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Economic Development and Transition. Chapter 18. Levels of Development. Half the world’s population lives in extreme poverty (less than $1 a day) Measure well being of country on development (process that nation meets economic, social and political needs of people)

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levels of development
Levels of Development
  • Half the world’s population lives in extreme poverty (less than $1 a day)
  • Measure well being of country on development (process that nation meets economic, social and political needs of people)
  • Developed nations (MDC’s)- above average level of material well being
  • Less Developed Countries (LDC’s) worlds poorest countries
  • Developing Countries- not poorest but not high standard of living of MDC’s
  • Development is how well a nation provides food, education, shelter, and levels of economic production
measuring development
Measuring Development
  • Primary measure of development is GDP (total market value of all goods and services produced in a year)
  • Per Capita GDP is GDP divided by total population
  • Does not account for distribution of wealth, in many LDC’s gap between rich and poor very wide
  • Energy consumption- amounts of energy used are an indication of industrialization (extensive organization of an economy for manufacturing)
  • Low levels of energy consumption are a sign of little industry, development
measuring development1
Measuring Development
  • Labor Force- LDC’s most labor force devoted to agriculture, little opportunity for workers to specialize
  • Unable to produce specialized goods for sale, unable to generate cash income
  • Consumer goods- large number of consumer goods means people have disposable income
  • Literacy- higher in more developed countries
  • Higher levels of education mean population is more productive
  • Life Expectancy- well nourished, well housed population has longer life expectancy
  • Infant mortality rate- number of deaths in first year of life per 1,000 births
characteristics of developed nations
Characteristics of Developed Nations
  • Have high per capita GDPs
  • Higher degree of economic, political freedom
  • Agricultural output high, but few farmers (mechanization, industrialization of agriculture)
  • Most of labor force in service industry or manufacturing
  • High energy usage
  • Use of technology increases productivity
  • Infant mortality low, life expectancy high
  • Most of population urbanized
  • Solid infrastructure (services needed to keep economy healthy- roads, communication systems, financial institutions)
characteristics of less developed countries
Characteristics of Less Developed Countries
  • Low per capita GDP
  • Low energy usage
  • Most of population in agriculture (subsistence farming)
  • Unemployment rates high
  • Education system inadequate, children needed to work on farms; literacy rates low
  • Most of population is rural (not always)
  • Poor diet, access to health care lead to high infant mortality and lower life expectancy
levels of development1
Levels of Development
  • Economic development occurs in the following stages
  • Primitive equilibrium- no economic system exists, based on tradition
  • Transition- traditions crumble, new ways adopted
  • Takeoff- new industries grow and profits reinvested
  • Semi-developed- economy expands, enters international market
  • Highly developed- basic needs easily met, economy focused on consumer goods, public sector
rapid population growth
Rapid Population Growth
  • Quality of life depends on productive population, LDCs can’t meet needs of rapidly growing population
  • Many LDCs are experiencing increase in life expectancy and no decrease in birth rates, leading to rapid population growth
  • Double population means need for more employment opportunities, schoolrooms, agricultural production, industrial output
factors of production
Factors of Production
  • Physical geography makes development difficult
  • Uneven distributions of resources, arable land
  • Sometimes problem is how to utilize resources, technology and capital to extract resources absent in many LCDs
physical and human capital
Physical and Human Capital
  • Lack of human made resources to create goods and services
  • Subsistence agriculture does not give families opportunity to save or produce anything more than food
  • Means large portion of population who don’t produce are supported by others
  • Health, nutrition, education important to develop human capital
  • Keeps investors away because they don’t see profit if country lacks a skilled, healthy workforce
health and education
Health and Education
  • Health- Performance and productivity depend on good nutrition, less developed countries suffer from chronic food shortages
  • Education- To use technology and move beyond subsistence educated workforce is necessary
  • LDCs have low rates of literacy and limited access to education
  • Ideas about gender keep women out of education and the workforce
  • Brain drain- best educated citizens leave many LDCs for education opportunities, attracted to opportunities of developed countries
political factors
Political Factors
  • Limited or reduced development in LDCs
  • Colonial legacy
  • Many were former colonies with economies based on extraction of raw materials
  • Shipped to colonizers, where they were turned into finished products
  • Many had to rely on colonies for manufactured goods
  • After WWII many became independent and tried to modernize their economies
  • At first they turned to central planning, many are now turning to free enterprise
  • Corruption in government
  • Policies and political decisions to only benefit a small minority, leaving many with needs unmet
  • Civil wars and social unrest have plagued many countries
  • Military leaders spend huge sums of money at the expense of other societal needs
  • 1970’s and 1980’s many LDCs acquired debt from foreign governments and private banks
  • Worldwide economic crises hindered countries from paying back loans (Oil Crisis 1973 value of dollar increased and made paying loans back more difficult)
  • Some countries foreign debt is greater than annual GDP
  • Building infrastructure, developing education, healthcare and creating industry require large sums of money
  • Two methods to finance development:
  • Internal financing from the countries citizens
  • Underdeveloped nations do not have much money to invest
  • Those with money keep it in foreign banks and overseas investments, many LDCs turn to foreign investment
  • Foreign investment money from other countries
  • Foreign direct investment- business established in country by foreign firm
  • Often formed by Multi-National Corporations (MNCs)
  • MNCs are large corporations that produce and sell goods across the globe
  • Attracted to LDCs for profit, take advantage of cheap labor and natural resources
  • Money not reinvested in country, goes to foreign owners
  • Potential for unethical treatment (low wages for workers)
  • Positive effects provide jobs, introduce technology, opportunity for related services to develop
  • Foreign portfolio investment- foreigners purchase stocks and bonds in countries markets, funds lead indirectly to increases in production
foreign aid
Foreign Aid
  • Foreign governments give money and other forms of aid to LDCs to aid development
  • Build schools, develop infrastructure
  • Reasons- humanitarian, military, economic, social
  • Examples- aid to Western Europe after WWII, more recently aid to Middle Eastern countries friendly to American democracy
  • These countries can provide new markets for American goods
international institutions
International Institutions
  • International institutions promote development
  • Most prominent are the World Bank, United Nations Development Program, International Monetary Fund
  • World Bank- largest provider of development assistance, raises money in financial markets and takes contributions from member nations
  • UN Development Program- elimination of poverty through development, provides grants for economic and social development, funded by voluntary contributions from UN members
world bank income groups
World Bank Income Groups

Blue – high Income

Green- uppermiddle income

Purple- lower middle income

Red -poor

international institutions1
International Institutions
  • International Monetary Fund (IMF)- facilitates development through policy advice, technical assistance
  • Often viewed as the last resort for struggling LDCs
  • Uses debt rescheduling ( giving more time, forgiving, dismissing borrowed money); stabilization programs (IMF tries to help change economic policies of debtor nation)
  • Stabilization programs have negative impact on poor; cuts in government services, cutting wages while prices rise
  • Cause decrease in domestic consumption while country tries to export more to make money
toward a market economy
Toward a Market Economy
  • LDCs began to see limitations of centrally planned economies
  • Many have begun to replace them with market based systems
  • Some are modifying their centrally planned economies to incorporate some free market practices
  • Huge adjustment for economy and nation
  • One of the first steps is privatization (sale or transfer of government owned business to private individuals)
  • Can sell business to one owner
  • Sell shares in business
  • Privatization means only profitable business will continue to operate
  • Means secure life long employment for some is over because competition weeds out the weak
other issues in transition
Other Issues in Transition
  • The Legal System and Government
  • Establishment of a legal system protecting property rights
  • Laws that ensure the transfer of property
  • Law and order prevent criminals and government from interfering with the day to day business of the economy
  • Laws need to provide a framework of regulation
  • Workers need to develop a different work ethic based on incentive to influence labor
russia in transition
Russia in Transition
  • USSR Once dominant communist nation, late 1980’s lagging economy brought social and economic reform
  • Most land, labor and capital devoted to heavy industry and the military, little left to produce consumer goods
  • 1980’s new leader Mikhail Gorbachev began series of economic reforms (perestroika) to gradually change over to a free market economy
  • Workers, factory managers had more control over production
  • Introduced a more open government policy (glasnost)where citizens could do what they wish without government reprisal
  • Policy changes led to collapse of communism in 1991
russia in transition1
Russia in Transition
  • By 1992 government lifted price controls, prices tripled
  • Wealth was unevenly distributed and organized crime and corruption infiltrated society and the economy
  • Financial aid from the World Bank and the IMF was mismanaged and not used efficiently
  • Recently Russia has started to tap into their vast oil, natural gas and mineral resources to sell on the world market