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Economics of the Developing World
I.
Who Are the Poor?
Concentrated in Sub-Saharan
Africa, India, and elsewhere in South Asia. The Chinese poverty rate was
higher than the developing country average in 1990, but much lower than
average in 2002. Income and literacy rates are relatively high in Latin
America, but poverty rates are also high because incomes are distributed
unevenly. With the exception of Sub-Saharan Africa, all regions are
expected to achieve their
Millennium Development Goal of reducing poverty by 50 percent from its
1990 level by 2015. In East Asia, the target has already been achieved.
Source:
World Bank, Global Economic Prospects
2006
II. Obstacles to
Development
A.
Introduction - To grow, a country must produce an output beyond
its subsistence needs, and must invest that surplus in productive means
rather than in extravagant consumption, the military, or civic monuments,
or transferring it abroad.
B.
Physical Environment - The average developing country has
half the arable land per capita of industrial countries. Most poor
countries are located in tropics, with extremes of heat, rain, and
insects.
C.
Culture - Cultural determinists have noted that most
high-income nations are predominantly Christian or Confucian--all
Protestant countries have high incomes--and no Muslim country has grown
rich without petroleum. They blame problems of Latin America on
authoritarian culture and strict brand of Catholicism imported from Spain.
Aspects of Hinduism, such as caste system, may have retarded development
in South Asia.
UPDATE: Drawing on the work of David Landes, Thomas Friedman
(p. 324) emphasizes the importance of values related to "hard work,
thrift, honesty, patience, and tenacity, as well as the degree to which it
is open to change, new technology, and equality for women." To what
extent does it "glocalize" -- that is, does it easily incorporate the best
of foreign ideas, practices, and technologies into a local culture that
maintains a sense of national solidarity, tradition, and purpose?
D.
The Economic System - Some institutional structures retard
development. In many poor countries, absence of fair and effective
legal institutions. Limited monetary exchange. In much of
Africa and Asia, land is held in common or worked on a sharecropping
basis; poor incentive for improvement. Dual labor
markets prevent transmission of modern
development to the traditional sector. Limited quality and
quantity of financial intermediation in many developing countries,
usually organized around a few large, heavily regulated banks. Securities
markets are rudimentary. Interest rates are controlled and taxed; provide
small incentive for saving.
E.
Vicious Circles of Poverty - The population in a poor
country cannot afford to invest in capital goods, education, and health
programs that are needed to promote development. Also, poverty breeds
crime, political instability, and excessive population growth, which
perpetuate poverty..
NOTE:
Jeffrey Sachs, in “Helping the world's poorest,” The Economist
August 14, 1999 (see link
here), points to another vicious
circle. Scientific research tends to follow market demand, so the
technological needs of developing countries (malaria and AIDS vaccines,
tropical biotechnology, etc.) are neglected. Solution: guarantee a market
to technology firms for developing country needs.
F.
Colonialism, Imperialism, and Dependency - Most would agree
that colonial rule was often exploitive--even the American Revolution was
prompted by exploitive British taxes. Some would argue that foreign
investment and trade are also exploitive and promote "dependent
development."
UPDATE: According to the
NBER working paper by Acemoglu,
Johnson, Robinson, Europeans adopted more exploitive, extractive
institutions in countries where the physical environment and health
conditions made it difficult for them to settle. These institutions
persisted, they say, through the years, and now explain approximately
three-quarters of the income per capita differences across former
colonies. Once they control for the effect of institutions, they find that
countries in Africa or those farther away from the equator do not have
lower incomes.
III. Development
Strategies
A.
Laissez Faire vs. Intervention --
Adam Smith argued that economic progress is natural. Governments
should maintain peace, sanctity of contracts, administration of justice,
and public projects. Excessive interference will stop economic progress.
In 1940s and 1950s, Ragnar Nurske argued that growth was stalled by
"vicious circles," and Paul Rosenstein-Rodan argued that a "big push" was
necessary to provide minimum speed or size of investment for sustained
development.
NOTE: As
an alternative to the “big push,” micro-credits:
In 1976, the Bangladeshi economics professor Muhammad Yunus tried an
experiment. From his pocket, he lent the equivalent of $26 to a group of
42 workers. With that 62 cents per person, they bought the materials for a
day’s work weaving chairs or making pots. They soon paid back the loan,
and Yunus went on to establish the Grameen Bank, which launched the
microcredit revolution. By the end of 2004, 3,164 microcredit
institutions reported reaching 92 million clients (more than 300 million
family members), most of whom are extremely poor, and about 83.5% of whom
are women. For more information, see the following sites:
Microcredit Summit Campaign
Grameen Bank
FINCA International
Opportunity International
B.
Balanced vs. Unbalanced Growth -- Nurske argued
industrialization requires balanced growth in all sectors for production
balance and because of Say's Law--the demand for one product is generated
by the production of others. Walt Rostow argued for unbalanced
development of "leading sectors" and Albert Hirschman emphasized
importance of sectors with strong backward linkages
(required industrial inputs) and forward linkages (produces important
industrial inputs).
C.
Import Substitution and Export Promotion - What industrial
sectors should develop first? Perhaps, begin with products with
demonstrated domestic demand--import substitution. Hopefully, will
reduce payments imbalances, but distorts allocation of resources
and reduces benefits of comparative advantage. Invites bribery and
corruption. Import reduction decreases demand for foreign currency, raises
the exchange rate, and makes it difficult to market exports. Instead,
export promotion keeps the nation open
to foreign trade, encourages efficiency, reaps benefits of
international specialization, and imposes cost on inflationary
policies and overvalued exchange rates.
On the other hand, it may increase dependence on foreign trade
(vulnerability to trade wars) and create enclave of exporters with weak
links to the local economy. Part of Washington Consensus.
UPDATE: Thomas Friedman argues that Globalization 2.0 was the era of
"Reform Wholesale," which emphasized the top-down macroeconomic provisions
of the Washington Consensus:
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Privatization of state-owned companies
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Deregulation of financial markets
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Exchange rate liberalization
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Openness and encouragement of foreign direct
investment
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Reduction of trade barriers
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Introduction of more flexible labor laws
He argues that these are still necessary, but not
sufficient. The flat world of Globalization 3.0 calls for "Reform Retail" which
involves a detailed microeconomic analysis of infrastructure, regulatory
institutions, education, and culture. In regulatory reform, according to
IFC report, focus on:
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Reduce opportunities for the regulatory system impede
constructive work and to promote corruption. It takes 2 days to start a
business in Australia, 203 days in Haiti, 215 days in D.R. Congo.
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Strengthen property rights by providing documentation and
legal protections.
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Increase transparency of regulatory system, partly by
increasing use of Internet for fulfillment.
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