1

Economic Development in Third World Countries

A report submitted to the Department of Investment Management in part-fulfillment of the requirements of the Final-term Examination in

Doing Business in Bangladesh Section-A

Prepared & Submitted by:

Rashedi, Mashfiqur Rahman

08-11983-3

FacultyM Taseen Chowdhury

Date of SubmissionAugust 14

Summer 2011

2

Preface

This term paper is specially designed to give some ideas about the course Doing

Business in Bangladesh.

By this term paper I get the opportunity to know about “Economic Development in

Third World Countries”. Through all the papers I tried our level best to give you some idea

about how the “Economic Development in Third World Countries” influences economic

behavior in Bangladesh.

I do not claim that this assignment is original in presentation. I have collected materials

from different source. I greatly acknowledge all suggestions received to enhance further the

value of this project. The suggestion has been incorporated whenever possible. I have tried to

give my best efforts not withstanding small errors do creep into the project.

I am extremely grateful to our faculty, M Taseen Chowdhury, Department of Finance,

who constantly took keen interest in boosting our morale and inspire of his busy schedule.

While every effort has been made to ensure accuracy, it cannot be claimed that the

assignment is absolutely error-free. In case of any confusion or doubt on any aspects of this

report, I am available for contact in any time.

3

Contents

Introduction 4

Objectives & Limitations 7

Literature Review 8

The development experiences of Third World countries 17

The Macroeconomic Foundation 22

Multinational Corporations in the Third World: Predators or

Allies in Economic Development

31

Thinking about the world economy 35

Conclusion 49

Bibliography 50

Introduction

4

It is commonly reported that the birthrate is much higher in the Third World than the First

World, and therefore the Third World's population will grow relative to the First World's

population. What this ignores is economic growth is transforming Third World countries into

First World countries.

In the past few decades the rise of countries like South Korea, Greece, the Czech Republic, and

others to developed status and immigration from the Third World to the First has largely

balanced the higher birth rate of the First World. But with the very rapid economic growth rate of

China, India, and much of the rest of the Third World we will see the Third World shrink and the

First World grow over the course of this century.

We can reasonably hope that most of the world's people will live in counties with economies rich

enough to support extremely stable democratic governments long before the end of the Twenty

First Century.

Current Success of the Third World

Even the marginally well informed know that China has been growing rapidly, more than

doubling its economic output per person every decade, for almost three decades. China has one

quarter of the Third World population, so China's success is a large part of the total picture.

China’s growth is based on labor intensive industrial exports, and is similar to the rapid growth

of Japan, South Korea, Taiwan, Hong Kong, and Singapore. So China is following a proven

formula that has rapidly transformed several Third World nations into First World nations. On

the down side, a country of 1.3 billion may not be able to follow this path to First World status as

rapidly as the others because it will flood world markets for the goods it exports.

India is about one fifth of the Third World and through Internet outsourcing it has recently

achieved super growth, growing fast enough to double per person output in a decade. Between

China and India 45 percent of the Third World will have reached super growth. What was once

5

the miracle of Japan and then a few other Far Eastern Tigers like Korea and Hong Kong will be

the norm for almost half of the Third World.

Much of the rest of the Third World has also been growing rapidly recently. The Economist

magazine has a table every week on the economic growth of twenty Third World countries and

five high income economies. In late 2005 when this article was originally written, all twenty of

the Third World countries had economic growth that exceeded their population growth. All but

one had a per capita economic growth rate that exceeded the normal First World per capita

economic growth rate of two percent. The exception, Mexico, had a growth rate roughly equal to

the typical economic growth of the most highly developed First World nations. The story the

statistics told is that in the previous year the majority of the Third World’s population lives in

countries at or near super growth, seven percent or more per capita growth per year, and much of

the rest of the Third World is not only growing faster than its population, its per person economic

growth is faster than the First World.

The growth of the Third World before the recession was very impressive, perhaps the best ever.

Even during the current recession and slow recovery the low income and lower middle income

countries are continuing to grow rapidly, even though not quite as fast.

Several years ago when I originally wrote this web page I said the Third World's growth rate

would fall from this peak, and it did. The Third World’s growth was also very impressive before

the East Asian financial crisis of 1997; probably the best ever up to that time. Unfortunately, the

rapid growth declined in several countries. As just as the Third World fell back from that peak in

the 90's, I expected it to fall from the pre-recession growth rate, but I also expect it to eventually

rise to future peaks of even faster growth.

Low Income Category Rapidly Declining

In 1998 almost sixty percent of the world's population lived in low income countries. Low

income is the lowest of the World Bank's four categories: low, lower middle, upper middle, and

high income. By 2008 that was down to about 15 percent as India, Pakistan, and Nigeria all made

it to lower middle income status by June 2008. That is a three quarters reduction in ten years.

6

Granted, to transform all the Third World nations into First World nations we will have to empty

the middle income category and emptying the middle income categories is much more difficult

than emptying the low income category. The border between low income and middle income

was 976 in 2008. The border between middle income and high income was 11,906. Still the rapid

decline in the population of the low income category can at least lend some plausibility to my

assertion that the nations of the Third World can be absorbed into the First World over the course

of this century.

How the Third World Will Join the First World

Over the last several decades light industry has been a major route into the First World. A major

difficulty with this route has been that the people of the First World rarely wear more than one

pair of underwear at a time. As there is limited demand for the products of low skill, light

industry, most countries had to more or less wait while light industry transformed a few countries

like China.

The rapid growth of India based on Internet outsourcing suggests there may be a second route.

So while a large portion of the Third World can grow to First World status through light

industry, another large portion can take this second route, the Internet, without hindering the first

group.

In fact quite the contrary, if the countries that are growing through outsourcing buy the light

industrial goods of the light industrial exporters then the new group, the outsourcers, will

actually help the old group, the industrial exporters to grow.

Finally, the success of these two routes is pushing up natural resource prices which might

provide a third route. Several routes to success means that Third World nations may not have to

wait their turn, or at least wait as long, to get on a path to rapid development.

Furthermore, there is a race between the higher birth rate of the Third World and the assent of

Third World countries to First World status through economic growth. The opening of new

routes to the First World, particularly through the Internet, may dramatically shift the advantage

to economic growth.

7

Objective of the study

The main goal of making this project is to analyze the concept of “Economic Development in

Third World Countries” and to give you good concept and very sufficient information about this

topic. I tried to convey what is Third World Countries, where from it came, how people are

affected by Economic Development and I also tried to find out some solutions for this concept.

To accomplish our goal, we divided it into several objectives. These are:

Found out the data source and collected data as much as possible.

Set out the methodology for doing report.

Interpreted the results and make an analysis on it.

Then we prepared the main paper.

And finally tried to found out some solutions.

Limitations of the study

In making this report I had some limitations that I could not across. As I am a student, I had a

shortage of time because I have some other courses to study which are also very important and I

am also involved in extracurricular activities.

I had to depend on the information that I have gathered from various sources like journal papers,

conference papers and internet. So, maybe I could not visualize the whole scenario of

“Economic Development in Third World Countries”, as I have a limited knowledge about it.

I hope you will consider if there is any lack of information in this project for these limitations.

8

Literature Review

Measure and concept of ‘Development’

The development of a country is measured with statistical indexes such as income per capita (per

person) (GDP), life expectancy, the rate of literacy, et cetera. The UN has developed the HDI, a

compound indicator of the above statistics, to gauge the level of human development for

countries where data is available.

The IMF uses a flexible classification system that considers "(1) per capita income level, (2)

export diversification—so oil exporters that have high per capita GDP would not make the

advanced classification because around 70% of its exports are oil, and (3) degree of integration

into the global financial system."

The World Bank classifies countries into four income groups. These are set each year on July 1.

Economies were divided according to 2008 GNI per capita using the following ranges of income:[14]

Low income countries had GNI per capita of US$995 or less.

Lower middle income countries had GNI per capita between US$996 and US$3,945.

Upper middle income countries had GNI per capita between US$3,946 and US$12,195.

High income countries had GNI above US$11,906.

The World Bank classifies all low- and middle-income countries as developing but notes, "The

use of the term is convenient; it is not intended to imply that all economies in the group are

experiencing similar development or that other economies have reached a preferred or final stage

of development. Classification by income does not necessarily reflect development status.

Developing countries are in general countries which have not achieved a significant degree of

industrialization relative to their populations, and which have, in most cases a medium to low

standard of living. There is a strong correlation between low income and high population growth.

9

The terms utilized when discussing developing countries refer to the intent and to the constructs

of those who utilize these terms. Other terms sometimes used are less developed countries

(LDCs), least economically developed countries (LEDCs), "underdeveloped nations" or Third

World nations, and "non-industrialized nations". Conversely, the opposite end of the spectrum is

termed developed countries, most economically developed countries (MEDCs), First World

nations and "industrialized nations".

To moderate the euphemistic aspect of the word developing, international organizations have

started to use the term Less economically developed country (LEDCs) for the poorest nations

which can in no sense be regarded as developing. That is, LEDCs are the poorest subset of

LDCs. This may moderate against a belief that the standard of living across the entire developing

world is the same.

The concept of the developing nation is found, under one term or another, in numerous

theoretical systems having diverse orientations — for example, theories of decolonization,

liberation theology, Marxism, anti-imperialism, and political economy.

Third World Countries in Terms of Poverty: world´s most impoverished countries

The least developed countries (LDCs) are a group of countries that have been identified by the United Nations as "least developed" following three criteria for the identification of the LDC-

1. A low-income estimate of the gross national income (GNI) per capita.

2. Weak human assets and

3. High degree of economic vulnerability.

There are 50 countries listed in the United Nations comparative analysis of poverty,34 African countries, 10 Asian countries, 5 Pacific Island Nations and one Caribbean nation.

10

List of Least Developed Countries (LDCs)

     

Africa      

Angola Benin Burkina Faso Burundi

Cape Verde Central African Republic Chad Comoros

Congo, Dem. Rep. of the Djibouti Equatorial Guinea Eritrea

Ethiopia Gambia Guinea Guinea-Bissau

Lesotho Liberia Madagascar Malawi

Mali Mauritania Mozambique Niger

Rwanda Sao Tome and Principe Senegal Sierra Leone

Somalia Sudan Tanzania Togo

Uganda Zambia    

       

Asia      

Afghanistan Bangladesh Bhutan Cambodia

Lao PDR Maldives Myanmar Nepal

Timor-Leste Yemen    

     

Australia and the Pacific      

Kiribati Samoa Solomon Islands Tuvalu

Vanuatu      

       

Caribbean    

Haiti      

Definition of ‘Least Developed Countries’

The term "Least Developed Countries (LDCs)" describes the world's poorest countries

with following 3 criteria:

   

Low-income criterion

based on a three-year average estimate of the gross national income (GNI) per capita (under

$750 for inclusion, above $900 for graduation)

11

Human resource weakness criterion

involving a composite Human Assets Index (HAI) based on indicators of:

(a) nutrition; (b) health; (c) education; and (d) adult literacy.

 

Economic vulnerability criterion

based on indicators of the instability of agricultural production; the instability of exports of

goods and services; the economic importance of non-traditional activities (share of

manufacturing and modern services in GDP); merchandise export concentration; and the

handicap of economic smallness.

Why Third World countries are poor

Most rich countries are in the North of the globe, and most poor countries are in the South, but

it’s not geography that causes wealth or poverty. After all, Australia and New Zealand are part of

the Southern hemisphere, and both are doing fine. You couldn’t say this of Papua New Guinea,

which is the Asian country closest to Australia and New Zealand.

A superficial view is to blame racial differences. Black Africa is the poorest and most disordered

part of the world, and Haiti, with an almost entirely black population, is the poorest country of

the Americas. But the coincidence is accidental.

What makes some countries rich, and others prone to poverty is not related to skin color or racial

factors. Many immigrants from poor nations do very well in the US and Canada (though one has

to admit that both countries are likely to make immigration easy only for the best and the

brightest of those who hail from Third World countries).

Natural Resources

It is also not the presence or lack of natural resources what makes a country rich or poor in the

long run. Japan is a country with very limited natural resources, and it has been the richest

12

country in Asia for a long time. On the other hand, it is easy to predict that some Third World

countries that currently are rich because of immense reserves of natural wealth while not being

burdened with large populations will slide back when the natural resources are depleted.

Many Causes

Why are the people of some countries doing well, in spite of the destruction brought by lost

wars, and in spite of the lack of natural resources, or an unfavorable climate? It’s wrong to

search for just one answer. There are many aspects that determine how well, or haw badly, a

country will fare economically.

Some aspects relate to the attitudes of people (and the roots of such attitudes can date back many

generations). Other aspects are just of a matter of the political system (think North and South

Korea). And I assume that in the coming world, with an ever higher degree of globalization,

providing a favorable political and social environment will become ever more relevant.

Educational systems certainly play a role. Richer countries typically have better educational

systems, and the discrepancy normally reaches back more than just a generation or two.

Furthermore, in some cultures, parents and the society put more value on education than in

others. Societies that have been influenced by Confucian teaching, from Singapore to Korea, will

likely feature more educational drill than, for example, Islamic societies.

As in protestant Christianity, societies guided by Confucian teachings will also be more likely to

regard business success as a consequence of righteousness, thus propagating an ideology that is

conducive to the accumulation of riches.

The Common Good

One aspect that determines the likelihood of economic success in a given society is the emphasis,

or lack of emphasis, that is put, psychologically and philosophically, on the common good. This

emphasis can be measured by the degree to which, emotionally or consciously, people agree that

a common good justifies restrictions on the individual, including oneself. It could also be

13

described as the degree to which the members of a society are willing to forego individual

advantages if thereby a larger advantage is secured for the community.

A cultural mentality that emphasizes self-sacrifice for the common good has played a major role

in the economic development of Japan and other East Asian nations in the second part or the

20th century.

From the perspective of the individual with advanced self-cognition, emphasizing the common

good (and therefore solidarity) sometimes makes sense, and sometimes it doesn’t. When

emphasizing the common good results in an advantage for the individual during his life time, it is

philosophically sound for the individual to act in solidarity. When such an advantage cannot be

derived during a person’s lifetime, or when such an advantage cannot be realistically expected, it

makes better philosophical sense for the individual to emphasize his own good, an not the

common good.

And please note that my activism is firmly based on the idea that there is a chance that it will

result in a society in which my own life will be better. But even though, I would only go so far in

my fight, and I would not sacrifice myself for a better world for my progeny or posterity. I would

also not expect this from those who join me in my endeavor, for ours is not a movement of

lunatics but of people with a high degree of self-cognition and a healthy mind.

Nevertheless, from the perspective of the society as a whole, is may well be better when

individual members of a society always emphasize the common good, even when it would lead

to self-destruction. It is for this anachronism that sometimes, societies based on an irrational

ideology, even a foolish religion, can be stronger, and economically stronger, than societies in

which the people have a philosophically more sound approach towards the question of when to

emphasize the common good, and when one’s individual advantage.

While lip service is paid to the common good anywhere around the globe, the degree to which

individuals are put under restrictions, or choose self-restriction, for the common good varies

from society to society, and both psychological and philosophical factors have to do with this.

14

Ethnic Homogeneity

Psychological factors depend, for example, on the ethnic fabric of a country. If a society is

ethnically homogenous to a very high degree (as are, for example, Japan and South Korea); it

will be more likely that individuals will strongly identify with the community and thus be willing

to emphasize the common good.

The opposite situation, we have in many countries of sub-Saharan Africa where the borders of

countries have been determined by how European powers had previously divided their colonies.

In a worst-case scenario, newly independent nations were made up of two major ethnic groups

who have been bitter enemies in pre-colonial times, and who then competed for dominance over

the newly independent state. Such creations have spelled humanitarian disaster in various central

African countries.

A bit luckier are countries that have just one dominant ethnic group, combined with a multitude

of smaller ethnic groups.

However, any country that is fractionated into ethnic groups that not only compete with each

other but also hate each other will make psychological identification with a common good more

difficult than a country with an ethnically homogenous population.

The lack of ethnic homogeneity, to a certain degree, explains why the economies of countries of

sub-Saharan Africa fare so poorly. Africa is by far the ethnically most fractionated continent of

the earth, and practically no country there has boundaries that match ethnic territories. The

people primarily identify with their clans, and beyond their clans, they identify with their ethnic

relatives (by and large those who speak the same language). People don’t identify with their

central governments, and not even with the organizational structures of the town they live in.

This creates an atmosphere that isn’t conducive to economic development. Hence, these

countries are poor and will likely stay poor.

In spite of the rules and restrictions, governments in African countries try to impose, the

sociopolitical and economic systems of all these countries is best classified as radically liberal. It

is so liberal that even physical violence is a tool of commerce. And because being out of power

15

often is synonymous with being repressed, a common attitude towards political change is to not

accept it if one can avoid it. Any party or politician will subscribe to democratic principles if

they help into power or preserve power. But if democratic principles favor opponents, the

principles are abandoned, not the claim to power.

On the other hand, this is an attitude shared by many a common man and many a common

woman in Third World countries. Most people in Third World countries have a good sense on

what is advantageous for them and what isn’t, and they don’t have qualms to abandon principles

or change sides when it is advantageous for them.

The above also goes a long way to explain corruption. Corruption is not just a problem of

political systems; it’s an attitude problem in countries where people are little inclined to accept

personal disadvantages for the common good, or where they are quick to take personal advantage

at the expense of the common good.

For many ethnically fractioned Third World countries, especially in Africa, an important first

step for economic development would be the creation of smaller countries along ethnic

boundaries, as this would likely allow a country’s people to better identify with a common good.

The quagmire of this path, however, is that the smaller a country, the easier it is dominated by

the military might, and the moral imperialism, of a superpower.

The trend towards smaller countries of course already exists in the Third World. Newly

established countries include Eritrea and Timor (with Somaliland a candidate in line), and civil

wars or low intensity conflicts for independence along ethnic lines are fought in many parts of

the Third World. But independence doesn’t come easy, and until it comes, if it comes, the

enormous costs of internal wars, along with a prevailing lack of identifying with a common

good, will keep many Third World countries poor.

Identification With Traditional Authorities

Countries with respected traditional authorities are in a better position. In countries like Thailand

and Japan, where old monarchies are revered, they contribute to the identification of individual

16

members of society with a common good, represented by the monarchy. By contrast, many of the

poorest countries of the world are so-called republics where there isn’t even a respected

presidency.

Yes, there are numerous other factors that determine economic success; but other factors being

equal or just comparable, the degree to which the individual members of emphasize the common

good reliably predicts how well a society will fare economically.

Road Traffic as Indicator

One can measure the degree to which, in daily life, the individual members of a society value the

common good through a simple indicator: road traffic

When a large number of participants in road traffic are willing to give way because it makes

sense for traffic flow overall, people uphold the common good versus individual advantages. The

opposite is a me-first attitude, even at red lights. Traffic chaos indicates little respect for the

common good, as well as the inability of the authorities to implement rules of the common good

against me-first traffic participants. Either way, traffic chaos indicates a decreased likelihood for

successful economic development, while countries in which road traffic discipline is observed

will usually do much better.

Traffic discipline is excellent in Northern Europe and North America, which goes hand in hand

with countries in these locations being the richest in the world. Traffic discipline is better in

Bangkok than in Manila or Jakarta, which is in line with the development progress in the

respective countries over the past decades. Traffic rules are largely ignored in much of sub-

Saharan Africa.

It does not mean that economic progress of countries depends on road traffic conditions. Road

traffic conditions are an easily observable overall indicator for the likely economic development

path of a country in the coming years. In Third World countries, the degree of observance of

traffic regulations corresponds fairly well to the economic development potential. In general, you

will find that the less the people of a country are willing to put the common good ahead of their

own personal advantage, the less a country will develop economically.

17

The ‘Development’ experiences of ‘Third World Countries’

The development experiences of Third World countries since the fifties have been staggeringly

diverse—and hence very informative. Forty years ago the developing countries looked a lot more

like each other than they do today. Take India and South Korea. By any standards, both countries

were extremely poor: India's income per capita was about $150 (in 1980 dollars) and South

Korea's was about $350. Life expectancy was about forty years and fifty years respectively. In

both countries roughly 70 percent of the people worked on the land, and farming accounted for

40 percent of national income. The two countries were so far behind the industrial world that it

seemed nearly inconceivable that either could ever attain reasonable standards of living, let alone

catch up.

If anything, India had the edge. Its savings rate was 12 percent of GNP while Korea's was only 8

percent. India had natural resources. Its size gave its industries a huge domestic market as a

platform for growth. Its former colonial masters, the British, left behind railways and other

infrastructure that were good by Third World standards. The country had a competent judiciary

and civil service, manned by a highly educated elite. Korea lacked all that. In the fifties the U.S.

government thought it so unlikely that Korea would achieve any increase in living standards at

all that its policy was to provide "sustaining aid" to stop them falling even further.

Less than forty years later—a short time in economic history—South Korea's extraordinary

success is taken for granted. By the end of the eighties, its per capita income (in the same 1980

dollars) had risen to $2,900, an increase of nearly 6 percent a year sustained over more than three

decades. None of today's rich countries, not even Japan, saw such a rapid transformation in the

deep structure of their economies. In contrast, India's income per capita grew from $150 to $230,

a rise of about 1.5 percent a year, between 1950 and 1980. India is widely regarded as a

development failure. Yet over the past few decades even India has achieved more progress than

today's rich countries did over similar periods and at comparable stages in their development.

18

This shows, first, that the setbacks the developing countries encountered in the eighties—high

interest rates, debt-servicing difficulties, falling export prices—were an aberration, and that the

currently fashionable pessimism about their future is greatly overdone. The super achievers of

East Asia (South Korea and its fellow "dragons," Singapore, Taiwan, and Hong Kong) are by no

means the only developing countries that are actually developing. Many others have also grown

at historically unprecedented rates over the past few decades. As a group, the developing

countries—134 of them, as conventionally defined, accounting for roughly three-quarters of the

world's population—have indeed been catching up with the developed countries.

The comparison between India and South Korea shows something else. It no longer makes sense

to talk of the developing countries as a homogeneous group. The East Asian dragons now have

more in common with the industrial economies than with the poorest economies in South Asia

and sub-Saharan Africa. Indeed, these subgroups of developing countries have become so

distinct that one might think they have nothing to teach each other, that because South Korea is

so different from India, its experience can hardly be relevant. That is a mistake. The diversity of

experience among today's poor and not-so-poor countries does not defeat the task of analyzing

what works and what doesn't. In fact, it is what makes the task possible.

Lessons of Experience

The hallmark of economic policy in most of the Third World since the fifties has been the

rejection of orthodox free-market economics. The countries that failed most spectacularly (India,

nearly all of sub-Saharan Africa, much of Latin America, the Soviet Union and its satellites)

were the ones that rejected the orthodoxy most fervently. Their governments claimed that for one

reason or another, free-market economics would not work for them. In contrast, the four dragons

and, more recently, countries such as Chile, Colombia, Costa Rica, Ivory Coast, Malaysia, and

Thailand have achieved growth ranging from good to remarkable by following policies based

largely on market economics.

Among the most important ideas in orthodox economics is that countries prosper through trade.

In the sixties and seventies the dragons participated in a boom in world trade. Because the

19

dragons succeeded as exporters, they had abundant foreign exchange with which to buy

investment goods from abroad. Unlike most other developing countries, the dragons had price

systems that worked fairly well. So they invested in the right things, in ways that reflected their

comparative advantage in cheap, unskilled labor.

Some economists still dismiss the dragons as special cases, but for reasons I find specious. They

argue that Hong Kong and Singapore are small (hitherto smallness had been regarded as a

disadvantage in development); that they are former colonies with traditions of excellence in

public administration (like India and many others); that they have been generously provided with

foreign capital (like Latin America). These economists also argue that Taiwan and South Korea

received generous foreign aid (like many other developing countries), and have even argued that

their lack of natural resources was an advantage. What was most unusual about these countries,

in fact, was a relatively market-friendly approach to economic policy.

The countries that failed, often guided by "experts" in the industrialized world, are the ones that

gave only a small role, if any, to private enterprise and to prices that are unregulated by

government. Government planners concentrated on broad aggregates such as investment,

consumption, and savings. Their priority was investment—the more, the better, regardless of its

quality.

Most governments also thought that their economies were inflexible and could not adjust to

changing conditions. The export earnings of developing countries were regarded as fixed, for

instance, and so was the import requirement for any given level of domestic production. The

possibilities for substituting one good for another in response to a change in price were denied or

ignored. The idea that workers respond to changes in incentives was likewise dismissed. This

assumed lack of responsiveness led the planners to believe that prices, rather than providing

signals for the allocation of resources, could serve other purposes instead. For instance, with

direct controls they could be kept low to reduce inflation, or raised here and there to gather

revenue for the government.

Taken to the limit, this "fixed-price" approach leads to regulation by input-output analysis. The

idea is to tabulate the flow of primary, intermediate, and finished goods throughout the economy,

20

on the assumption that each good requires inputs of other specific goods in fixed proportions.

When all the cells in the table have been filled in, a government needs only to decide what it

wants the economy to produce in order to know exactly what the country needs to import, good

by good.

India went in for this sort of planning in a big way. More than a few of today's leading free-

market economists have worked within India's planning system or have studied it in detail, and

intimate contact with it leads them to one inescapable conclusion: government planning of the

economy does not work. Professor Deepak Lal of London University, a leading proponent of

market economics for the Third World, mentions his experience with India's planning

commission in his book The Poverty of Development Economics. He calls the anti-market

approach favored in so many countries the "dirigiste dogma."

From Peru to Ghana

In the noncommunist world, the most striking recent example of this dogma at work is Peru.

When Alan Garcia's government came to power in the summer of 1985, Peru was already in a

bad way, thanks largely to high tariffs and other import barriers, restrictive labor-protection laws,

extensive credit rationing, high taxes, powerful trade unions, and an extraordinarily elaborate

system of regulations to control the private sector. One result was Peru's justly celebrated black

market, or "informal economy," described by Hernando de Soto in his modern classic, The Other

Path. The other result was great vulnerability to adverse economic events. The early eighties

delivered several, including a world recession, high interest rates, a drying up of external finance,

and declining commodity prices.

Garcia's policy was based, he said, on two words: control and spend. After imposing price

controls, he sharply increased public spending. The program succeeded at first. Gross domestic

product (GDP) grew 9.5 percent in 1986 and 7 percent in 1987. But by the spring of 1988

inflation was running at 1,000 percent a year; by the end of the year it was 6,000 percent. After

that, output and living standards collapsed. In 1990, the economy a wreck, Garcia was voted out

of office.

21

The dirigiste dogma has proved equally damaging in Africa. Take Ghana. When it became

independent in 1957, it was the richest country in the region, with the best-educated population.

It was the world's leading exporter of cocoa; it produced 10 percent of the world's gold; it had

diamonds, bauxite, and manganese, and a flourishing trade in mahogany. Its income per capita

was almost exactly equal to South Korea's at $490 (in 1980 dollars). By the early eighties,

however, Korea's income per capita had risen fourfold, while Ghana's had actually fallen nearly

20 percent to $400 per head. Investment slumped from 20 percent of GDP in the fifties to 2

percent by 1982, and exports dropped from more than 30 percent of GDP to 4 percent.

The country's leader at independence, Kwame Nkrumah, was a spokesman for the newly

independent Africa. He said the region needed to develop its own style of government, suited to

its special circumstances. He spent vast sums on megaprojects. As economic troubles mounted,

he nationalized companies and followed with capital repression. Under his regime capital flew

abroad, and people with skills and money did the same. The kleptocrats (government officials

who steal large amounts) ran the country into the ground. In the early eighties a new government

came to power and at last began to steer the economy along orthodox lines. Until then, Ghana

had been to Africa what Peru is to Latin America: a distillation of everything that has gone

wrong with the continent's economies.

In the Third World, where so many people live off the land, agricultural development is crucial.

Ghana provides a startling case study in how to wreck the farm sector. The means was the

agricultural marketing board—a statutory monopoly that bought farmers' crops at controlled

prices and resold them either at home or abroad. The prices paid to farmers were kept artificially

low, on the assumption that farmers ignored price signals.

Between 1963 and 1979 the price of consumer goods went up by a factor of twenty-two in

Ghana. The price of cocoa in neighboring countries went up by a factor of thirty-six. But the

price paid by the cocoa marketing board to Ghana's farmers went up just six fold. In real terms,

therefore, the returns to cocoa farmers vanished. The country's supposedly price-insensitive

farmers responded by switching to production of other crops for subsistence, and exports of

cocoa collapsed. Peru and Ghana are extreme cases, but they show in the starkest way that prices

do matter in the Third World and that rejecting market economics carries extremely high costs.

22

The essential elements of a development strategy based on orthodox economics are

macroeconomic stability, foreign trade, and strictly limited intervention in the economy. With

policies under these three headings, governments can foster enterprise and entrepreneurship, the

irreplaceable engines of capitalist growth.

The Macroeconomic Foundation

Experience shows that high and unstable inflation can harm growth. A noninflationary

macroeconomic policy is, therefore, a prerequisite for rapid development. Control of government

borrowing is the crucial element in such a policy. When public borrowing is excessive,

governments are soon obliged to finance it by printing money, and rising inflation then follows.

That is why the conventional approach to stabilization (a term that covers steps to reduce an

unsustainable trade deficit as well as anti-inflation policies) usually advocates lower public

spending and/or higher taxes. The International Monetary Fund has long made programs of this

sort a precondition for financial assistance to countries in distress.

These so-called austerity programs have aroused two sorts of controversy. First, some

economists question whether big changes in fiscal policy are really needed. In Latin America, for

example, some governments sought "heterodox" policies to reduce inflation without the

recession that the orthodox approach almost always brings on. The heterodox approach argues

that in high-inflation countries, the budget deficit is caused mainly by inflation, not the other way

round. The argument is twofold. First, because there is a lag between when people earn income

and when they must pay taxes on it, high inflation reduce real tax revenues. Second, inflation

increases the nominal interest rate (and hence the budgetary cost of servicing past government

debt).

Hence the heterodox logic: reduce inflation with direct controls on prices and incomes and a

currency reform, and the budget deficit will shrink of its own accord. This method has been tried

repeatedly in Brazil and Argentina, where brief success has generally given way to a worse mess

than at the outset, and in Israel, where the results were more encouraging. Israel shows that the

23

heterodox can work—that falling inflation does cut public borrowing. What matters is whether

the deficit that remains after the heterodox measures are in place is low enough to be

noninflationary. In practice, the remaining deficit is almost always too high, and the program

fails. Countering inflation almost always requires a dose of austerity.

The second controversy over austerity concerns the costs of this remedy. Many economists argue

that orthodox programs put too much of the burden on the poorest parts of society. To cut their

budget deficits, governments can either raise taxes or cut spending. Raising more revenue—even

if that could be done without harming incentives—is hard because of weak tax administration.

So stabilization nearly always involves cuts in public spending. If the cuts fall on food subsidies

and welfare spending, goes this argument, they hurt the most vulnerable.

This argument sounds plausible, but in many countries it is wrong. A study by Guy Pfeffermann

of the World Bank shows that the beneficiaries of social spending in the developing countries are

not the poor. First, more public spending of any sort means more public employment.

Bureaucracies in developing countries do not give many jobs to the landless rural poor, to small

street traders, to unskilled manual workers, or to the urban unemployed. They recruit from the

middle classes, who are, therefore, the first to benefit from public spending.

They often are the second and third to benefit as well. In some countries subsidies have

amounted to more than 10 percent of GDP. These mainly go toward making electricity, gasoline,

housing, and credit artificially cheaper for consumers. Quite apart from the massive

microeconomic damage that these price distortions cause, such subsidies do not reach the poor.

Many of the poor do not live in houses, which greatly reduces their need for electricity, and most

do not own cars. (Gasoline subsidies alone in Ecuador and Venezuela have been equivalent to

several percentage points of GDP.) Although some of the poor would benefit from credit,

subsidized credit is not aimed at them and makes the unsubsidized kind harder to get and a lot

more expensive. Spending on education is also, as a rule, heavily biased toward the middle

classes. In some developing countries, spending per capita on university education exceeds

spending per capita on primary education by a factor of thirty. Many of the poor lack access to

the most basic primary education, while the universities remain the publicly funded preserve of

the middle class. And in most developing countries the coverage of heavily subsidized social

24

security systems is strongly skewed against the poor. In Brazil in 1984, only 8 percent of workers

in the poorest broad sector of the economy (farming) were covered by a social security system.

Nearly 80 percent of workers in the most prosperous sector (transport and communications) were

covered.

By and large, the scope for cutting public spending in developing countries without hurting the

poor is more than enough for stabilization to succeed. In some cases (subsidized credit, for

example) a reduction in public spending would actually help the poor directly, even before the

broader benefits of macroeconomic stability began to flow back. Admittedly, this is not much

help in political terms. It is easy to neglect the poor. That is precisely why this vast system of

subsidies does not help them. But the middle classes can shout loudly when the economic

distortions that help them are taken away. So the political barriers to getting economic policy

right are formidable.

The Gains from Trade

For its World Development Report in 1987, the World Bank classified forty-one developing

countries according to their openness to trade since the sixties. It classed economies as either

inward looking (exports were discouraged) or outward looking (exports were not discouraged),

with a further division according to the strength of any trade bias. The World Bank then plotted

these groups against a variety of economic indicators.

Growth in income per capita was highest in the strongly outward-looking economies and lowest

in the strongly inward-looking ones. The same was true for growth in total GDP and in value

added in manufacturing, and for the standard measure of the efficiency of investment. On all

these criteria the moderately outward-looking countries also outperformed inward-looking

economies, although by a smaller margin. The failure of a strong inward orientation to promote

domestic manufacturing—not just exports of manufactures—is particularly striking. The whole

point of looking inward had been to industrialize faster.

25

The three strongly outward-oriented countries in the World Bank's report were Hong Kong,

Singapore, and South Korea. Taiwan would have been the fourth if it had been included in the

sample, and would have reinforced the message. The four dragons, however, have been more

diverse in their policies than is usually assumed. Hong Kong's outward orientation is due to

unalloyed free trade. The other three have been interventionist to varying degrees, using export

incentives to offset the export-discouraging effects of domestic protection.

South Korea, by some measures the most interventionist dragon, is often cited as proof that

intelligent dirigiste, rather than a broadly outward-looking trade policy, is the key to rapid

development. This judgment is often based on the false premise that Korea has protected its

domestic producers as much as if not more than the inward lookers have protected theirs, with

the difference that it has then piled on a lot of incentives for exporters. This is incorrect. In

reality, South Korea has had a moderate and declining degree of domestic protection with just

enough export promotion to achieve broad neutrality in trade incentives.

Korea's growth surge began in the mid-sixties. Policy began to change in the late fifties. At that

time Korea's government placed quantitative restrictions on almost all imports, but the

restrictions were looser than in many other developing countries. The government began to

provide export incentives to offset its protection for producers of import substitutes. At first this

failed to work, perhaps because the currency was overvalued, leaving too great a bias against

exports. In the early sixties the government dismantled its multiple exchange-rate system,

devalued the currency, and (because devaluation helped exporters) reduced its export subsidies.

These liberalizing reforms were the turning point. Exports began to grow rapidly.

In 1967 the government reformed its import control system, greatly reducing the number of

imports subject to quotas and began to reduce its tariffs. So as the miracle proceeded in the late

sixties and seventies, the background was not just outward orientation (domestic protection

offset by export promotion), but a low average level of domestic protection, with relatively little

variation in the rates of protection from one sector to another. Toward the end of the seventies,

when Korea did increase its support for heavy industry, the economy began to run into trouble.

Policymakers acknowledged their mistake and moved back toward liberalization.

26

The clear consensus among mainstream economists is that outward-looking trade policies are

one of the keys to development. But why? The answer from orthodox economics is that trade

allows countries to exploit their comparative advantage. Trade enables a country to consume a

mix of goods that is different from the mix it produces—with prices in world markets acting as

the mediator between the two. Conventional theory proves that trade, as a result, makes both

partners unambiguously better off. So long as import barriers and other policies do not drive

domestic prices too far away from world prices, market forces are enough to push production and

consumption in the right direction. But trade does more than bring about the right mix of

products. It also eliminates the inefficiencies in production caused by protection.

Protection may make some domestic producers monopolists or near monopolists, thus

introducing an inefficiency directly (because monopolists exploit their market strength by

producing less and charging more) and indirectly (because, lacking competition, they have no

incentive to keep costs low).

Two of the world's top trade specialists, Professors Jagdish Bhagwati of Columbia University

and Anne Krueger of Duke University, have emphasized yet another source of inefficiency

pervasive in developing and industrial countries alike: "rent-seeking," or more generally,

"directly unproductive profit-seeking." These springs from the efforts of business are to exploit

or evade the distortions caused by protection. For instance, import licensing may drive a wedge

between the official price of an intermediate good and the price that a domestic producer is

willing to pay.

This "rent" is a potential source of profit for somebody. Resources will be spent in trying to

corner the market in licenses, or in bribing the bureaucrats who decide which firms will get them,

or in lobbying governments to alter the pattern of protection in ways that favor the lobbyists.

Worst of all, resources will be spent in trying to win an increase in the overall level of protection.

A study of Turkey (see Grais et al.) found that the costs of rent-seeking in the late seventies were

between 5 percent and 10 percent of GDP. Because the study made no allowance for the effect of

protection on domestic monopoly power, this is an under-estimate of the cost. A study by Joel

Bergsman, which did take monopoly effects into account, found that the annual costs of

protection were 7 percent of GDP in Brazil, 3 percent in Mexico, 6 percent in Pakistan, and 4

27

percent in the Philippines. Such results speak for themselves. The evidence shows that trade

works; orthodox theory shows why.

Where to Intervene

It is often argued that all the dragons (except Hong Kong) have had highly interventionist

governments. Even on the assumption that these interventions, by luck or judgment, left the

economies with outward-looking trade regimes, this poses a question. Might their success be due

to nothing more profound than the fact that good intervention is better than bad? It is not the

extent of intervention that matters, the argument goes, but the skill with which it is done.

It is true that these countries, especially South Korea, have had interventionist governments. This

they have in common with almost all developing countries. The difference is not only that they

pursued an outward-looking approach to trade (broad lesson number one), but also that this

approach molded the forms of intervention they undertook in the domestic economy (broad

lesson number two). The net effect (broad lesson number three) was to leave the price system

largely intact as a signaling device for the private sector.

More generally, an outward-looking approach to trade does not require laissez-faire (though

laissez-faire does require an outward-looking approach to trade). The state has a vital role in

development. Paradoxically, however, most of the Third World's highly interventionist

governments neglect this role because they are too busy doing things they should not.

Government has several vital jobs to do and no spare resources to waste on other things. The cost

of an effective legal system, for instance, is public money well spent. This means countries need

rules that define property rights, contracts, liability, bankruptcy, and so on (which most

developing countries already have). It also means enforcing those rules effectively (which fewer

manage to do). Spending on physical and social infrastructure is essential, for there are good

(orthodox) reasons to think that the private sector will provide too little. Numerous studies have

shown that the economic returns to spending on primary education, especially for girls, are

extremely high. Governments need to do more in such areas, not less, though none of these tasks

requires the government to be a monopolist.

28

Governments have done too little in the areas where they can do some good because they have

spread themselves too thin and been far too ambitious in areas where intervention is, at best,

unnecessary. Instead of building roads, schools, and village health centers, Third World

governments have built prestigious airports, universities, and big-city hospitals. Instead of letting

businesses compete, they have created state-run industries and sheltered their extraordinary

inefficiencies from foreign and domestic competition.

Advocates of state intervention often claim to be realists. Markets are not perfect, they say, so

governments have to step in, especially in developing countries. They are right up to a point. The

price system never works perfectly, least of all in developing countries. But it is important to be

realistic about governments, too. The past forty years of development experience have shown

that no resource is in scarcer supply than good government, and that nothing market forces could

devise has done as much harm in the Third World as bad government.

Two Myths

A common argument is that many developing countries will be condemned to economic

stagnation, regardless of the economic policies their governments pursue, by two factors beyond

their control: their insupportable debts and their lack of home-grown entrepreneurs. Both ideas

are wrong.

First, consider debt. The costs of the debt crisis of the eighties have indeed been great. At the

margin, foreign capital matters a lot—not just in quantitative terms, but because of the foreign

expertise that often comes with it. But the problem of debt, serious though it is, is by no means

an insuperable obstacle to growth in the Third World. Even in good times, foreign capital has

financed only a small part of the investment undertaken in developing countries. Debt needs to

be kept in perspective.

In its World Development Report 1989, the World Bank compiled data on financial balances for

a sample of fourteen developing countries (some now "highly indebted," others not) for which

sufficiently detailed data were available. The figures suggest that the biggest source of capital, by

far, in these economies during the seventies and eighties was household saving. This was

equivalent, on average, to 13 percent of GDP in the countries in the sample. Businesses saved 9

29

percent of GDP. The domestic supply of capital—the sum of household saving and business

saving—was 22 percent of GDP, while the inflow of foreign capital was only 2 percent of GDP.

After the debt myth comes the myth of the missing (especially African) entrepreneur. The idea

that the Third World lacks the spirit of enterprise is laughable. Peasant farmers who switch to

another crop in response to a change in their government's marketing arrangements are

entrepreneurs. So are the unregistered taxi and minibus operators who keep most Third World

cities moving. So are street vendors, perambulating water vendors, money changers, and

informal credit brokers. So are the growers of illegal crops such as coca, who in many countries

are denied the opportunity of making a decent living by legal means. So are the smugglers of just

about anything that do such a roaring trade across Africa's borders, profiting from the massive

price distortions that government policies create.

Entrepreneurship admittedly is partly a matter of skills—in choice of technique, in management,

in finance, in the ability to read the label on a bag of fertilizer. Skills have to be learned, and in

many developing countries they are in short supply. But this supply is not fixed. The success of

the green revolution in India and elsewhere shows that farmers are willing to learn new skills

when they can see an advantage in doing so. (The green revolution involved the introduction of

high-yielding crop varieties that required different methods and more sophisticated inputs such

as fertilizer and an assured water supply.)

To see what entrepreneurship in the Third World can achieve, consider the flowering of the

garment export business in Bangladesh, one of the poorest countries in the world. This started

with a collaboration between Noorul Quader, a bureaucrat-turned-entrepreneur, and the Daewoo

Company of South Korea. Quader's new company, Desh, agreed to buy sewing machines from

Daewoo and send workers to be trained in South Korea. Once Desh's factory started up, Daewoo

would advise on production and handle the marketing in return for royalties of 8 percent of sales.

Daewoo did not lend to Desh or take any stake in the business. But it showed Desh how to

design a bonded warehouse system, which the government agreed to authorize. This was crucial.

In effect, it made garment exporting a special economic zone—an island of free trade within a

highly protected economy.

30

At the end of 1979, Desh's 130 trainees returned from South Korea with three Daewoo engineers

to install the machines. Garment production began in April 1980 with 450 machines and 500

workers. In 1980 the company produced 43,000 shirts with a value of $56,000. By 1987 sales

had risen to 2.3 million shirts and a value of $5.3 million—a growth rate of 92 percent a year.

Desh did so well that it canceled its collaboration agreement with Daewoo in June 1981, just

eighteen months after the startup. It began to do its own marketing and bought its raw materials

from other suppliers. It achieved most of its success on its own. Also, the company has suffered

heavy defections of its Daewoo-trained staff. Of the initial batch of 130 who visited South Korea

in 1980, 115 had left the company by 1987—to start their own garment-exporting businesses.

From nothing in 1979, Bangladesh had seven hundred garment-export factories by 1985. They

belonged to Desh, to Desh's graduates, or to others following their example.

There is no lack of entrepreneurship in the Third World. To release this huge potential,

governments first need to do much less. Above all, they must stop trying to micromanage the

process of industrialization, whether through trade policy, industrial licensing, or direct control

of state-owned enterprises. But they also need to do more. They must strive to keep public

borrowing and inflation in check, while investing adequately in physical and nonphysical

infrastructure.

In the early nineties, spurred by the collapse of the socialist model in Eastern Europe, a growing

number of developing countries are trying to reorder their economic priorities in this way. If they

persevere, the coming decades will be a time of unprecedented advance in the developing world.

31

Multinational Corporations in the Third World:

Predators or Allies in Economic Development

Multinational corporations (MNCs) engage in very useful and morally defensible activities in

Third World countries for which they frequently have received little credit. Significant among

these activities are their extension of opportunities for earning higher incomes as well as the

consumption of improved quality goods and services to people in poorer regions of the world.

Instead, these firms have been misrepresented by ugly or fearful images by Marxists and

“dependency theory” advocates. Because many of these firms originate in the industrialized

countries, including the U.S., the U.K., Canada, Germany, France, and Italy, they have been

viewed as instruments for the imposition of Western cultural values on Third World countries,

rather than allies in their economic development. Thus, some proponents of these views urge the

expulsion of these firms, while others less hostile have argued for their close supervision or

regulation by Third World governments.

Incidents such as the improper use in the Third World of baby milk formula manufactured by

Nestle, the gas leak from a Union Carbide plant in Bhopal, India, and the alleged involvement of

foreign firms in the overthrow of President Allende of Chile have been used to perpetuate the

ugly image of MNCs. The fact that some MNCs command assets worth more than the national

income of their host countries also reinforces their fearful image. And indeed, there is evidence

that some MNCs have paid bribes to government officials in order to get around obstacles

erected against profitable operations of their enterprises.

Several governments, especially in Latin America and Africa, have been receptive to the

negative images and have adopted hostile policies towards MNCs. However, a careful

examination of the nature of MNCs and their operations in the Third World reveals a positive

image of them, especially as the allies in the development process of these countries. For the

greater well-being of the majority of the world’s poor who live in the Third World, it is

important that the positive contributions of these firms to their economies become more widely

known. Even as MNCs may be motivated primarily by profits to invest in the Third World, the

32

morality of their activities in improving the material lives of many in these countries should not

be obscured through misperceptions.

The first point to recognize about MNCs is that, besides operating under more than one

sovereign jurisdiction, they are in nature very similar to local or non-multinational firms

producing in more than one state or plant. We may call such multi-plant firms uninational

corporations (UNCs). Thus, a UNC with branch plants in Alaska as well as some other parts of

the U. S. would have been known as an MNC had Alaska continued to be a non-U.S. territory.

Indeed, the experience of European countries soon to become more unified economically or the

former Soviet Union now breaking up into several sovereign or quasi-sovereign states should

impress us of the fact that the United States or Canada easily could have been several

independent countries, and some present UNCs would have been MNCs.

Like UNCs, MNCs are owned by shareholders who expect annual returns or dividends in

compensation for funds they make available for the firm’s production and sales activities. It is to

enable MNCs to pay such dividends that their managers seek out the most efficient workers for

the wages they pay, buy materials at the cheapest costs possible, seek to produce in countries

levying the lowest profit taxes, and sell in markets where they can earn the highest revenues after

costs. (This is no different from anyone seeking employment at the highest wage for the least

amount of tedium, the most congenial work environment and location, and the highest

employment benefits.) Perhaps the main difference between uni national and multinational

corporations is that the latter have been more successful than the former, and as a result have

expanded their activities to many more regions and sovereign states.

Many do recognize UNCs or local firms as helpful agents in the development of the communities

in which they operate. Primary in this recognition is the employment they create and the (higher)

incomes earned because of their having established in the region. These firms also rent buildings

and land, or sometimes buy them, thus generating higher incomes for their owners. For example,

in the absence of the present Japanese owners having bid for the Rockefeller Center in New

York, the price its American owners would have gotten for it would have been lower. The same

applies to the income prospects of owners of the Seattle Mariners should the sale of this club to

the Japanese buyers go through. It is precisely in similar ways that MNCs enrich labor and other

33

resource owners in the Third World. In their absence, the people would have had fewer or much

lower paying jobs, and the demand for land and other local resources would have been lower.

Without the operators of such hotels as the Holiday Inn, the Sheraton, the Hyatt, Four Seasons,

and the Hilton having leased or bought beach-front properties in several of the popular tourist

resorts in the Third World, their owners (individuals or government) might have received much

less for their sale. Such purchases also release the capital of resource owners for investment in

other enterprises.

Some of those who recognize little positive contributions from MNCs to the economics

development of the Third World countries might, however, acknowledge that these firms pay

higher wages to local employees than they typically would receive elsewhere, and higher rents

for land and buildings. But they often argue that the wages in Third World countries are lower

than those paid by MNCs in the more developed countries, and the working conditions are not of

the same standard. However, the comparison misses several key points. For example, the skill or

educational levels of workers in the Third World and those of the more developed countries are

not the same. The amount of machinery and equipment handled by workers in the two locations

are also different. In short, the amount of output generated by a worker in the Third World is

typically smaller than that produced in the more developed world. Indeed, if MNCs could hire

enough of higher skilled workers in the more developed countries at the wages workers are paid

in the Third World, they would gladly do so. They would thus earn higher profits while selling

their goods and services at lower prices. But the fact is that the voluntary exchange system in

which MNCs operate would not permit them. Besides those working for charity, few others

would for long accept wages they consider to be less than their contribution to an enterprise.

The same explanation applies to wages paid by MNCs in the Third World. Unless workers find it

most profitable to work for MNCs at the wages they offer, they would choose employment

elsewhere. Similarly, unless MNCs can make as much profit as they can at home, as well as

compensation for the additional risks taken to invest in the Third World, including the risk of

asset confiscation by a hostile future government, they would not venture into those parts of the

world. Thus, there have to be net benefits for both parties in a transaction (here workers and

multinational corporations) for the transaction to take place, and on a continuous basis.

34

It may also be worthwhile to point out that research has not confirmed the frequent assertion that

foreign firms, including MNCs, make excessive or higher profits per dollar invested than their

local counterparts. On the contrary, private local firms on average earn higher rates of profits

before taxes than foreign firms (as revealed by research in India, Brazil, Columbia, Guatemala,

Ghana, and Kenya). And the simple explanation is that many Third World governments tax the

profits of their local firms at a higher rate than they do those of foreign firms. Thus, the after-tax

rates of profit are similar for foreign and private local firms in the Third World. Furthermore,

new wealth created by any firm has to cover the wages, interest, equipment, and the rental costs

of land and buildings incurred in production before profits are paid. And much of such payments

stay within the host Third World economy.

It may also be worthwhile to point out that research has not confirmed the frequent assertion that

foreign firms, including MNCs, make excessive or higher profits per dollar invested than their

local counterparts. On the contrary, private local firms on average earn higher rates of profits

before taxes than foreign firms (as revealed by research in India, Brazil, Columbia, Guatemala,

Ghana, and Kenya). And the simple explanation is that many Third World governments tax the

profits of their local firms than they do those of foreign firms. Thus, the after-tax rates of profit

are similar for foreign and private local firms in the Third World. Furthermore, new wealth

created by any firm has to cover the wages, interest, equipment, and the rental costs of land and

buildings incurred in production before profits are paid. And much of such payments stay within

the host Third World economy.

If we withhold our paternalistic instincts towards poorer people in the Third World, we would

also respect their judgment to purchase products manufactured there by MNCs rather than accuse

the firms of selling inappropriate products to them. Being poor does not make one’s choice of

products less defensible or moral than the choices of the rich. And without sufficient demand for

the products, MNCs would not make profits from selling them in the Third World. In a free

trading regime, the same products might have been imported had they not been produced by

MNCs. There is thus no valid reason why Third World governments should require that MNCs

manufacture and sell only second- or third-rate quality products in those countries, as some

analysts from the more developed countries have suggested. Is there anything legitimate that

Third World governments can do about the activities of multinational corporations in their

35

countries? Yes; but nothing more than they legitimately and reasonably would do about local

firms, bearing in mind that excessive taxation of profits or environmental regulations reduce total

investments by both types of firms. Perhaps, MNCs may be able to offer bigger bribes than local

firms to escape restrictions imposed on them by Third World governments. If so, such

restrictions mainly work against the development of local firms. The solution ought to be a

loosening of restrictions on businesses so they may create more wealth and in the process

facilitate the development of local enterprise and lessen the incidence of corruption in

government.

Adam Smith, who was also a moral philosopher, long observed that an individual “by

directing . . . industry in such a manner as its produce may be of the greatest value, . . . intends

only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote

an end which was no part of it. By pursuing his own interest he frequently promotes that of the

society more effectually than when he really intends to promote it.”

These observations apply with equal force to the investment activities of multinational

corporations in Third World countries. And it is no accident that people in those Third World

countries whose governments have been more open to the presence of multinational corporations

have experienced significant improvements in their standard of living (e.g., Bermuda, the

Bahamas, Hong Kong, South Korea, Singapore, and Taiwan) while many in countries hostile to

these firms continue to be mired in poverty. It may not be the intent of Third World

governments, but perpetuating poverty in the name of protecting their people from alleged

exploitation by MNCs has little moral justification.

Thinking about the world economy

The idea that Third World competition threatens living standards in advanced countries seems

straightforward. Suppose that somebody has learned to do something that used to be my

exclusive specialty. Maybe he or she isn't quite as good at it as I am but is willing to work for a

fraction of my wage. Isn't it obvious that I am either going to have to accept a lower standard of

36

living or be out of a job? That, in essence, is the view of those who fear that Western wage rates

must fall as the Third World develops.

But this story is completely misleading. When world productivity rises (as it does when Third

World countries converge on First World productivity), average world living standards must

rise: after all, the extra output must go somewhere. This by itself presumes that higher Third

World productivity will be reflected in higher Third World wages, not lower First World

incomes.

Another way to look at it is to notice that in a national economy, producers and consumers are

the same people; foreign competitors who cut prices may lower the wage I receive, but they also

raise the purchasing power of whatever I earn. There is no reason to expect the adverse effect to

predominate.

The world economy is a system -- a complex web of feedback relationships -- not a simple chain

of one-way effects. In this global economic system, wages, prices, trade, and investment flows

are outcomes, not givens. Intuitively plausible scenarios based on day-to-day business

experience can be deeply misleading about what happens to this system when underlying

parameters change, whether the parameters are government policies like tariffs and taxes or more

mysterious factors like the productivity of Chinese labor.

As anyone knows who has studied a complex system, be it global weather, Los Angeles traffic

patterns, or the flow of materials through a manufacturing process, it is necessary to build a

model to understand how the system works. The usual procedure is to start with a very simplified

model and then make it increasingly realistic; in the process, one comes to a more sophisticated

understanding of the actual system.

In this article, I will follow that procedure to think about the impact of emerging economies on

wages and jobs in the advanced world. I will start with an oversimplified and unrealistic picture

of the world economy and then gradually add realistic complications. At each stage, I will also

bring in some data. By the end, I hope to have made clear that the seemingly sophisticated view

that the Third World is causing First World problems is questionable on conceptual grounds and

wholly implausible in terms of the data.

37

Model 1: A One-Good, One-Input World

Imagine a world without the complexities of the global economy. In this world, one all-purpose

good is produced -- let's call it chips -- using one input, labor. All countries produce chips, but

labor is more productive in some countries than in others. In imagining such a world, we ignore

two crucial facts about the actual global economy: it produces hundreds of thousands of distinct

goods and services, and it does so using many inputs, including physical capital and the "human

capital" that result from education.

What would determine wages and standards of living in such a simplified world? In the absence

of capital or differentiation between skilled and unskilled labor, workers would receive what they

produce. That is, the annual real wage in terms of chips in each country would equal the number

of chips each worker produced in a year -- his or her productivity. And since chips are the only

good consumed as well as the only good produced, the consumer price index would contain

nothing but chips. Each country's real wage rate in terms of its CPI would also equal the

productivity of labor in each country.

What about relative wages? The possibility of arbitrage, of shipping goods to wherever they

command the highest price, would keep chip prices the same in all countries. Thus the wage rate

of workers who produce 10,000 chips annually would be ten times that of workers who produce

1,000, even if those workers are in different countries. The ratio of any two nations' wage rates,

then, would equal the ratio of their workers' productivity.

What would happen if countries that previously had low productivity and thus low wages were to

experience a large increase in their productivity? These emerging economies would see their

wage rates in terms of chips rise -- end of story. There would be no impact, positive or negative,

on real wage rates in other, initially higher-wage countries. In each country, the real wage rate

equals domestic productivity in terms of chips; that remains true, regardless of what happens

elsewhere.

What's wrong with this model? It's ridiculously oversimplified, but in what ways might the

simplification mislead us? One immediate problem with the model is that it leaves no room for

38

international trade: if everyone is producing chips, there is no reason to import or export them.

This issue does not seem to bother such competitiveness theorists as Lester Thurow. The central

proposition of Thurow's Head to Head is that because the advanced nations produce the same

things, the benign niche competition of the past has given way to win those head-to-head

competitions. But if the advanced nations are producing the same things, why do they sell so

much to one another?

While the fact that countries do trade with one another means that our simplified model cannot

be literally true, this model does raise the question of how extensive the trade actually is between

advanced nations and the Third World. It turns out to be surprisingly small despite the emphasis

on Third World trade in such documents as the Delors white paper. In 1990, advanced industrial

nations spent only 1.2% of their combined GDPs on imports of manufactured goods from newly

industrializing economies. A model in which advanced countries have no reason to trade with

low-wage countries is obviously not completely accurate, but it is more than 98% right all the

same.

Another problem with the model is that without capital, there can be no international investment.

We'll come back to that point when we put capital into the model. It's worth noting, however,

that in the U.S. economy, more than 70% of national income accrues to labor and less than 30%

to capital; this proportion has been very stable for the past two decades. Labor is clearly not the

only input in the production of goods, but the assertion that the average real wage rate moves

almost one for one with output per worker, that what is good for the United States is good for

U.S. workers and vice versa, seems approximately correct.

One last assertion that may bother some readers is that wages automatically rise with

productivity. Is this realistic? Yes. Economic history offers no example of a country that

experienced long-term productivity growth without a roughly equal rise in real wages. In the

1950s, when European productivity was typically less than half of U.S. productivity, so were

European wages; today average compensation measured in dollars is about the same. As Japan

climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of

the U.S. level. South Korea's wages have also risen dramatically over time. Indeed, many Korean

economists worry that wages may have risen too much. Korean labor now seems too expensive

39

to compete in low-technology goods with newcomers like China and Indonesia and too

expensive to compensate for low productivity and product quality in such industries as autos.

The idea that somehow the old rules no longer apply, that new entrants on the world economic

stage will always pay low wages even as their productivity rises to advanced-country levels, has

no basis in actual experience. (Some economic writers try to refute this proposition by pointing

to particular industries in which relative wages don't match relative productivity. For example,

shirtmakers in Bangladesh, who are almost half as productive as shirtmakers in the United States,

receive far less than half the U.S. wage rate. But as we'll see when we turn to a multigood model,

that is exactly what standard economic theory predicts.)

Our one-good, one-input model may seem silly, but it forces us to notice two crucial points.

First, an increase in Third World labor productivity means an increase in world output, and an

increase in world output must show up as an increase in somebody's income. And it does: it

shows up in higher wages for Third World workers. Second, whatever we may eventually

conclude about the impact of higher Third World productivity on First World economies, it won't

necessarily be adverse. The simplest model suggests that there is no impact at all.

Model 2: Many Goods, One Input

In the real world, of course, countries specialize in the production of a limited range of goods;

international trade is both the cause and the result of that specialization. In particular, the trade in

manufactured goods between the First and Third worlds is largely an exchange of sophisticated

high-technology products like aircraft and microprocessors for labor-intensive goods like

clothing. In a world in which countries produce different goods, productivity gains in one part of

the world may either help or hurt the rest of the world.

This is by no means a new subject. Between the end of World War II and the Korean War, many

nations experienced a series of balance-of-payments difficulties, which led to the perception of a

global "dollar shortage." At the time, many Europeans believed that their real problem was the

overwhelming competitiveness of the highly productive U.S. economy. But was the U.S.

40

economy really damaging the rest of the world? More generally, does productivity growth in one

country raise or lower real incomes in other countries? An extensive body of theoretical and

empirical work concluded that the impact of productivity growth abroad on domestic welfare can

be either positive or negative, depending on the bias of that productivity growth -- that is,

depending on the sectors in which such growth occurs.

Sir W. Arthur Lewis, who won the 1979 Nobel Prize in economics for his work on economic

development, has offered a clever illustration of how the effect of productivity growth in

developing countries on the real wages in advanced nations can work either way. In Lewis's

model, the world is divided into two regions, call them North and South. This global economy

produces not one but three types of goods: high-tech, medium-tech, and low-tech. As in our first

model, however, labor is still the only input into production. Northern labor is more productive

than Southern labor in all three types of goods, but that productivity advantage is huge in high-

tech, moderate in medium-tech, and small in low-tech.

What will be the pattern of wages and production in such a world? A likely outcome is that high-

tech goods will be produced only in the North, low-tech goods only in the South, and both

regions will produce at least some medium-tech goods. (If world demand for high-tech products

is very high, the North may produce only those goods; if demand for low-tech products is high,

the South may also specialize. But there will be a wide range of cases in which both regions

produce medium-tech goods.)

Competition will ensure that the ratio of the wage rate in the North to that in the South will equal

the ratio of Northern to Southern productivity in the sector in which workers in the two regions

face each other head-to-head: medium-tech. In this case, Northern workers will not be

competitive in low-tech goods in spite of their higher productivity because their wage rates are

too high. Conversely, low Southern wage rates are not enough to compensate for low

productivity in high-tech.

A numerical example may be helpful here. Suppose that Northern labor is ten times as

productive as Southern labor in high-tech, five times as productive in medium-tech, but only

twice as productive in low-tech. If both countries produce medium-tech goods, the Northern

41

wage must be five times higher than the Southern. Given this wage ratio, labor costs in the South

for low-tech goods will be only two-fifths of labor costs in the North for this sector, even though

Northern labor is more productive. In high-tech goods, by contrast, labor costs will be twice as

high in the South.

Notice that in this example, Southern low-tech workers receive only one-fifth the Northern wage,

even though they are half as productive as Northern workers in the same industry. Many people,

including those who call themselves experts on international trade, believe that kind of gap

shows that conventional economic models don't apply. In fact, it's exactly what conventional

analysis predicts: if low-wage countries didn't have lower unit labor costs than high-wage

countries in their export industries, they couldn't export.

Now suppose that there is an increase in Southern productivity. What effect will it have? It

depends on which sector experiences the productivity gain. If the productivity increase occurs in

low-tech output, a sector that does not compete with Northern labor, there is no reason to expect

the ratio of Northern to Southern wages to change. Southern labor will produce low-tech goods

more cheaply, and the fall in the price of those goods will raise real wages in the North. But if

Southern productivity rises in the competitive medium-tech sector, relative Southern wages will

rise. Since productivity has not risen in low-tech production, low-tech prices will rise and reduce

real wages in the North.

What happens if Southern productivity rises at equal rates in low- and medium-tech? The relative

wage rate will rise but will be offset by the productivity increase. The prices of low-tech goods in

terms of Northern labor will not change, and thus the real wages of Northern workers will not

change either. In other words, an across-the-board productivity increase in the South in this

multigood model has the same effect on Northern living standards as productivity growth had in

the one-good model: none at all.

It seems, then, that the effect of Third World growth on the First World, which was negligible in

our simplest model, becomes unpredictable once we make the model more realistic. There are,

however, two points worth noting.

42

First, the way in which growth in the Third World can hurt the First World is very different from

the way it is described in the Schwab letter or the Delores White Paper. Third World growth does

not hurt the First World because wages in the Third World stay low but because they rise and

therefore push up the prices of exports to advanced countries. That is, the United States may be

threatened when South Korea gets better at producing automobiles, not because the United States

loses the automobile market but because higher South Korean wages mean that U.S. consumers

pay more for the pajamas and toys that they were already buying from South Korea.

Second, this potential adverse effect should show up in a readily measured economic statistic:

the terms of trade, or the ratio of export to import prices. For example, if U.S. companies are

forced to sell goods more cheaply on world markets because of foreign competition or are forced

to pay more for imports because of competition for raw materials or a devalued dollar, real

income in the United States will fall. Because exports and imports are about 10% of GNP, each

10% decline in the U.S. terms of trade reduces U.S. real income by about 1%. The potential

damage to advanced economies from Third World growth rests on the possibility of a decline in

advanced-country terms of trade. But that hasn't happened. Between 1982 and 1992, the terms of

trade of the developed market economies actually improved by 12%, largely as a result of falling

real oil prices.

In sum, a multigood model offers more possibilities than the simple one-good model with which

we began, but it leads to the same conclusion: productivity growth in the Third World leads to

higher wages in the Third World.

Model 3: Capital and International Investment

Let's move a step closer to reality and add another input to our model. What changes if we now

imagine a world in which production requires both capital and labor? From a global point of

view, there is one big difference between labor and capital: the degree of international mobility.

Although large-scale international migration was a major force in the world economy before

1920, since then all advanced countries have erected high legal barriers to economically

43

motivated immigration. There is a limited flow of very highly skilled people from South to North

-- the notorious "brain drain" -- and a somewhat larger flow of illegal migration. But most labor

does not move internationally.

In contrast, international investment is a highly visible and growing influence on the world

economy. During the late 1970s, many banks in advanced countries lent large sums of money to

Third World countries. This flow dried up in the 1980s, the decade of the debt crisis, but

considerable capital flows resumed with the emerging-markets boom that began after 1990.

Many of the fears about Third World growth seem to focus on capital flows rather than trade.

Schwab's fear that there will be a "massive redeployment of production assets" presumably refers

to investment in the Third World. The famous estimate by the Economic Policy Institute that

NAFTA would cost 500,000 U.S. jobs was based on a completely hypothetical scenario about

diversion of U.S. investment. Even Labor Secretary Robert Reich, at the March 1994 job summit

in Detroit, attributed the employment problems of Western economies to the mobility of capital.

In effect, he seemed to be asserting that First World capital now creates only Third World jobs.

Are those fears justified?

The short answer is yes in principle but no in practice. As a matter of standard textbook theory,

international flows of capital from North to South could lower Northern wages. The actual flows

that have taken place since 1990, however, are far too small to have the devastating impacts that

many people envision.

To understand how international investment flows could pose problems for advanced-country

labor, we must first realize that the productivity of labor depends in part on how much capital it

has to work with. As an empirical matter, the share of labor in domestic output is very stable. But

if labor has less capital at its disposal, productivity and thus real wage rates will fall.

Suppose, then, that Third World nations become more attractive than First World nations for

First World investors. This might be because a change in political conditions makes such

investments seem safer or because technology transfer raises the potential productivity of Third

World workers (once they are equipped with adequate capital). Does this hurt First World

44

workers? Capital exported to the Third World is capital not invested at home, so such North-

South investment means that Northern productivity and wages will fall. Northern investors

presumably earn a higher return on these investments than they could have earned at home, but

that may offer little comfort to workers.

Before we jump to the conclusion that the development of the Third World has come at First

World expense, however, we must ask not merely whether economic damage arises in principle

but how large it is in practice.

How much capital has been exported from advanced countries to developing countries? During

the 1980s, there was essentially no net North South investment -- indeed, interest payments and

debt repayments were consistently larger than the new investment. All the action, then, has taken

place since 1990. In 1993, the peak year of emerging-markets investment so far, capital flows

from all advanced nations to all newly industrializing countries totaled about $ 100 billion.

That may sound very high, but compared with the First World economy, it isn't. Last year, the

combined GNPs of North America, Western Europe, and Japan totaled more than $ 18 trillion.

Their combined investment was more than $ 3.5 trillion; their combined capital stocks were

about $ 60 trillion. The record capital flows of 1993 diverted only about 3% of First World

investment away from domestic use and reduced the growth in the capital stock by less than

0.2%. The entire emerging-market investment boom since 1990 has reduced the advanced

world's capital stock by only about .5% from what it would otherwise have been.

How much pressure has this placed on wages in advanced countries? A reduction of the capital

stock by 1% reduces productivity by less than 1%, since capital is only one input; standard

estimates put the number at about 0.3%. A back-of-the-envelope calculation therefore suggests

that capital flows to the Third World since 1990 (and bear in mind that there was essentially no

capital flow during the 1980s) have reduced real wages in the advanced world by about 0.15% --

hardly the devastation that Schwab, Delores, or the Economic Policy Institute presume.

There is another way to make the same point. Anything that draws capital away from business

investment in the advanced countries tends to reduce First World wages. But investment in the

45

Third World has become considerable only in the last few years. Meanwhile, there has been a

massive diversion of savings into a purely domestic sink: the budget deficits run up by the

United States and other countries. Since 1980, the United States alone has run up more than $ 3

trillion in federal debt, more than ten times the amount invested in emerging economies by all

advanced countries combined. The export of capital to the Third World attracts a lot of attention

because it is exotic, but the amounts are minor compared with domestic budget deficits.

At this point, some readers may object that one cannot compare the two numbers. Savings

absorbed by the federal budget deficit simply disappear; savings invested abroad create factories

that make products that then compete with ours. It seems plausible that overseas investment is

more damaging than budget deficits. But that intuition is wrong: investing in Third World

countries raises their productivity, and we've seen in the first two models that higher Third

World productivity per se is unlikely to lower First World living standards.

The conventional wisdom among many policymakers and pundits is that we live in a world of

incredibly mobile capital and that such mobility changes everything. But capital isn't all that

mobile, and the capital movements we have seen so far change very little, at least for advanced

countries.

Model 4: The Distribution of Income

We seem to have concluded that growth in the Third World has almost no adverse effects on the

First World. But there is still one more issue to address: the effects of Third World growth on the

distribution of income between skilled and unskilled labor within the advanced world.

For our final model, let's add one more complication. Suppose that there are two kinds of labor,

skilled and unskilled. And suppose that the ratio of unskilled to skilled workers is much higher in

the South than in the North. In such a situation, one would expect the ratio of skilled to unskilled

wages to be lower in the North than in the South. As a result, one would expect the North to

export skill intensive goods and services - that is, employ a high ratio of skilled to unskilled labor

46

in their production, while the South exports goods whose production is intensive in unskilled

labor.

What is the effect of this trade on wages in the North? When two countries exchange skill-

intensive goods for labor-intensive goods, they indirectly trade skilled for unskilled labor; the

goods that the North ships to the South "embody" more skilled labor than the goods the North

receives in return. It is as if some of the North's skilled workers migrated to the South. Similarly,

the North's imports of labor-intensive products are like an indirect form of low-skill immigration.

Trade with the South in effect makes Northern skilled labor scarcer, raising the wage it can

command, while it makes unskilled labor effectively more abundant, reducing its wage.

Increased trade with the Third World, then, while it may have little effect on the overall level of

First World wages, should in principle lead to greater inequality in those wages, with a higher

premium for skill. Equally, there should be a tendency toward "factor price equalization," with

wages of low skilled workers in the North declining toward Southern levels.

What makes this conclusion worrisome is that income inequality has been rapidly increasing in

the United States and to a lesser extent in other advanced nations. Even if Third World exports

have not hurt the average level of wages in the First World, might they not be responsible for the

steep declines since the 1970s in real wages of unskilled workers in the United States and the

rising unemployment rates of European workers?

At this point, the preponderance of the evidence seems to be that factor price equalization has not

been a major element in the growing wage inequality in the United States, although the evidence

is more indirect and less secure than the evidence we brought to our earlier models. In essence,

trade with the Third World is just not that large. Since trade with low-wage countries is only a

little more than 1% of GDP, the net flows of labor embodied in that trade are fairly small

compared with the overall size of the labor force.

47

More careful research may lead to larger estimates of the effect of North-South trade on the

distribution of wages, or future growth in that trade may have larger effects than we have seen so

far. At this point, however, the available evidence does not support the view that trade with the

Third World is an important part of the wage inequality story.

Moreover, even to the extent that North-South trade may explain some of the growing inequality

of earnings, it has nothing to do with the disappointing performance of average wages. Before

1973, average compensation in the United States rose at an annual rate of more than 2%; since

then it has risen at a rate of only 0.3%. This decline is at the heart of our economic malaise, and

Third World exports have nothing to do with it.

The Real Threat

The view that competition from the Third World is a major problem for advanced countries is

questionable in theory and flatly rejected by the data. Why does this matter? Isn't this merely

academic quibbling? One answer is that those who talk about the dangers of competition with the

Third World certainly think that it matters; the European Commission presumably did not add its

comments about low-wage competition to its white paper simply to fill space. If policymakers

and intellectuals think it is important to emphasize the adverse effects of low-wage competition,

then it is at least equally important for economists and business leaders to tell them they are

wrong.

Ideas matter. According to recent newspaper reports, the United States and France have agreed to

place demands for international standards on wages and working conditions on the agenda at the

next GATT negotiations. U.S. officials will doubtless claim they have the interests of Third

World workers at heart. Developing countries are already warning, however, that such standards

are simply an effort to deny them access to world markets by preventing them from making use

of the only competitive advantage they have: abundant labor. The developing countries are right

this is protectionism in the guise of humanitarian concern.

48

Most worrisome of all is the prospect that disguised protectionism will eventually give way to

cruder, more open trade barriers. For example, Robert Kuttner has long argued that all world

trade should be run along the lines of the Multi-Fiber Agreement, which fixes market shares for

textile and apparel. In effect, he wants the cartelization off all world markets. Proposals like that

are still outside the range of serious policy discussion, but when respectable voices lend credence

to the wholly implausible idea that the Third World is responsible for the First World's problems,

they prepare the way for that kind of heavy-handed interference in world trade.

We are not talking about narrow economic issues. If the West throws up barriers to imports out

of a misguided belief that they will protect Western living standards, the effect could be to

destroy the most promising aspect of today's world economy: the beginning of widespread

economic development, of hopes for a decent living standard for hundreds of millions, even

billions, of human beings, Economic growth in the Third World is an opportunity, not a threat; it

is our fear of Third World success, not that success itself, that is the real danger to the world

economy.

The End of the Third World

When the billion plus people of China start importing the underwear that they are now exporting

then the low income category will be rapidly emptied, and in time the lower and upper middle

income categories. The Third World will end.

This is perhaps a pessimistic view of the future. Just as the low wage, labor intensive industries

became one engine of rapid development several decades ago, and Internet outsourcing has

recently become another engine, new engines of growth may develop. But even with the engines

we have now the Third World's days are numbered.

49

Conclusion

The future is, as always, uncertain. Nevertheless, a good deal of optimism is justified. The huge

and growing gap between rich and poor nations is likely to be temporary. It seems to be

shrinking now and we can hope that will continue.

There will need to be considerable adjustment in the First World. The increased prices for oil

which are a result of increased demand from China, India, and the Third World, illustrate the

basic point that we will have to share access to the world's resources. The First World will have

to meet the challenge of reinventing the technology of a rich society so that we can provide a

comfortable life style with fewer resources and less harm to the environment.

Furthermore, many First World industries will move to the Third World. Industrial production of

consumer goods will be concentrated in the Third World. The First World will pay for them with

capital goods which will enable the Third World to rapidly increase its productivity and achieve

First World status. In the process many First World workers will lose their jobs. The pain of

readjustment in the First World will be real, but relatively minor compared to terrible suffering

the Third World currently experiences.

Will First World countries become Third World countries? The history of many decades

suggests this is very unlikely. The richer First World countries with broad based industrial

economies tend to grow at about two percent a year. There are recessions where income per

person declines a percentage point or two. Growth can slow for a decade as it has in Japan, or

even stall altogether for about a decade as it did in Finland and Sweden. But as most broad based

industrial economies are several times as rich as the richest Third World country and really

serious economic decline, which is common in Third World natural resource exporters, is

unknown in broad based rich industrial countries there is little reason to fear First World nations

becoming Third World Nations. Of course oil rich nations and even a natural resource producer

like Argentina move up and down between high and middle income depending on the prices of

their exports. But the broad based industrial nations are unlikely to suffer any serious decline.

Once a First World nation always a First World nation.

50

Bibliography

The First World Will Soon Be the Only World, By Richard Bruce BA, MA, and PhC in

Economics

Third World, By Gerard Chaliand

Crook, Clive. "The Third World." The Economist, September 23, 1989

http://en.wikipedia.org/wiki/Least_Developed_Country

http://en.wikipedia.org/wiki/Developing_country#cite_note-WB-13

http://www.nationsonline.org/oneworld/third_world.htm#Poverty

Why Third World countries are poor ; Version 1.4, February 2010

World Development Report 1989, By the World Bank

http://www.acton.org/pub/religion-liberty/volume-2-number-5/multinational-

corporations-third-world-predators-o

(Multinational Corporations in the Third World, by James C. W. Ahiakpor)