L8. Global Economy Mechanisms: Economic Cycle of Developing Economies PDF

Stages of economic development – the economic cycle in developing economies Global economy mechanisms – Lecture 8  ❑ Developing countries – definition Structure of the ❑ The structure of developing countries ❑ Common characteristics of de...

Stages of economic development – the economic cycle in developing economies Global economy mechanisms – Lecture 8  ❑ Developing countries – definition Structure of the ❑ The structure of developing countries ❑ Common characteristics of developing nations lecture ❑ Case study: Recent trends of developing countries  A developing country is one with real per/capita income that is low relative to that in advanced countries like the US, Japan, and those in Developing Western Europe (Samuelson, P., Nordhaus, W., countries – Economics, 1989). definition Should we still use the concept of developing countries? ❑ In 2016 the World Bank decided to no longer use the term of developing countries/nations Untenable generalisations about development – case of developing countries (1) ❑1. Developing countries are trapped in a vicious circle of stagnation; they are condemned to stagnation and poverty. This stereotypical view of developing countries is generally untrue. One should also always remember that every economically advanced country was once a developing country. ❑2. Given the pace of the population growth, food scarcity in developing countries will always be a problem. This statement, often associated with horrible images of starvation and malnutrition on the African continent, is generally untrue. ❑3. Agricultural and mining exports cannot contribute to the economic development of a country. This unfavorable image of agricultural and mining exports originates from the late nineteenth century when tropical developing countries exported agricultural products and industrial countries exported industrial products. Nevertheless, there are many countries where agricultural and mining exports have been the foundation of later economic prosperity. They can also make a positive contribution today. See also: https://data.worldbank.org/indicator/NV.AGR.TOTL.ZS  Untenable generalisations about development – case of developing countries (2) ❑ 4. Dependence of developing countries on the advanced economies leads to a net outflow of capital. This proposition originates from the first half of the twentieth century, when there was an outflow of resources from colonies to their colonizers. However, during most of the second half of the twentieth century, developing countries have profited from net inflows of capital. ❑ 5. Rapid population growth is always a threat to economic development. There is no point in denying that rapid population growth is a problem in many developing countries. However, under certain conditions a too low population density may form an obstacle to economic growth. Rapid population growth does not preclude economic growth. Sometimes population growth can be a stimulus to economic development and technological change. Population Yearly Density Urban World Country (or dependency) # 2018 Change (P/Km²) Pop % Share 1 China 1,415,045,928 0.39 % 151 58% 18.54 % 2 India 1,354,051,854 1.11 % 455 32% 17.74 % 3 U.S. 326,766,748 0.71 % 36 83% 4.28 % 4 Indonesia 266,794,980 1.06 % 147 54% 3.50 % 5 Brazil 210,867,954 0.75 % 25 84% 2.76 % 6 Pakistan 200,813,818 1.93 % 260 38% 2.63 % 7 Nigeria 195,875,237 2.61 % 215 49% 2.57 % 8 Bangladesh 166,368,149 1.03 % 1,278 35% 2.18 % 9 Russia 143,964,709 -0.02 % 9 73% 1.89 % 10 Mexico 130,759,074 1.24 % 67 78% 1.71 % 11 Japan 127,185,332 -0.23 % 349 94% 1.67 % 12 Ethiopia 107,534,882 2.46 % 108 20% 1.41 % 13 Philippines 106,512,074 1.52 % 357 44% 1.40 % 14 Egypt 99,375,741 1.87 % 100 38% 1.30 % 15 Viet Nam 96,491,146 0.99 % 311 34% 1.26 % Source: http://www.worldometers.info/world-population/; https://www.populationmatters.org/the-issue/overview/facts/?gclid=EAIaIQobChMI0O38raPB2gIVQ7HtCh2cNAJyEAAYASAAEgLh_vD_BwE  ❑ Criteria for examination: The size of the country (geographic area, population and income) The Its historical and colonial background structure of Its endowments of physical and human resources developing The relative importance of its public and private sectors The nature of its industrial structure countries Its degree of dependence on external economic and political forces The distribution of power and the institutional and political structure within the nation The structure of developing countries 1. The size of the country ✓Large size usually presents advantages of diverse resource endowments, large potential markets and a lesser dependence on foreign sources of materials and products. But it also creates problems of administrative control, national cohesion and regional imbalances. Ex. India: Population (2016) - 1,210,193,422 inhabitants, GDP/capita: $7,749 Singapore: Population (2017) - 5,612,300 inhabitants, GDP/capita: $93,678  The structure of developing countries 2. Historical and colonial background 3. Physical and human resources Most African and Asian nations were at one time A country’s potential for economic or another colonies of the Western European growth is influenced by its endowments countries, primarily Britain and France but also of physical resources (land, minerals and Belgium, Netherlands, Germany, Portugal and other raw materials) and human Spain. In Latin America, a longer history of resources (both numbers of people and political independence plus a more shared their levels of skills). The extreme case of colonial heritage (Spanish and Portuguese) has favourable physical resource endowment meant that countries possess relatively similar in the Persian Gulf oil states. At the other economic, social and cultural institutions and extreme countries like Chad, Haiti and face similar problems. Bangladesh, where endowments of raw materials and minerals and even fertile land are relatively minimal.  The structure of developing countries 4. Relative importance of the public and private sectors Most developing countries have mixed economic systems. In general, Latin America and Southeast Asian nations have larger private sectors than South Asian and African sectors. Economic policies, such as those designed to promote more employment, will naturally be different for countries with large public sectors that for those with sizable private sectors. In economies dominated by the public sector, direct government investment projects and large rural works programs will take precedence, whereas in private-orientated economies, special tax allowances designed to induce private businesses to employ more workers might be more common. 5. Industrial structure The vast majority of developing countries are agrarian in economic, social and cultural outlook. Most Latin American countries, having a longer history of independence then African or Asian countries possess more advanced industrial sectors. In the 1970s and 1980s, countries like Taiwan, South Korea, Hong Kong and Singapore greatly accelerated the growth of their manufacturing output. In terms of sheer size, India has one of the largest manufacturing sectors, but it is small in relation to the nation’s enormous rural population.  The structure of developing countries 6. Degree of dependence on external economic and political forces Most small nations are highly dependent on foreign trade with the developed world. 7. Distribution of power and the institutional and political structure within the nation The constellation of interests and power among different segments of the populations of the most developing countries is itself the results of their economic, social and political histories. Whatever the specific distribution of power among the military, the industrialists and the large landowners of Latin America; the politicians and high-level civil servants in Africa; the oil sheiks and financial moguls of the Middle East or the landlords, moneylenders and wealthy industrialists of Asia – most developing countries are ruled directly by small and powerful elites to a greater extent that the developed nations are. Common Characteristics of Developing Nations 1. Low levels of living, comprising low incomes, high 2. Low levels Common Characteristics of inequality, poor of productivity Developing Nations health and (Todaro, M., 1994) inadequate education 3. High rates of population 4. High and growth and rising levels of dependency unemployment burdens 5. Significant 6. Dominance, dependence on dependence agricultural and production and vulnerability in primary product international export relations THE FOUR ELEMENTS IN DEVELOPMENT Human Resources Population Explosion: The Legacy of Malthus demographers project that the poor countries will add about 1 billion people over the next 25 years. ”As population doubles and redoubles, it is as if the globe were halving and halving again in size—until finally it has shrunk so much that food production is below the level necessary to support the population” T. R. Malthus, An Essay on the Principle of Population (1798) Economic planners in developing countries emphasize the following strategies: 1. Control disease and improve health and nutrition. Raising the population’s health standards not only makes people happier but also makes them more productive workers. Health-care clinics and provision of safe drinking water are vitally useful social capital. 2. Improve education, reduce illiteracy, and train workers. Educated people are more productive workers because they can use capital more effectively, adopt new technologies, and learn from their mistakes. 3. Above all, do not underestimate the importance of human resources. Most other factors can be bought in the international marketplace. THE FOUR ELEMENTS IN DEVELOPMENT Natural Resources Perhaps the most valuable natural resource of developing countries is arable land. Much of the labor force in developing countries is employed in farming. Some economists believe that natural wealth from oil or minerals is not an unalloyed blessing. Countries like the United States, Canada, and Norway have used their natural wealth to form the solid base of industrial expansion. In other countries, the wealth has been subject to plunder and rent seeking by corrupt leaders and military cliques. THE FOUR ELEMENTS IN DEVELOPMENT Capital The leaders in the growth race invest at least 20 percent of output in capital formation. By contrast, the poorest agrarian countries are often able to save only 5 percent of national income. In many developing countries, the single most pressing problem is too little saving. Particularly in the poorest regions, urgent current consumption competes with investment for scarce resources. The result is too little investment in the productive capital so indispensable for rapid economic progress. THE FOUR ELEMENTS IN DEVELOPMENT Technological Change and Innovations Entrepreneurship and Innovation One of the key tasks of economic development is promoting an entrepreneurial spirit. A country cannot thrive without a group of owners or managers willing to undertake risks, open new businesses, adopt new technologies, and import new ways of doing business. At the most fundamental level, innovation and entrepreneurship thrive when property rights are clear and complete and taxes and other drains on profits (such as corruption) are low and predictable. Government can also foster entrepreneurship through specific investments: by setting up extension services for farmers, by educating and training the workforce, and by establishing management schools. See also: https://www.gemconsortium.org/report/gem-2019-2020-global-report Imitating Technology Japan joined the industrial race late, and only at the end of the nineteenth century did it send students abroad to study Western technology. The Japanese government took an active role in stimulating the pace of development and in building railroads and utilities. By adopting productive foreign technologies, Japan moved into its position today as the world’s second-largest industrial economy. STRATEGIES OF ECONOMIC DEVELOPMENT Industrialization vs. Agriculture In most countries, incomes in urban areas are almost double those in rural areas. Industrialization is capital-intensive, attracts workers into crowded cities, and often produces high levels of unemployment. Raising productivity on farms may require less capital, while providing productive employment for surplus labor. State vs. Market What are the important elements of a market-oriented policy? The important elements include the : predominance of private property and ownership; an outward orientation in trade policy; low tariffs and few quantitative trade restrictions; the promotion of small business, and the fostering of competition. STRATEGIES OF ECONOMIC DEVELOPMENT Growth and Outward Orientation Should developing countries attempt to be self-sufficient, to replace most imports with domestic production? – IMPORT SUBSTITUTION Should a country strive to pay for the imports it needs by improving efficiency and competitiveness, developing foreign markets, and keeping trade barriers low? - OUTWARD ORIENTATION OR OPENNESS  Case study: Recent trends of developing countries 1. China China has been the largest contributor to world growth since the global financial crisis of 2008. China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Such growth has enabled China, on average, to double its GDP every eight years and helped raise an estimated 800 million people out of poverty Source: https://fas.org/sgp/crs/row/RL33534.pdf  Case study: Recent trends of developing countries 1. China China has become the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise trader, and holder of foreign exchange reserves. This in turn has made China a major commercial partner of the United States. China is the largest U.S. merchandise trading partner, biggest source of imports, and third-largest U.S. export market. China is also the largest foreign holder of U.S. Treasury securities, which help fund the federal debt and keep U.S. interest rates low. Source: https://fas.org/sgp/crs/row/RL33534.pdf  Case study: Recent trends of developing countries 1. China – the path toward development Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a centrally planned, or command, economy. A large share of the country’s economic output was directed and controlled by the state, which set production goals, controlled prices, and allocated resources throughout most of the economy. During the 1950s, all of China’s individual household farms were collectivized into large communes. To support rapid industrialization, the central government undertook large- scale investments in physical and human capital during the 1960s and 1970s. As a result, by 1978 nearly three-fourths of industrial production was produced by centrally controlled, state-owned enterprises (SOEs), according to centrally planned output targets. Source: https://fas.org/sgp/crs/row/RL33534.pdf  Case study: Recent trends of developing countries Figure 2. Comparison of Chinese and Japanese Per Capita GDP: 1950-1978 ($ billions, PPP basis) Source: https://fas.org/sgp/crs/row/RL33534.pdf  Case study: Recent trends of developing countries 1. China – the path toward development – the introduction of economic reforms Beginning in 1979, China launched several economic reforms. The central government initiated price and ownership incentives for farmers, which enabled them to sell a portion of their crops on the free market. In addition, the government established four special economic zones along the coast for the purpose of attracting foreign investment, boosting exports, and importing high technology products into China. The first four special economic zones were created in 1980 in southeastern coastal China and consisted of what were then the small cities of Shenzhen, Zhuhai, and Shantou in Guangdong province and Xiamen (Amoy) in Fujian province. Additional reforms, which followed in stages, sought to decentralize economic policymaking in several sectors, especially trade. Source: https://fas.org/sgp/crs/row/RL33534.pdf  Developing economies – their role in the era of globalization – general statistics HISTORICAL AND PROJECTED ANNUAL GROWTH RATES OF GNP PER CAPITA (%) (2005 $PPP) HISTORICAL SHARES OF WORLD GNP, 1997-2017 (% 2005 $PPP) Source: BRICS (2017), ” The role of BRICS in the world economy & international development”  Questions? Opinions / Suggestions? Thank you, see you next session...