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Developmental Economics

Developmental Economics. Types of Countries. Industrially Advanced Countries (IACs; MDC, 1 st World) Developing Countries (DVCs, LDC/NIC, 2 nd /3 rd World) 1) V. diff. abilities to improve (China vs. Sudan) 2) Absolute income gap widening. Obstacles to Development.

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Developmental Economics

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  1. Developmental Economics

  2. Types of Countries • Industrially Advanced Countries (IACs; MDC, 1st World) • Developing Countries (DVCs, LDC/NIC, 2nd/3rd World) • 1) V. diff. abilities to improve (China vs. Sudan) • 2) Absolute income gap widening

  3. Obstacles to Development • 1) use resources more efficiently: un/underemployment, productive + allocative efficiency • 2) Expand available resources

  4. Natural Resources • Unequal distribution of resources • Resource curse • Climate • Primary production greater price variability (boom + bust; carryover effects of recessions)

  5. Human Resources • 1) Overpopulation China + India underpopulated? • 2) Un/underemployment rampant • 3) Labor productivity low • Standard of living = consumer goods (food) production / population • Higher s of l more population: mortality rate falls + birthrate increases (less infant mortality) lower s of l • Malthusian “the rich get richer and the poor get children”

  6. Population Pressures • 1) Reduced saving and investment • 2) Productivity lower: large pop requires equally large capital stock • 3) Large pop requires food Resource Overuse ( soil erosion/depletion famine) • 4) Urban Problems

  7. Demographic Transition View • Rising income fewer kids • Marginal benefits vs. marginal costs

  8. Capital Accumulation • 1) DVCs suffer shortage capital goods • 2) Capital stock crucial: unlikely/impossible increase arable land • 3) Capital accumulation may be cumulative: capital productivity higher real income greater saving + investment more capital

  9. Domestic Capital Formation + Flight • Poverty inability to give up current consumption for investment; even w/high saving rate, large % of small % still small amount • Lack of investors + incentives, infrastructure impedes returns on investments • Instability (pol. + econ) capital flight “Brain Drain” • Overcome: concerted leadership + group sacrifice

  10. Technological Advance • DVCs can adopt some tech from IACs (crop rotation, grain storage bins) at low cost • Capital accumulation w/o more money: transfer investment from less to more productive • Capital-saving tech vs. capital-using tech (expensive metal plows, better fertilizers)

  11. Sociocultural and Institutional Factors • “the will to develop” • Sociocultural impediments: 1) Tribal + ethnic allegiance > economic self-interest; 2) caste systems; 3) religious beliefs (capricious universe view) • Institutional obstacles: 1) corruption, education, etc.; 2) Land reform (Guatemala)

  12. Vicious Circle • DVC characteristics both causes + consequences poverty

  13. Role of Domestic Government • Positive Roles: • Law + Order • Take up entrepreneurial slack • Infrastructure • Forced saving + investment • Social-institution problems • Negative: cronyism, inefficiency, genocide as law + order, counterproductive showpiece projects (Aswan High Dam, Three Gorges Dam)

  14. Role of Advanced Nations • Expanding Trade • Foreign Aid: Loans + Grants • World Bank: 1) last resort lending, 2) basic development projects, 3) technical assistance • Private Capital Flows Microloans, “emerging market hunters” • Foreign Harm? • 1) Dependency: aid as welfare • 2) Bureaucracy + Centralized Gov’t: aid to gov’t create + maintain bureaucracies to run aid programs more regulation + slower economic growth • 3) Corruption + Misuse (Oil-for-Food)

  15. DVC Policies for Growth • 1) Establish rule of law • 2) Free trade • 3) Control population • 4) Encourage foreign investment • 5) Build human capital • 6) Peace • 7) Independent central banks • 8) Realistic exchange-rate policies • 9) Privatize state industries

  16. IAC policies • 1) Direct aid to neediest • 2) Reduce tariffs, quotas, + subsidies • 3) Provide debt relief • 4) Allow temp workers but discourage brain drain • 5) Discourage arm sales

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