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PowerPoint Lectures for

Principles of Economics, 9e

By

Karl E. Case, Ray C. Fair & Sharon M. Oster

; ;

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

36PART VII THE WORLD ECONOMY

Economic Growth inDeveloping and

Transitional Economies

Fernando & Yvonn Quijano

Prepared by:

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36

Life in the Developing Nations: Population and Poverty

Economic Development: Sources andStrategies

The Sources of Economic DevelopmentStrategies for Economic DevelopmentGrowth versus Development: The Policy

CycleTwo Examples of Development: China

and India

Issues in Economic DevelopmentPopulation Growth

The Transition to a Market EconomySix Basic Requirements for Successful

Transition

CHAPTER OUTLINE

PART VII THE WORLD ECONOMY

Economic Growth inDeveloping and

Transitional Economies

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Economic Growth in Developing and Transitional Economies

All economic analysis deals with the problem of making choices under conditions of scarcity, and the problem of satisfying people’s wants and needs is as real for Somalia and Haiti as it is for the United States, Germany, and Japan. The universality of scarcity is what makes economic analysis relevant to all nations, regardless of their level of material well-being or ruling political ideology.

Even though economic problems and the policy instruments available to tackle them vary across nations, economic thinking about these problems can be transferred easily from one setting to another.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 37

Life in the Developing Nations: Population and Poverty

TABLE 36.1 Indicators of Economic Development

Country Group

Population,2006

Gross National

Income per Capita,

2006(dollars)

Literacy Rate(percent over

15 yearsof age)

Infant Mortality,

2006 (deaths

before age 5 per 1,000

births)

InternetUsers per

1,000 people,2005

Low-income 2.3 billion 510 29 122.0 30

Lower middle-income

2.4 billion 1,580 75 42.0 47

Upper middle-income

575.9 million 4,770 243 29.7 72

High-income 1.0 billion 32,040 2,977 7.0 76

Source: World Bank, www.worldbank.org

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In the year 2006, the population of the world and the number of nations were:

a. 200 billion people and 155 nations.

b. 6.5 billion and over 200 nations.

c. 1.2 billion and more than 2,000 nations.

d. 3.2 billion and more than 300 nations.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 37

In the year 2006, the population of the world and the number of nations were:

a. 200 billion people and 155 nations.

b.b. 6.5 billion and over 200 nations.6.5 billion and over 200 nations.

c. 1.2 billion and more than 2,000 nations.

d. 3.2 billion and more than 300 nations.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 37

Life in the Developing Nations: Population and Poverty

While the developed nations account for only about one quarter of the world’s population, they are estimated to consume three-quarters of the world’s output.

This leaves the developing countries with about three-fourths of the world’s people but only one-fourth of the world’s income.

The simple result is that most of our planet’s population is poor.

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Economic Development: Sources and Strategies

The Sources of Economic Development

Capital Formation

vicious-circle-of-poverty hypothesis Suggests that poverty is self-perpetuating because poor nations are unable to save and invest enough to accumulate the capital stock that would help them grow.

capital flight The tendency for both human capital and financial capital to leave developing countries in search of higher expected rates of return elsewhere with less risk.

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The vicious cycle of poverty is an explanation of poverty that emphasizes:

a. Income distribution and wealth accumulation.

b. Hunger, illiteracy, and malnutrition.

c. Consumption, saving, investment, and capital accumulation.

d. Agriculture versus industry and imports versus exports.

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The vicious cycle of poverty is an explanation of poverty that emphasizes:

a. Income distribution and wealth accumulation.

b. Hunger, illiteracy, and malnutrition.

c.c. Consumption, saving, investment, and capital accumulation.Consumption, saving, investment, and capital accumulation.

d. Agriculture versus industry and imports versus exports.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 37

Economic Development: Sources and Strategies

The Sources of Economic Development

Human Resources and Entrepreneurial Ability

brain drain The tendency for talented people from developing countries to become educated in a developed country and remain there after graduation.

Social Overhead Capital

social overhead capital Basic infrastructure projects such as roads, power generation, and irrigation systems.

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Which of the following statements is correct?

a. Poverty alone cannot explain capital shortages, and poverty is not necessarily self perpetuating.

b. Development cannot proceed without human resources capable of initiating and managing economic activity.

c. The governments of developing countries can do important and useful things to encourage development, especially in areas that the private sector would never touch.

d. All of the above statements are correct.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 37

Which of the following statements is correct?

a. Poverty alone cannot explain capital shortages, and poverty is not necessarily self perpetuating.

b. Development cannot proceed without human resources capable of initiating and managing economic activity.

c. The governments of developing countries can do important and useful things to encourage development, especially in areas that the private sector would never touch.

d.d. All of the above statements are correct.All of the above statements are correct.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 16 of 37

Economic Development: Sources and Strategies

The Sources of Economic Development

Social Overhead Capital

Corruption

The following chart shows the World Bank’s rating of corruption levels in a number of countries around the world. The countries are ranked from those with the strongest controls on corruption—Germany and France—to those with the lowest controls—Pakistan and Nigeria. Indonesia, as you can see, is near the bottom of the list.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 17 of 37

Economic Development: Sources and Strategies

Strategies for Economic Development

Agriculture or Industry?

TABLE 36.2 The Structure of Production in Selected Developed and Developing Economies, 2003

Country

Per-CapitaGross National Income (GNI)

Percentage of Gross Domestic Product

Agriculture Industry Services

Tanzania $ 375 45 17 37

Bangladesh 480 20 28 52

China 2,010 12 47 41

Colombia 2,740 12 34 54

Thailand 2,990 10 46 44

Brazil 4,730 5 31 64

Korea (Rep.) 17,690 2 23 75

Japan 38,410 2 30 68

United States 44,970 2 23 75

Source: World Bank, World Development Indicators, 2008; Sectoral numbers for U.S. and Japan are for 2003.

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Economic Development: Sources and Strategies

Strategies for Economic Development

Exports or Import Substitution?

import substitution An industrial trade strategy that favors developing local industries that can manufacture goods to replace imports.

export promotion A trade policy designed to encourage exports.

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When imports of manufactured goods become relatively expensive in the domestic market, while exports become relatively inexpensive world markets, a country would naturally tend to choose:

a. Import substitution over export promotion.

b. Export promotion over import substitution.

c. Both import substitution and export promotion.

d. Neither import substitution nor export promotion.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 20 of 37

When imports of manufactured goods become relatively expensive in the domestic market, while exports become relatively inexpensive world markets, a country would naturally tend to choose:

a.a. Import substitution over export promotion.Import substitution over export promotion.

b. Export promotion over import substitution.

c. Both import substitution and export promotion.

d. Neither import substitution nor export promotion.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 21 of 37

Economic Development: Sources and Strategies

Strategies for Economic Development

Central Planning or the Market?

International Monetary Fund (IMF) An international agency whose primary goals are to stabilize international exchange rates and to lend money to countries that have problems financing their international transactions.

World Bank An international agency that lends money to individual countries for projects that promote economic development.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 of 37

Economic Development: Sources and Strategies

Strategies for Economic Development

Microfinance: A New Idea

In the mid 1970s, Muhammad Yunus, a young Bangladeshi economist created the Grameen Bank in Bangladesh.

Microfinance is the practice of lending very small amounts of money, with no collateral, and accepting very small savings deposits. It is aimed at introducing entrepreneurs in the poorest parts of the developing world to the capital market.

Relative to traditional bank loans, microfinance loans are much smaller, repayment begins very quickly, and the vast majority of the loans are made to women (who, in many cases, have been underserved by mainstream banks).

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 23 of 37

Economic Development: Sources and Strategies

Growth versus Development: The Policy Cycle

structural adjustment A series of programs in developing nations designed to: (1) reduce the size of their public sectors through privatization and/or expenditure reductions, (2) decrease their budget deficits, (3) control inflation, and (4) encourage private saving and investment through tax reform.

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Economic Development: Sources and Strategies

Growth versus Development: The Policy Cycle

Cell Phones Increase Profits for Fishermen in IndiaKerala is a poor state in a regionof India.

Beginning in 1997 and continuingfor the next several years, mobilephone service was introduced to this region of India.

Once the phones were introduced, waste, which had averaged 5 to 8 percent of the total catch, was virtually eliminated.

In fact, cell phones are improving the way markets in less developed countries work by providing price and quantity information so that both producers and consumers can make better economic decisions.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 25 of 37

Economic Development: Sources and Strategies

Two Examples of Development: China and India

China and India provide two interesting examples of rapidly developing economies. While low per- capita incomes still mean that both countries are typically labeled developing as opposed to developed countries, many expect that to change in the near future.

Many commentators expect India and China to dominate the world economy in the twenty-first century.

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Issues in Economic Development

Population Growth

The populations of the developing nations are estimated to be growing at about 1.7 percent per year.

Concern over world population growth is not new. The Reverend Thomas Malthus (who became England’s first professor of political economy) expressed his fears about the population increases he observed 200 years ago. Malthus believed that populations grow geometrically at a constant growth rate—thus the absolute size of the increase each year gets larger and larger—but that food supplies grow more slowly because of the diminishing marginal productivity of land. These two phenomena led Malthus to predict the increasing impoverishment of the world’s people unless population growth could be slowed.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 27 of 37

Issues in Economic Development

Population Growth

The Consequences of Rapid Population Growth

FIGURE 36.1 The Growth of World Population, Projected to A.D. 2020

For thousands of years, population grew slowly. From A.D. 1 until the mid-1600s, population grew at about .04 percent per year. Since the Industrial Revolution, population growth has occurred at an unprecedented rate.

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Thomas Malthus, England’s first professor of political economy, expressed his fears about:

a. Excessive industrialization leading to worker exploitation.

b. Geometric growth in population but diminishing marginal productivity of the land.

c. The limitations that population growth imposes on saving and investment.

d. The inability of societies to improve human capital through nutrition and formal education when population grows too rapidly.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 29 of 37

Thomas Malthus, England’s first professor of political economy, expressed his fears about:

a. Excessive industrialization leading to worker exploitation.

b.b. Geometric growth in population but diminishing marginal Geometric growth in population but diminishing marginal productivity of the land.productivity of the land.

c. The limitations that population growth imposes on saving and investment.

d. The inability of societies to improve human capital through nutrition and formal education when population grows too rapidly.

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Issues in Economic Development

Population Growth

Causes of Rapid Population Growth

fertility rate The birth rate. Equal to (the number of births per year divided by the population) × 100.

mortality rate The death rate. Equal to (the number of deaths per year divided by the population) × 100.

natural rate of population increase The difference between the birth rate and the death rate.

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The difference between the birth rate and the death rate is called:

a. The fertility rate.

b. The mortality rate.

c. The natural rate of population increase.

d. The labor force participation rate.

e. The stabilization rate.

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 32 of 37

The difference between the birth rate and the death rate is called:

a. The fertility rate.

b. The mortality rate.

c.c. The natural rate of population increase.The natural rate of population increase.

d. The labor force participation rate.

e. The stabilization rate.

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The Transition to a Market Economy

Six Basic Requirements for Successful Transition

Economists generally agree on six basic requirements for a successful transition to a market-based system:

(1) macroeconomic stabilization,(2) deregulation of prices and liberalization of

trade,(3) privatization of state-owned enterprises and

development of new private industry,(4) establishment of market-supporting

institutions such as property and contract laws and accounting systems,

(5) a social safety net to deal with unemployment and poverty, and

(6) external assistance.

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The Transition to a Market Economy

Six Basic Requirements for Successful Transition

Macroeconomic Stabilization

To achieve a properly functioning market system, prices must be stabilized.

Deregulation of Prices and Liberalization of Trade

An unregulated price mechanism ensures an efficient allocation of resources across industries.

Privatization

Private ownership provides a strong incentive for efficient operation, innovation, and hard work that is lacking when ownership is centralized and profits are distributed to the people.

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The Transition to a Market Economy

Six Basic Requirements for Successful Transition

Market-Supporting Institutions

The capital market, which channels private saving into productive capital investment in developed capitalist economies, is made up of hundreds of different institutions.

Social Safety Net

This social safety net might include unemployment insurance, aid for the poor, and food and housing assistance.

External Assistance

Very few believe that the transition to a market system can be achieved without outside support and some outside financing.

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Which of the following are market supporting institutions?

a. Private property.

b. The right to profits.

c. The enforcement of contracts and property rights.

d. All of the above.

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Which of the following are market supporting institutions?

a. Private property.

b. The right to profits.

c. The enforcement of contracts and property rights.

d. d. All of the above.All of the above.

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The Transition to a Market Economy

Six Basic Requirements for Successful Transition

Shock Therapy or Gradualism?

shock therapy The approach to transition from socialism to market capitalism that advocates rapid deregulation of prices, liberalization of trade, and privatization.

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brain drain

capital flight

export promotion

fertility rate

import substitution

International Monetary Fund (IMF)

mortality rate

natural rate of population increase

shock therapy

social overhead capital

structural adjustment

tragedy of commons

vicious-circle-of-poverty hypothesis

World Bank

REVIEW TERMS AND CONCEPTS