Financing Development
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Investment Building infrastructure, developing
education, healthcare and creating industry require large sums of money
Two methods to finance development: Internal financing from the countries
citizens Underdeveloped nations do not have
much money to invest Those with money keep it in foreign
banks and overseas investments, many LDCs turn to foreign investment
Foreign investment money from other countries
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Investment Foreign direct investment- business established in
country by foreign firm Often formed by Multi-National Corporations
(MNCs) MNCs are large corporations that produce and sell
goods across the globe Attracted to LDCs for profit, take advantage of cheap
labor and natural resources Money not reinvested in country, goes to foreign
owners Potential for unethical treatment (low wages for
workers) Positive effects provide jobs, introduce technology,
opportunity for related services to develop Foreign portfolio investment- foreigners purchase
stocks and bonds in countries markets, funds lead indirectly to increases in production
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Foreign Aid Foreign governments give money and other
forms of aid to LDCs to aid development Build schools, develop infrastructure Reasons- humanitarian, military, economic,
social Examples- aid to Western Europe after
WWII, more recently aid to Middle Eastern countries friendly to American democracy
These countries can provide new markets for American goods
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International Institutions International institutions promote
development Most prominent are the World Bank, United
Nations Development Program, International Monetary Fund
World Bank- largest provider of development assistance, raises money in financial markets and takes contributions from member nations
UN Development Program- elimination of poverty through development, provides grants for economic and social development, funded by voluntary contributions from UN members
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World Bank Income GroupsBlue – high
IncomeGreen-
uppermiddle income
Purple- lower middle income
Red -poor
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International Institutions International Monetary Fund (IMF)-
facilitates development through policy advice, technical assistance
Often viewed as the last resort for struggling LDCs
Uses debt rescheduling ( giving more time, forgiving, dismissing borrowed money); stabilization programs (IMF tries to help change economic policies of debtor nation)
Stabilization programs have negative impact on poor; cuts in government services, cutting wages while prices rise
Cause decrease in domestic consumption while country tries to export more to make money
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Transition to Free Enterprise
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Toward a Market Economy LDCs began to see limitations of centrally planned economies Many have begun to replace them with market based systems Some are modifying their centrally planned economies to
incorporate some free market practices Huge adjustment for economy and nation One of the first steps is privatization (sale or transfer of
government owned business to private individuals)A. Can sell business to one ownerB. Sell shares in business Privatization means only profitable business will continue to
operate Means secure life long employment for some is over because
competition weeds out the weak
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Other Issues in Transition The Legal System and
Government Establishment of a legal system
protecting property rights Laws that ensure the transfer of
property Law and order prevent criminals
and government from interfering with the day to day business of the economy
Laws need to provide a framework of regulation
Workers need to develop a different work ethic based on incentive to influence labor
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Russia in Transition USSR Once dominant communist nation, late
1980’s lagging economy brought social and economic reform
Most land, labor and capital devoted to heavy industry and the military, little left to produce consumer goods
1980’s new leader Mikhail Gorbachev began series of economic reforms (perestroika) to gradually change over to a free market economy
Workers, factory managers had more control over production
Introduced a more open government policy (glasnost)where citizens could do what they wish without government reprisal
Policy changes led to collapse of communism in 1991
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Russia in Transition By 1992 government lifted price
controls, prices tripled Wealth was unevenly distributed
and organized crime and corruption infiltrated society and the economy
Financial aid from the World Bank and the IMF was mismanaged and not used efficiently
Recently Russia has started to tap into their vast oil, natural gas and mineral resources to sell on the world market