Chapter 17

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Chapter 17Economic Development
MACROECONOMICS EXPLORE APPLYby Ayers and
Collinge
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Learning Objectives

1. Discuss the problems that are a priority for
   developing countries.
2. Describe the goals on the United Nations
   development agenda.
3. Point out the incentives for population growth.
4. Explain the connection between economic
   development and property rights.

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Learning Objectives

1. Identify the roles of the International Monetary
   fund and the World Bank in economic development.
2. Describe how insecure property rights have
   hindered economic development in Russia.

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17.1DEVELOPING COUNTRIES AND POVERTY

• There are approximately 6.2 billion people in the
  world living in 207 countries.
• The International Monetary Fund (IMF) classifies
  these countries into three groups
• Developed countries free market high income
  countries
• Less developed countries a person in one of
  these 128 countries may earn as little as 170 a
  year.
• Transitional economies moving away from central
  economies towards market economies.

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Developing Countries and Poverty

• Economic development is a field within economics
  that studies why some countries remain mired deep
  in poverty, while other countries prosper.
• The data that describes a countrys economic
  development are called economic indicators.
• Per capita income is probably the indicator
  referred to most frequently.
• Often a set of indicators is needed to assess the
  level of development in a country.

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Problems of the Developing Countries

• While there are significant differences in the
  problems LDCs face, they do share several
  problems
• Poverty.
• Deficiencies in infrastructure.
• Low life expectancy rates.
• High population growth.
• The extreme poverty of the LDCs has enormous
  consequences for the people living in those
  countries, including the prospect of an early
  death.

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Problems of the Developing Countries
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Problems of the Developing Countries
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Rostows Stages of Economic Development

• In 1960 Economic historian Walter W. Rostow
  suggested that countries pass through 5 stages in
  their development.
• Stage 1 Traditional society.
• Stage 2 Preconditions for takeoff.
• Stage 3 Takeoff.
• Stage 4 Drive to maturity.
• Stage 5 High Mass Consumption.

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Problems of the Developing Countries
LOW-INCOME COUNTRIES COMPARED TO THE UNITED STATES
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A Development Agenda

• The stated mission of the United Nations (UN) is
  to promote world peace and prosperity through
  international cooperation.
• The UN has set eight economic development goals.
• The U.N. plans to achieve these goals by 2015.
• The goals are associated with targets, specific
  results that when achieved will mean each goal
  has been met.

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Problems of the Developing Countries
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United Nations Development Indicators for the
World
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17.2POPULATION GROWTH

• The world has seen its population grow rapidly.
• From just over 3 billion in 1960, to over 6
  billion today.
• Part of the reasons for this growth is that
  advances in medicine and hygiene have lowered
  death rates, thereby increasing longevity.
• Birthrates have also been high, especially among
  the segments og the population least able to
  afford raising children.

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World Population Growth
Billions of people
10 8 6 4 2 0
Population
1650 1750 1850 1900 1950
2002 2020
Years
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The Dismal Science

• Economics was once called the dismal science.
• Thomas Robert Malthus popularized the notion in
  the 1800s that economics could only hope to
  delay the day when the worlds population finds
  itself at the brink of starvation.
• According to this view, starvation is the only
  force that can keep population in check.
• The world has come a long way since the 1800s
  and both population and living standards have
  increased dramatically.
• Since population is growing geometrically, there
  is still room for concern.

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Population Growth
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Subsidizing Population Growth
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Problems with the Price Signal

• One group that frequently does not bear the cost
  of its decisions is parents.
• Efficiency would suggest that parents should pay
  all of the cost that rearing children.
• Equity suggest that children children should have
  comparable opportunities.
• Since a child born into poverty does not choose
  to be there, to promote equity, it makes since
  for taxpayers to subsidize less fortunate
  children.

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Problems with the Price Signal

• To the extent that the cost of rearing children
  are paid by others, parents face a marginal cost
  of rearing children that does not reflect the
  full cost of those children to society.
• Government subsidies can influence parents to
  choose to have more children than they would were
  the marginal cost not subsidized.
• The result is that government subsidies tend to
  increase population growth.

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Problems with the Price Signal

• In order to receive extra government aid or tax
  write-offs.
• These are children that children would prefer to
  have, except for the extra they cause.
• In other words, the parents demand curve would
  be negative for these children
• Public assistance intended to help children may
  in this way lead to more children who need help.

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Problems with the Price Signal

• In less developed countries people have children
  they dont want for several reasons.
• One is because they lack access to birth control,
  or they may have customs or beliefs that do not
  accept its use.
• A second reason is due to ineffective or
  non-existent government programs such as social
  security or other transfer programs.

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Problems with the Price Signal

• A couple in a less developed country with several
  children can rely on them for assistance if they
  reach advanced ages.
• Education, medical care, and stable governments
  can help address population growth issues.

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17.3PRICES AND PROPERTY RIGHTS

• For countries to develop they need capital.
• Investments from private sources or government is
  the source of this capital.
• Because of the central importance of prices in
  guiding consumption and investment spending
  throughout the world, the market economy is often
  called the price system.
• Prices respond to scarcity.
• Other things equal, the scarcer the resources,
  the higher their prices.

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Prices and Property Rights

• With the price of a non-renewable resource like
  oil, when the resource price rises the market is
  motivated to explore for more of it and develop
  substitutes.
• As the price of oil has risen, technology has
  responded to prevent shortages.
• Many developing countries exports are heavily
  weighted toward natural resources.
• The problem arises when the prices of these
  commodities is not high enough to sustain
  development.

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Prices and Property Rights

• The Prebisch-Singer thesis, which was advanced in
  the 1950s, states that developing countries will
  be trapped in poverty because the price of their
  exports will be driven down by increasing
  commodity supplies as the price system responds.
• This can lead to immiserising growth, where
  increasing supplies of commodities exported by
  the LCDs causes prices to drop so far that these
  countries end up worse off because of trade.
• This thesis is not generally accepted by
  economist for the ills of these countries.

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Prices and Property Rights

• Secure property rights, meaning rights of
  ownership, are lacking in many LDCs.
• Investors need to know that they will be able to
  retain the fruits of their investments, or they
  will not invest.
• They must not fear that government action in the
  future will prevent them from reaping the rewards
  that they envision when they make their
  investments in the present.

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Economic Growth

• Economic incentives can put a brake on population
  growth.
• Specifically, as countries become wealthier, the
  opportunity cost of peoples time rises.
• Fertility rates, the number of children born per
  woman, reflect economic incentives and traditions
  such as attitudes towards family size.

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Economic Growth
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17.4COUNTRIES HELPING COUNTRIES Foreign Aid

• When one country helps another country, the
  mechanism is often foreign aid.
• Foreign aid consist of donated money or capital.
• Countries provide foreign aid on their own and
  through membership in the two most important
  organizations that channel resources to the
  poorer countries.
• World Bank
• International Monetary Fund

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Foreign Aid An Answer to Scarcity?

• Polls show that people in the developed countries
  support the principles of giving aid to the
  LDCs.
• The amount of that aid is the subject of debate.
• To provide relief to the worlds most heavily
  indebted countries the U.S. and other countries
  help pay for the debt through a program
  established by the IMF and the World Bank.

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Purposes of U.S. Foreign Aid
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The International Monetary Fund (IMF)

• The purposes of the IMF are to
• Promote international monetary cooperation
• Facilitate the expansion of international trade.
• Encourage exchange rate stability.
• Further the establishment of a multilateral
  (multicountry) payment system.
• Provide resources to member countries
  experiencing balance of payments problems.

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The World Bank

• World Bank loans to less-developed member
  countries are intended to further their economic
  development.
• World Bank loans only go to developing countries,
  and must be repaid.
• Lending is of two types.
• The first is lending to countries that are able
  to pay near-market interest on loans they
  receive.
• The second is to countries that cannot afford to
  pay interest at all. These loans are called
  credits.

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17.5MACROECONOMIC INDICATORS FOR RUSSIA
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Terms Along the Way

• developed countries
• less-developed countries
• Transitional economies
• economic development
• Rostows stages of economic development

• the dismal science
• price signals
• Prebisch-Singer thesis
• immiserizing growth
• property rights
• World Bank
• International Monetary Fund

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Test Yourself

• Life expectancy in in the LDCs is generally
• about the same as developing countries.
• higher than in developed countries because people
  eat healthier foods.
• higher than in developed countries because the
  people eat less frequently.
• lower than in the developed countries.

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Test Yourself

• 2. The fourth stage in Rostows stage model is
• traditional society
• takeoff.
• drive to maturity.
• high mass consumption.

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Test Yourself

• 3. The price system
• hinders economic development.
• has no effect on economic development.
• promotes economic development by offering people
  incentives to find and develop new resources.
• promotes economic development, but is clearly
  inferior to central planning in that role.

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Test Yourself

• 4. In recent years annual foreign aid from all
  countries has totaled about
• 10 billion.
• 40 billion.
• 70 billion.
• 100 billion.

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Test Yourself

• 5. The primary role of the International monetary
  fund (IMF) is to
• central planning of economies.
• make sure that countries repay their loans to the
  World Bank.
• show farmers in LDCs how to produce enough food
  to avoid starvation.
• strengthen the world monetary and financial
  system.

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Test Yourself

• 6. As Russia develops its market economy by
  reducing taxes and securing property rights, the
  underground economy in Russia will likely
• expand.
• diminish.
• remain the same.
• be legalized by the government.

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The End!