Economic Problems of

Developing Countries
Economic Problems of
Developing Countries

The Problem of
Underdevelopment
 THE PROBLEM OF
UNDERDEVELOPMENT
■ The gulf between rich and poor
countries
✜ differences in GNY
GNY per head as % of US GNY per head: 2000 (using ppp exchange rates)
USA 100.0
Switzerland 88.6
Japan 77.2
Hong Kong 74.9
Germany 73.0
Singapore 72.9
France 71.4
UK 68.7
Greece 49.4
Malaysia 24.4
Russia 23.4
Brazil 21.4
Peru 13.8
China 11.5
Jamaica 10.2
India 7.0
Pakistan 5.7
Nigeria 2.3
Ethiopia 1.9
Sierra Leone 1.3

0 10 20 30 40 50 60 70 80 90 100
 THE PROBLEM OF
UNDERDEVELOPMENT
■ The gulf between rich and poor
countries
✜ differences in GNY

✜ differences in mortality and health

 THE PROBLEM OF
UNDERDEVELOPMENT
■ The gulf between rich and poor
countries
✜ differences in GNY

✜ differences in mortality and health

✜ other differences
Selected world statistics
Selected world statistics
Selected world statistics
Selected world statistics
Selected world statistics
Selected world statistics
Selected world statistics
Selected world statistics
Selected world statistics
Selected world statistics
 THE PROBLEM OF
UNDERDEVELOPMENT
■ Differences between developing
countries
✜ resources and climate

✜ infrastructure

✜ cultural and social factors

✜ degree of industrialisation

✜ relations with developed world

 THE PROBLEM OF
UNDERDEVELOPMENT
■ Measuring development
✜ basic needs approach
✦ advantages of this approach
✦ disadvantages of this approach

✜ using GNY statistics

✦ advantages of this approach
✦ disadvantages of this approach

✜ the Human Development Index

Human Development Index (HDI) for selected countries (1999)
Human Development Index (HDI) for selected countries (1999)
Human Development Index (HDI) for selected countries (1999)
Human Development Index (HDI) for selected countries (1999)
Human Development Index (HDI) for selected countries (1999)
Human Development Index (HDI) for selected countries (1999)
Human Development Index (HDI) for selected countries (1999)
Human Development Index (HDI) for selected countries (1999)
Human Development Index (HDI) for selected countries (1999)
 Economic Problems of
Developing Countries

International Trade and

Development
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Role of international trade in economic
development
✜ importance of trade
✜ trade strategies
✦ primary outward-looking strategy
✦ secondary inward-looking strategy
• import-substituting industrialisation (ISI)

✦ secondary outward-looking strategy

• exporting manufactures
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Primary outward-looking strategy
✜ importance of primary exports
✜ justification for exporting primaries
✦ comparative advantage (Heckscher–Ohlin)
✦ vent for surplus; engine for growth

✜ weakness of traditional trade theory

✜ problems for primary exporters: long term
✦ slow growth in exports
✦ rapid growth in imports

✜ problems for primary exporters: short term

✦ price and output fluctuations
World primary commodity prices (1990 = 100)
World primary commodity prices (1990 = 100)
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Primary outward-looking strategy
✜ importance of primary exports
✜ justification for exporting primaries
✦ comparative advantage (Heckscher–Ohlin)
✦ vent for surplus; engine for growth

✜ weakness of traditional trade theory

✜ problems for primary exporters: long term
✦ slow growth in exports
✦ rapid growth in imports

✜ problems for primary exporters: short term

 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Primary outward-looking strategy
✜ importance of primary exports
✜ justification for exporting primaries
✦ comparative advantage (Heckscher–Ohlin)
✦ vent for surplus; engine for growth

✜ weakness of traditional trade theory

✜ problems for primary exporters: long term
✦ slow growth in exports
✦ rapid growth in imports

✜ problems for primary exporters: short term

✦ price and output fluctuations
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Import-substituting industrialisation
✜ the process of ISI

✜ justification
✦ problems of primary-outward looking policies

✦ greater
dynamic potential with industrial
production

✦ infant industries
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Import-substituting industrialisation
✜ adverse effects
✦ against comparative advantage
✦ cushions inefficiency
✦ urban bias
✦ damages exports
✦ wide variations in effective protection
✦ social / cultural problems
✦ environmental costs
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Exporting manufactures
 Growth rates and export performance of
selected secondary outward-looking countries
 Growth rates and export performance of
selected secondary outward-looking countries
 Growth rates and export performance of
selected secondary outward-looking countries
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Exporting manufactures
✜ transition from inward-looking to
outward-looking industrialisation
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Exporting manufactures
✜ transition from inward-looking to
outward-looking industrialisation

✜ benefits from a secondary

outward-looking policy
 INTERNATIONAL TRADE AND
DEVELOPMENT
■ Exporting manufactures
✜ transition from inward-looking to
outward-looking industrialisation

✜ benefits from a secondary

outward-looking policy

✜ drawbacks of a secondary
outward-looking policy
 Economic Problems of
Developing Countries

Structural Problems in
Developing Countries
STRUCTURAL PROBLEMS IN DEVELOPING
COUNTRIES

■ The neglect of agriculture

✜ problems of urban bias
✜ policies to promote agriculture
✜ problems with these policies
■ Inappropriate technology
✜ capital-intensity biases
✜ arguments for capital-intensive technology
✜ arguments for labour-intensive technology
 STRUCTURAL PROBLEMS IN
DEVELOPING COUNTRIES

■ Unemployment
✜ rapid population growth
✜ capital-intensity bias
 Limited choice of techniques: one technique only
Q1 Q2 Q3
Capital (K)

Q3

Q2

Q1

Labour (L)
 Limited choice of techniques: one technique only
Q1 Q2 Q3

Expansion path
Capital (K)

c
K3 Q3
b
K2 Q2
a
K1 Q1

O L1 L2 L3
Labour (L)
 Limited choice of techniques: one technique only
Q1 Q2 Q3

Assume that
total capital supply is K
total labour supply is L
Capital (K)

Q3

K Q2

Q1

O
L
Labour (L)
 Limited choice of techniques: one technique only
Q1 Q2 Q3

With K of capital, only Q2 can be

produced. Only L1 will be required

L − L1 will be unemployed.
Capital (K)

Q3

K Q2

Q1

O L1 L
Labour (L)
 Capital intensity bias

Assume that
the total supply of capital is K, and
the total supply of labour is L.
Capital (K)

Q1
Q2
O
L
Labour (L)
 Capital intensity bias

With competitively determined prices,

the market will clear at point d
with output of Q1 and
A
price ratio given by the slope of AB
Capital (K)

d
K

Q1
Q2
O B
L
Labour (L)
 Capital intensity bias

With a lower relative price of capital

(given by slope of line CD)
or a bias in favour of
A
capital-intensive techniques,
C less labour will be employed (L1) and
Capital (K)

output will be lower (Q2).

d
K

Q1
Q2
O L1 D B
L
Labour (L)
 STRUCTURAL PROBLEMS IN
DEVELOPING COUNTRIES

■ Unemployment
✜ rapid population growth
✜ capital-intensity bias
✜ rural–urban migration
 STRUCTURAL PROBLEMS IN
DEVELOPING COUNTRIES

■ Unemployment
✜ rapid population growth
✜ capital-intensity bias
✜ rural–urban migration
✜ external influences
 STRUCTURAL PROBLEMS IN
DEVELOPING COUNTRIES

■ Unemployment
✜ rapid population growth
✜ capital-intensity bias
✜ rural–urban migration
✜ external influences
■ Inflation
 STRUCTURAL PROBLEMS IN
DEVELOPING COUNTRIES

■ Unemployment
✜ rapid population growth
✜ capital-intensity bias
✜ rural–urban migration
✜ external influences
■ Inflation
✜ problems of hyper-inflation
 STRUCTURAL PROBLEMS IN
DEVELOPING COUNTRIES

■ Unemployment
✜ rapid population growth
✜ capital-intensity bias
✜ rural–urban migration
✜ external influences
■ Inflation
✜ problems of hyper-inflation
✜ monetarist explanations
 STRUCTURAL PROBLEMS IN
DEVELOPING COUNTRIES

■ Unemployment
✜ rapid population growth
✜ capital-intensity bias
✜ rural–urban migration
✜ external influences
■ Inflation
✜ problems of hyper-inflation
✜ monetarist explanations
✜ structuralist explanations
Economic Problems of
Developing Countries

The Problem of
Debt
Growth in debt of developing countries:
(average annual)
Growth in debt of developing countries:
(average annual)
Growth in debt of developing countries:
(average annual)
Growth in debt of developing countries:
(average annual)
Debt ratios and the growth of debt:
(average of all developing countries)
Debt ratios and the growth of debt:
(average of all developing countries)
Debt ratios and the growth of debt:
(average of all developing countries)
 THE PROBLEM OF DEBT

■ Effects of the first oil shock 1971–78

■ Effects of the second oil shock 1979–84
✜ deep world recession
✜ decline in commodity prices
✜ high interest rates

■ Effects of recessions in early 1990s and

early 2000s
 THE PROBLEM OF DEBT

■ The effects of the debt problem on

developing countries
✜ effects on growth

✜ effects on poverty

■ Coping with debt crises: rescheduling

✜ rescheduling official loans

✜ rescheduling commercial loans

 THE PROBLEM OF DEBT

■ Dealing with debt

✜ structural reform in developing countries
✦ IMF policy recommendations
✦ interventionist solutions
✜ debt swaps
✜ debt forgiveness
✦ the HIPC initiative
✦ Jubilee 2000
✦ subsequent events
✜ should all debt be cancelled and aid
increased?