Zimbabwe

1
Zimbabwe

• Economic Development
• Workshops

2
What is development?

• GDP
• GNP
• HDI
• Others

3
What does the HDI measure?

• Waste control and pollution
• Poor water supplies
• High real population growth
• Living standards
• Civil liberties
• The status of women
• Access to education

4
Types of economies

• Second World Country - this mainly referred to
  those countries of the former eastern block and
  meant that were poor but had some basic
  facilities.
• Third World Country - many of these are located
  in the 'southern section' of the globe. They are
  more commonly known as Developing Countries
  (DC's) and have within them a number of different
  types of economy.
• .

5
Characteristics

• a) The very poorest, where people live on less
  than 500 a year and have access to very few of
  the features we see in our lives.
• (b) Middle-income countries, which though still
  poor by our standards, do have pockets of
  considerable economic growth within them. At the
  top end of this category are nations such as
  South Korea and Singapore. Some prefer to call
  these Newly Industrialised Countries (NIC's).
  Within this group are many of the Tiger Economies
  of the Far East

6
How are things changing?

• The 'second world' economies noted above are now
  mostly in transition. That is they are changing
  from being command economies into using the more
  liberal, free market ideals seen in the
  high-income economies. As such they are
• Introducing market forces via demand and supply
  factors to determine prices
• De-regulating markets
• Privatising industries
• Removing protective barriers
• Seeking orders outside their old trading circles
• Joining the European Union.

7
Problems facing developing countries

• The major problems faced by developing economies
  are
• (a) That they have rapid population growth. This
  means that their age pyramid tends to be 'bottom
  heavy' and this put pressure on education and
  employment.
• (b) They lack physical capital structures, so
  they have inadequate supplies of communication
  facilities, roads, rail, ports, radio and TV sets
  and less well-irrigated land

8
Problems continued..

• (d) The high population growth mentioned above
  puts enormous strain on facilities and in many of
  these countries people's life styles are actually
  getting worse. The 'dependency rates' are getting
  larger as those in work become responsible for
  more who are not directly contributing to the
  economy.
• (e) Again high population growth places enormous
  burdens on the health facilities and infant
  deaths remain very high in most of these
  countries.
• (e) With some many people living in these
  countries trying to find a job is difficult. This
  leads to high unemployment and also
  underemployment. Which is when people have a job,
  saying selling you single cigarettes but they do
  not constitute a real form of employment as the
  'West' see it

9
The developing world

• The majority of those living in the poorest
  nations still live on or near the land. A visit
  to any of these countries will show just how
  resourceful people can be when finding places to
  grow food!
• Slowly, some are moving more into the secondary
  or manufacturing sectors of how we divide
  economies. This allows them to add more value and
  so have some central funds to spend on hospitals,
  schools etc.

10
The developing world

• In only the most 'advanced' of the poorest
  countries does a meaningful services sector
  exist. Some of these have allowed themselves to
  be used as 'off-shore' banking facilities for
  funds from rich nations. Many have banks,
  insurance companies etc but they are in their
  infancy, or are sometimes branches of well-known
  western companies. Some do support a small
  quaternary sector and Internet cafes are becoming
  a common sight in even the poorest of nations.
  But the hardware and software is all imported and
  that costs large amounts of foreign exchange. The
  'digital divide' is a pressing problem and is not
  improved by problems of electricity supply.
• Foreign Trade also shows us some of the
  essentials of being a developing economy. Many of
  the poorest countries exist on selling low-valued
  primary products, such as coffee and tea. They
  keep little of the real value and have to accept
  the prices we in the developed economies want to
  pay. They do produce some manufactures but they
  too tend to be low in value.

11
The developing world

• Most developing countries depend on a formal
  economy for their wealth creation but outside
  this formal area exists an enormous informal
  sector. People survive by growing, buying and
  selling a huge variety of goods and services.
  Revenues are not declared and are not taxed.
  Government sees only a small amount of what it is
  due and therefore cannot afford to spend on the
  essentials of life.
• The difference between rural and urban life is
  clear to anyone who visits one of these
  countries. The urban areas tend to suffer from
  overcrowding, poor sanitation and
  unemployment/underemployment. Inadequate
  education and health services are a feature of
  the lives of many urban dwellers. However, huge
  differences do exist and air conditioning,
  satellite dishes and other signs of wealth e.g.
  four wheel drive vehicles clearly differentiate
  the rich from the poor.

12
The developing world

• In rural areas the contrasts between the rich and
  the poor are normally less obvious. They exist
  but in less stark ways. Education remains a
  privilege and health facilities remain poor. But
  they can grow food and live a life closer to that
  of their culture and for many this is more
  rewarding.
• The traditional economy still supports the
  majority in most of these countries. Food,
  clothing, cooking ware and other essentials are
  what most contribute towards. However, some more
  modern industries do play an important role in
  the fabric of the economy. Transport is one and
  this employs quite large numbers. Power
  generation, communications and financial services
  are also growing in importance.
• So too are manufacturing industries that add
  value to local produce or products

13
Economic, social and political issues

• Culture is a strong influence on economics. It
  creeps into how people see their role in an
  economy and just where, for example, women fit
  into the world of business. In some countries
  women remain firmly the providers of food for men
  folk and the main carers of children. Even the
  role and ownership of money differs from one
  country to another.
• Politics is certainly an important factor is
  deciding who does what within an economy.
  Democracy does not have a one-sized, single model
  fits all. Civil rights differ and this impacts on
  how well people can use their natural talents.
  Dictatorships exist in some countries and one
  party states are quite common. Military regimes
  frequently appear and then the right to vote and
  change a government is suspended

14
History is important

• The colonial history is also important. The
  British tended to want colonies to break-even, or
  even make a profit. The French and Belgians
  exercised different forms of control and the
  former still does to this day. They ways in which
  government, the role of the state in the economy
  and the direction of economic development took
  during colonial days still affect these countries
  today. For many the immediate post-colonial days
  were spent trying to follow a more Socialist form
  of economics. Five year plans and big centrally
  controlled investments were the ways in which
  development would be achieved. However, few of
  these were successful and the collapse in
  commodity prices and the rise in oil prices left
  many of these nations in serious debt problems.
  When this occurred the World Bank had to be
  called in and they imposed a strict regime of
  dismantled price controls, a drastic reduction in
  the printing of money and various other
  implications of the Structural Adjustment
  Programmes. Now, many of these countries are
  embarking on programmes of de-regulation and
  privatisation

15
So how do we change things?
16
Maybe free trade?

• Free trade
• International trade is based on specialisation
  at a national level. Countries exchange goods
  with others and pay for imports from the revenues
  received from exporting. To work effectively,
  this system relies on few, if any, barriers
  existing to interfere with 'free trade'.

17
But nothing is static

• Transport costs and tariffs will change the
  relative prices of goods and may therefore 'blur'
  the impact of comparative advantage.
• Exchange rates do not always relate exactly to
  what comparative advantage theory suggests as
  they have many other determinants - this may also
  negate the theory.
• Imperfect competition may lead to prices being
  different to opportunity cost ratios. Imperfect
  competition may also lead to the exploitation of
  economies of scale which may adjust to what
  comparative advantage theory suggests should
  happen.
• Comparative advantage theory is a static theory
  and does not take account of some of the more
  dynamic elements determining world trade. In
  particular, the factor of production capital is
  not a natural resource, and so may come outside
  the scope of the theory.

18
Rostow?

• One of the most regarded models of economic
  growth and therefore development potential is
  known by its founders name Walt Rostow. He
  considered that all economies pass through FIVE
  phases. These are as follows
• The traditional phase - where barter is common
  and most work on or about the land.
• Pre-take-off - where a self-sustaining growth
  potential is close and savings are rising at a
  rate of 15-20 of national income
• Take-off - the economy is recording continuous
  periods of economic growth
• Drive for maturity - the economy is genuinely
  moving from the developing to the developed form
• Mass consumption - the majority of citizens enjoy
  a high materials standard of living.

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Rostow

• Rostow placed considerable importance on the role
  of savings and how these in turn produce
  investment. The savings could be both domestic
  and foreign and would therefore collectively
  drive the economy into a period of growth and
  maturity. By by-passing any problems with
  domestic savings (the savings gap) the world
  economy would be both helping the poorer nations
  and itself, as total demand would increase. Some
  now argue that savings and investment alone are
  not enough to promote real economic growth. They
  suggest that (a) the direction and purpose of
  investment has to be carefully selected and
  monitored and that (b) domestic sums have to be
  encouraged to remain 'at home'. Too often
  'capital flight' leads to savings being deposited
  in other, more lucrative overseas markets.

20
Fisher and Clark

• Primary production is concerned with the
  extraction of raw materials through agriculture,
  mining, fishing, and forestry. Low-income
  countries are assumed to be predominantly
  dominated by primary production.
• Secondary production concerned with industrial
  production through manufacturing and
  construction. Middle-income countries are often
  dominated by their secondary sector.
• Tertiary production concerned with the provision
  of services such as education and tourism. In
  high-income countries the tertiary sector
  dominates. Indeed having a large tertiary sector
  is seen as a sign of economic maturity in the
  development process.

21
Fisher and Clark

• Countries are assumed to first pass through the
  primary production stage then the secondary stage
  and finally the tertiary stage. As economies
  develop and incomes rise then the demand for
  agricultural goods will increase but due to their
  low income elasticity of demand at a
  proportionally lower rate than income

22
Fisher and Clark

• However, the demand for manufactured goods will
  have a higher income elasticity of demand. So as
  incomes grow further the demand for these goods
  will grow at a proportionately higher rate. Hence
  the secondary industry will grow. As incomes
  continue to grow then people will start to
  consume more services as these have an even
  higher income elasticity of demand. Thus the
  tertiary sector will then grow and develop.
• However, this may be misleading.

23
Fisher and Clark

• Some LDC's may have a large tertiary sector due
  to a large tourist industry without having
  developed a secondary industry. Economists argue
  that this could be somewhat risky. If the
  economic base is dominated by an economic
  activity such as tourism that has a high-income
  elasticity of demand then a recession in the
  consuming nations will have a disproportionately
  large impact on the export earnings. A fall
  income will bring about a proportionately greater
  reduction in demand for the service and this will
  have severe impact on the economy. If it does not
  have a primary or secondary production to fall
  back on then borrowing and debt might be the only
  prospect.

24
Harrod Domar

• The model suggests that the economy's rate of
  growth depends on
• The level of saving
• The productivity of investment i.e. the capital
  output ratio

25
Harrod Domar how does it work?

• For example, if 15 worth of capital equipment
  produces each 1 of annual output, a
  capital-output ratio of 15 to 1 exists. A 5 to 1
  capital-output ratio indicates that only 5 of
  capital is required to produce each 1 of output
  annually. The model concludes that
• Economic growth depends on the amount of labour
  and capital.
• As DC's often have an abundant supply of labour
  it is a lack of physical capital that holds back
  economic growth and development.
• More physical capital generates economic growth.
• Net investment leads to more capital
  accumulation, which generates higher output and
  income.
• Higher income allows higher levels of saving.

26
Harrod-Domar

• Developed in 1930s
• Economic growth and economic development are not
  the same. Economic growth is a necessary but not
  sufficient condition for development
• Practically it is difficult to stimulate the
  level of domestic savings particularly in the
  case of developing countries where incomes are
  low.
• Borrowing from overseas to fill the gap caused by
  insufficient savings causes debt repayment
  problems later.
• The law of diminishing returns would suggest that
  as investment increases the productivity of the
  capital will diminish and the capital to output
  ratio will therefore rise.

27
Lewis' model

• productivity was central to development of an
  economy. This was best achieved by encouraging
  migration of workers from the less productive
  sectors of the economy, for example agriculture,
  which is traditional and into the newer
  industries of manufacturing and tertiary. The
  latter would be more productive and so accumulate
  greater wealth. In turn this would generate
  greater funds for government through taxation and
  this would enable them to spend on the essentials
  of development. Savings would be encouraged, as
  rates of return would increase. Lewis felt that
  the marginal productivity of a rural worker was
  low.

28
Lewiss model - problems

• The idea that the productivity of labour in rural
  areas is almost zero may be true for certain
  times of the year however during planting and
  harvesting the need for labour is critical to the
  needs of the village.
• The assumption of a constant demand for labour
  from the industrial sector is questionable.
  Increasing technology may be labour saving
  reducing the need for labour. In addition if the
  industry concerned declines again the demand for
  labour will fall.
• The idea of trickle down has been criticised.
  Will higher incomes earned in the industrial
  sector be saved? If the entrepreneurs and labour
  spend their new found gains rather than save it,
  funds for investment and growth will not be made
  available.
• The rural urban migration has for many LDCs been
  far larger that the industrial sector can provide
  jobs for. Urban poverty has replaced rural
  poverty.

29
Neo-classical growth model

• Increase in the labour quantity (population
  growth)
• Improvements in the quality of labour through
  training and education
• Increase in capital (through higher savings and
  investment)
• Improvements in technology

30
Neo-classical
31
Neo-classical

• Neo classical economists advocate the following
  strategies should be encouraged
• Competitive free markets
• Privatisation of state owned industries
• A move from closed (no trade) to open (trading)
  economies
• Opening up the domestic economy through
  encouraging free trade (i.e. abolish tariffs and
  quotas) and foreign direct investment.

32
Neo-classical - criticisms

• These policies will stimulate investment, higher
  output and income and hence higher savings. This
  model makes a number of unrealistic assumptions
  and ignores a number of crucial issues
• The assumption is that the creation of a free
  market and a private enterprise culture is
  possible and desirable.
• The existence of market failure such as
  externalities associated with economic growth are
  ignored
• The problem of uneven distribution of income is
  ignored

33
Dependency theory

• Underdevelopment is seen as the result of unequal
  relationships between rich developed capitalist
  countries and poor developing ones. In the past
  colonialism embodied the inequality between the
  colonial powers and their colonies. As the
  colonies became independent the inequalities did
  not disappear. Powerful developed countries such
  as the US, Europe and Japan dominate dependent
  powerless developing economies via the capitalist
  system and that continues to perpetuate power and
  resources inequalities.

34
Dependency Theory

• Dominant countries have such a technological and
  industrial advantage that they can ensure the
  global economic system works in their own
  self-interest. Organisations such as the World
  Bank, the IMF and the WTO have agendas that
  benefit the firms, and consumers of primarily the
  rich world. Freeing up world trade, one of the
  main aims of the WTO, benefits the wealthy
  nations that are most involved in world trade.
  Creating a level playing field for all countries
  assumes that all countries have the necessary
  equipment to be able to play. For the worlds'
  poor this is often not the case.

35
Dependency Theory

• In this model the responsibility for lack of
  development within developing economies rests
  with the rich nations. Those who support the
  dependency theory argue that only substantial
  reform of the world capitalist system and a
  redistribution of assets will 'free' developing
  economies from poverty cycles and enable
  development to occur. Measures that the rich
  nations could take would include the elimination
  of world debt and the introduction of global
  taxes such as the Tobin Tax. This tax on foreign
  exchange transactions, named after its proponent,
  the American Economist, James Tobin, would
  generate large revenues that could be used to pay
  off debt or fund development projects. Gordon
  Brown has suggested something similar and the
  Jubilee movement has put forward that debt should
  be cancelled and not re-scheduled

36
Dependency Theory..but

• Power is not easily redistributed, as countries
  that possess it are unlikely to surrender it. It
  may be that it is not the governments of the rich
  nations hold the power but large multinational
  enterprises that are reluctant to see the world's
  resources being reallocated in favour of the
  developing economies.
• The redistribution of assets globally will result
  in slower rates of growth in the rich economies
  and this might be politically unpopular.

37
Balanced and unbalanced growth
38
Balanced and unbalanced growth

• Allocation of resources
• All of us have recently become aware of the real
  cost of resource usage. We now need to be
  conscious of externalities. How will the
  developing world control air pollution, or the
  risk of deforestation? Will they simply become
  the dumping ground for rich nation's waste?
• Another problem in balancing growth might be soil
  erosion and degradation. They also need to be
  aware of water scarcity, pollution and waste
  disposal. All of these challenges face us in the
  developed world but those experiencing the
  challenges of economic develop have to 'balance'
  their desire to grow against the possible
  problems that might arise. The reduction in their
  biodiversity might also need to be addressed, as
  will atmospheric changes. Do they

39
Balanced and unbalanced growth

• Ban or impose strict rules and controls
• Extend property rights and force private
  enterprise to pay more to the problems they cause
• Impose taxes on pollution and other externalities
• Subsidise non-pollution methods of production
• Award permits to pollute

40
To achieve these we will have to..

• Land ownership and reform
• Involving the local communities in their own
  development
• Engaging the poor and making them feel that some
  opportunities will come their way
• Pricing in ways that include the real costs of
  development

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41
Challenges

• Productivity
• How will they increase the quality of their
  inputs and control the real costs of what they
  hope will be genuine increases in output. It's
  quality as well as quantity. Should the balance
  be towards export-led growth or import
  substitution?
• Human capital development
• What comes first teacher training, or schools in
  which the teachers can work, or should they await
  the arrival of students? Not an easy problem to
  resolve. What of technical, adult and higher
  education? Where do they fit into the demand for
  precious resources?
• Financial systems
• These too are essential but like all systems they
  can be abused. Do you force domestic savings to
  stay national? Do you monitor investment flows to
  make certain they are going to what you want them
  to? This is an area of development riddled with
  problems.

42
Challenges

• Price distortions
• What will be the short-term negative affects of
  the removal of price caps and subsidies as
  against the benefits for the economy in the long
  term?
• Openness of markets
• Can government do without customs revenues and so
  allow in goods that are needed? In return can
  exports be allowed into developed markets, or
  will the big players, such as the EU continue to
  block goods from developing countries?
• Access to technology
• Should domestic companies be encouraged to use
  technology, say be tax relief or subsidies? Maybe
  overseas investment could be encouraged by
  allowing tax write-offs if they bring technology
  with them?

43
Challenges

• Access to technology
• Should domestic companies be encouraged to use
  technology, say be tax relief or subsidies? Maybe
  overseas investment could be encouraged by
  allowing tax write-offs if they bring technology
  with them?
• Agricultural reform
• Surely one target must be self - sufficiency in
  basic food requirements? This will take
  short-term resource allocation but what will be
  the long-term benefits?
• Intervention in markets
• This works for some economies and not others.
  Should government use public funds to subsidise
  some industries and not others? What exactly are
  'essential' industries?

44
Challenges

• Culture
• Will development simply ride over thousands of
  years of history and evolution? Or, will another
  'balance' have to be sort? Too fast a pace of
  change can have serious consequences. Likewise,
  the adjustment of women to their new roles and
  challenges needs to be carefully explained and
  introduced.
• Achieving a balanced and sustainable growth
  record is difficult but the target is to develop
  via ways that do not endanger the quality of life
  of those who follow.

45
Domestic Problems

• Fight off the power of multi-nationals and still
  keep access to the lucrative markets that the
  companies come from
• Maintain a biodiversity and balance of nature as
  pressures increase for the profits contained in
  their natural resource exploitation.
• Allow the economy to develop within the terms of
  sustainable development
• Another important factor is factor endowment and
  the ability to exploit these. Some of the
  countries on 'Southern Africa' have huge reserves
  of the most valuable resources in the world. But
  how do they develop them so as to benefit as many
  of their population as possible? Will they import
  expensive expatriate technology or will they
  train their own workforce

46
Population

• Population
• Population will be an important part of the
  development
• The net population increase figure (births -
  deaths migration) will be an important factor.
  In some developing economies population growth is
  still around 4 per annum. In the short run this
  will put pressure on education and employment but
  eventually social provision for the elderly will
  have to be financed. Population growth also
  impacts on the
• Supply of food - though little starvation exists
  in the developing world malnutrition (see chart 1
  below) is a major problem in many countries. It
  adds to the size of infant mortality.
• Environment - food pressure puts pressure on land
  and takes valuable resources away from other
  sectors. Intensive methods require inputs that
  might damage the environment. GM crops are
  thought by some to be a major reducer of poverty
  whilst for others they threaten our very
  survival.

47
Population

• Age has already been touched on but we need to
  consider the dependency ratio again. Those no
  longer working will require a larger proportion
  of national income than they currently need. This
  will be fuelled in the developing world by the
  problems of
• (a) Inadequate education systems
• (b) The need to keep children away from school to
  work on the land
• (c) A lack of adequate jobs for those who have
  received a more formal education. The lack of
  jobs leads to crime and increasing drug abuse.

48
Birth rate

• Government and the birth rate - development
  implies better health, education etc and a fast
  growing population make this more difficult. So,
  should government try to influence the size of
  families? China tried this with its one child
  policy. Some of the problems associated with this
  form of population manipulation are not
  attractive.
• Whatever the government decides to do one fact is
  agreed upon by most, namely, that as an economy
  develops so the number of conceptions per female
  declines

49
Other factors

• Education - health care and family planning can
  feature in government-sponsored programmes. As
  mentioned earlier fiscal (tax) incentives can be
  used to promote fewer children.
• The role of women in society - if women can earn
  some money - say by a female only micro loan and
  then save this in a women-only bank then they can
  gain some financial independence. This seems to
  be a successful way of reducing family sizes.

50
Migration

• Migration - the pull of cities continues to cause
  large numbers to move to urban areas. Some argue
  that agricultural workers have low productivity
  and that they should be encouraged to move to
  cities and the higher productivity jobs to be
  found there. However, they create little, if
  anything if all they drift into is unemployment,
  poverty and crime. Many of those who migrate to
  the cities do so on the expectation that
  eventually they will earn more than in the rural
  areas. Perhaps it might be best if some
  government funding went to the rural areas, so
  making life in those regions more closely
  resemble what the rural dwellers perceive urban
  life to be? This would take both money and time,
  as schools, hospitals, roads etc would be needed
  to offer a similar lifestyle to that which the
  urban liver supposedly has access to.

51
Poverty

• Poverty is a grinding fact of life. You receive
  little education, hope or access to any of the
  normal features of our lives. What value can be
  added to these people? They may be intelligent
  and gifted individuals but they will receive
  little, if any education. Health care will be
  non-existent. The inequalities apparent within
  their economy will breed resentment. This can
  lead to hatred, ethic violence, corruption and
  the undermining of the democratic process. Those
  thinking of investing in such an economy will
  probably decide not to. If you earn little, say
  just a few dollars a day what chance do you have
  of saving any money, or owning a bank account?
  The acquiring of capital is basically impossible
  and that precludes you from passing wealth to
  your direct descendants.

52
Poverty cycle

• This poverty can be very difficult to reduce as
  many economies struggle to develop. They often
  find themselves in what is known as the poverty
  cycle. This can be seen as a spiral that prevents
  them from developing. To develop, we know that
  they need to invest. Investment needs funding and
  this requires savings. However, if they have low
  income levels, then they have low savings levels.
  This means a lack of funds for investment, which
  in turn leads to lower incomes. It is in essence
  a downward spiral of cumulative causation. Low
  incomes means low investment levels which means
  even lower incomes. They need to break the cycle
  to develop, but how?

53
Poverty Cycle
54
Government Failure

• This can arise as the result of
• inadequate information - government seldom
  possess full and accurate information. So, it
  makes decisions on inadequate detail and mistakes
  arise.
• Conflicting objectives - all decisions have an
  opportunity cost and any elected government
  normally wants to satisfy those who voted for it.
  This might be to the detriment of those who did
  not.
• Administrative costs - sometimes the cost of
  correcting a market failure actually outweigh the
  benefits.
• Market distortion - by intervening to correct one
  market failure a government might create another.
  It in turn might be worse than the original they
  first attacked. In the UK the minimum wage
  continues to attract such criticism.

55
Public Choice Theory

• Public choice theory, which is now popular in
  developed economies, suggests that politicians
  will not always attempt to maximise economic
  welfare. They will try to maximise their
  popularity by the laws and decisions they make.
  In pure economics these may not be the best ways
  of spending our money. Decisions might be
  influenced by
• Local interests
• Trying to include minority interests
• Conflicting personal interests
• Short-termism
• Regulatory capture

56
International Problems

• Developing economies mainly trade in primary
  exports. The money raised from their sale pays
  for manufactured imports. Diversification has
  been a slow process and again it has a strong
  geographic bias. The Far Eastern economies have
  been able to move up through the categories of
  exports to command increased market shares of low
  and medium technology goods. Alas, for many of
  their poorer African cousins the reliance on
  low-valued primary exports has not fallen by a
  significant amount in the sources of foreign
  exchange earnings
• One major problem facing a number of developing
  economies is the volatility of the commodity
  markets. For over 30 years the prices of
  commodities, both hard and soft varieties, have
  been falling in real terms
• Many of the exported commodities are relatively
  inelastic in the short run and once the crop has
  begun its development there is little else to do
  but accept whatever the world price is at the
  time of harvest. Without unreliable flows of
  earnings it is difficult to put aside monies for
  investment in diversification

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Commodity Market problems

• Overproduction, which puts pressure on that
  country to accept whatever price they can get
• Failure to get all producers to join the 'club'
• Storage of some commodities is difficult and
  expensive, so fluctuations cannot be evened out
• Floor prices are too high and encourage
  overproduction. This then requires precious
  revenues to buy and so the investment funds begin
  to disappear
• Terms of Trade deteriorate

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The developing world and debt

• Increased interest rates
• Increased value of the dollar, so they had to
  sell more exports in order to pay back debt
  valued in dollars
• The recession in the developed world meant that
  they imported less from developing economies. A
  long-term decline started in the real value of
  most commodities
• Net capital inflows reduced dramatically
• Many of the developing countries experiencing net
  outflows of money, in that they actually paid
  more to the developed economies than they
  received from them. So, the poorest nations were
  sending a substantial part of their income to the
  richer countries (the poor aiding the rich!).
• Their total debt increased 25 fold during the two
  decades of the 1980s and 90s.
• Their debt-export ratio rose and they had to earn
  more money from the sale of exports just to pay
  their debts.
• Their debt to GDP ratio rose and so a larger
  proportion of their national income was owed in
  debt.
• Their debt-service ratio rose. This shows the
  percentage of export revenue that has to be used
  to repay debt plus interest. This need not be a
  problem if exports are rising faster in real
  terms, but they were not.

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Other problems

• They can attempt to expand GDP faster than their
  debt ratio. This is quite easy to write but
  difficult to achieve in reality.
• The richer nations could write-off debts.
  Supporters of this action argue that, once
  released from a burden they cannot afford to pay,
  developing economies would import more and so
  boost developed world trade. Such imports could
  raise living standards and allow for more
  investment. Opponents, and the US is amongst
  these, point to irresponsible borrowing being
  promoted if old debt is wiped off. The Highly
  Indebted Poor countries initiative of the EU and
  others has borne some fruit but, in reality, many
  of the debts cancelled would never have been
  repaid. Most countries attempt to re-schedule
  debt, or seek a moratorium while they adjust to
  the increased sums needed to be allocated to
  debt.
• Structural adjustment programmes can be accepted
  as part of an IMF loan to clear debts. This
  scheme tends to impose heavy costs on economies

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Other problems

• Non-convertible currencies
• These mainly apply to developing countries whose
  exchange rates are fixed (usually against the
  dollar), rather than floating, and whose
  currencies are not therefore freely convertible
  through the financial markets.
• As the fixed rate is usually one that would be
  greater than the free market equilibrium rate,
  the exchange rates have tended to be overvalued.
  This may act as a barrier to development as it
  makes exports more expensive, causing yet another
  problem for exporters of primary commodities,
  while at the same time making imports cheaper.
• Usually a pre-condition of the IMF when it gives
  loans to heavily indebted developing countries is
  that they devalue their currencies and allow them
  to float
• Capital flight
• Capital flight is an aspect of the debt crisis of
  developing countries. Indebted countries have
  often borrowed more money to simply finance their
  debts but, rather than being used to repay these
  debts, much of this money has been put on deposit
  in foreign banks by firms and individuals, or has
  been put into stocks and shares and property.
• Capital flight occurs when firms or individuals
  speculate on the prospect of earning a higher
  return abroad. This will particularly occur when
  there is
• Fear of devaluation / a belief that the exchange
  rate is overvalued
• High rates of inflation
• A low real rate of interest
• A need to 'launder' money abroad
• A poor domestic investment prospect.

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Globalisation

• Employment - those who see globalisation as a
  'success' point to the increase in employment
  worldwide. Between 1980 and 1994 the world
  workforce grew by over 630 million workers. The
  pro-globalisation lobby also point to the
  increase in life expectancy in such countries as
  South Korea, which only 30 years ago recorded
  infant mortality rates close to those of the
  worst now being posted in parts of Africa.
• Poverty - the thing now is to transform more and
  more countries into dynamic parts of this
  expansive economy.'
• Capital - this is one area where the
  globalisation process has been seen to produce
  problems as well as perceived advantages. In the
  1980s came the Latin American crisis, then that
  of Mexico and as the century drew to a conclusion
  the Asian capital outflow caused severe problems.
  What now seems to happen is that short-term
  capital follows move with alarming speed from one
  high return location to another. These sudden
  rushes either in or out of one market cause
  serious problems for the domestic banking system
  and the exchange rate, property prices and other
  asset values.
• Debts - the scale of this problem has enormous
  potential for disaster amongst some of the
  poorest nations.
• When we consider debts it is clear that there is
  a need for tighter supervision of
• Capital flows, especially those short term flows,
  such as hedge funds and derivatives, that can
  move at alarming speed from one economy to
  another.
• The provision of international liquidity, so as
  currency crises can be reacted to quickly and in
  sufficient volumes to stop the erosion in a
  certain currencies value.

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Globalisation

• The ability of the IMF to act as international
  lender of last resort. Indeed, the future might
  be best served by the creation of a Global
  Central Bank.
• A more orderly way of settling rescue packages.
  Ways need to be found to involve private
  investors as early as possible, else they can
  gain from the movements of currency values that
  accompany a sharp fall in just one currency.
• Who decides what is to happen? In the opinion of
  some this remains the domain of the rich
  countries. Membership of G7 and G8 needs to be
  broadened. This has already started with the
  formation of GX, to which China, India, Brazil,
  Russia, South Korea and South Africa have been
  added to the original G7 membershipp

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Policies to promote development

• Aid
• Humanitarian - which can both be by individual
  country to country or via a major organisation
  such as one of the UN agencies. This is NOT a
  loan and is normally sent to help against a
  specific problem e.g. drought.
• Bi-lateral - which is given by one country to
  another. It is a loan, though may be subject to a
  long period prior to re-payment commencing and
  granted of soft, or below market terms. The
  largest recipient of UK bilateral aid is India.
• Multi-lateral - which is when separate countries
  pay money into one central organisation, say the
  IMF and it then determines who receives money and
  for what. Once again this is a loan and has to
  re-pay.
• Some grants are made and they might be directed
  at technical services, or scholarships for some
  students to study in a particular country. Aid
  might also be trade related, in that the monies
  will only be made available if the receiving
  country agrees to buy goods or services from the
  donor nation.
• Successful aid should be an attempt to
• Overcome the low savings ratios recorded in
  developing economies. Most poor people consume
  the vast majority of what they earn.
• Help reduce foreign exchange outflows, so
  allowing the domestic government to use such
  monies to build the necessary infrastructure for
  development.
• Reduce the dependency of private investment,
  which may not arrive or will only be found at a
  high price to the country seeking such funding

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Aid should

• Successful aid should also
• Improve the living standards of the poorest
  people in the receiving country. This is not
  always possible, as government is normally based
  in the capital, which is by definition an urban
  centre. Like all political regimes those in
  developing countries serve those who elected them
  to office and power. Those who did not tend to
  receive little. If this persists it can be a
  cause of unrest and even coups and military
  takeovers.
• Move with the times and accept that what was
  fashionable several years may no longer be. Local
  opinion and knowledge is increasingly used when
  deciding on what to invest in and why.
• Not simply provide cheap food, except in an
  emergency, as this undermines the domestic
  agricultural sector. In some countries a once
  self-sufficient farming sector has lost part of
  its domestic market to food aid and now the
  country imports part of its staple food crop.
• Allow choice to be exercised by the receiving
  country. A problem with tied aid is that it
  reduces choice and the developing economy may not
  be getting the best deal

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Aid works best when..

• They work best when
• Allowed to tackle issues at local level
• Encouraged to employ as many local workers as
  possible
• Specialise in specific and often rural-based
  project work
• Project monitoring is done very carefully
• Relations with government are cordial but not too
  friendly
• However
• Structural Adjustment Programmes. These are part
  of any 'rescue package' a developing country may
  ask for. Normally, they require the receiver to
  accept that
• They cut, or even drop all subsidies and price
  controls, even on basic foodstuffs
• They cut public expenditure
• They reduce the quantity of money in circulation
• They reduce those employed in the public sector
• They quickly reduce domestic inflation
• They open up home markets
• They privatise essential utilities such as gas,
  water and electricity, as well as other
  industries

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Domestic Policies

• Sectoral change
• Industrialisation
• Population
• Macro stabilisation
• Conclusion
• The developing world faces many problems as it
  attempts to increase the amount of economic
  welfare available to its citizens. The main
  difficulties are
• Being able to exploit their resources
• Being able to specialise and gain through
  comparative advantage
• Being able to keep more value added within their
  own economy
• Having fair access to developed markets