Chapter 9 Development Key Issue 4

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Jason TANG

Chapter 9

Key Issue 4

Why Do Less Developed Countries Face Obstacles to Development?

Development through self sufficiency Development through International trade Financing Development Fair Trade

Development Through Self-Sufficiency

For much of the 20th century self-sufficiency or balanced growth was the most populardevelopment alternative, especially for LDCs.

It protects infant industries by setting barriers and tariffs on imports, as well as fixingquotas and requiring licenses to restrict the number of legal importers.

India followed this model of development in the decades after independence fromBritain.

It has two major problems. It protects inefficient industries and creates a largebureaucracy to administer the various controls.

Development Through International Trade

In the 1950s W.W. Rostow proposed his development model, which helped countries tomove towards development through international trade.

This was a five-stage model. Stage 1 is a traditional society, in which a country is still predominantly

agricultural.

Stage 2, a country reaches the preconditions for takeoff when entrepreneursinitiate economic activities. Infrastructure develops and productivity increases.

Stage 3 is takeoff, which is essentially the beginning of an industrial revolution. Stage 4, in the drive to maturity stage, industry diffuses and results in rapid

growth.


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Stage 5, the final stage, is the age of mass consumption, when the economyshifts from heavy industry to the production of consumer goods.

Examples of International Trade Approach

The international trade approach has been followed by numerous countries in Asia. The most successful initially in Asia included South Korea, Singapore, Taiwan and Hong

Kong. They concentrated on the production of manufacturing goods using cheap labor.

The petroleum-rich Arab countries pursued the same approach. Saudi Arabia, Kuwait,Bahrain, Oman, and the United Arab Emirates have been very successful, using

petroleum revenues to finance large-scale projects.

Problems with the International Trade Alternative

The international trade approach to development also has problems. These include: 1) Uneven resource distribution

Some countries found that the prices of their commodities did notincrease and in some cases decrease

2) Market stagnation World Market for many products is expanding slower than in the past

3) Increased dependence on MDCs. Building up takeoff industries that sell to MDCs may force LCDs might

have to cut back on production of food, clothing, and other necessities

Recent Triumphs with the International Trade Alternative

But it has now been embraced by most countries. This approach has been aided by thecreation of the World Trade Organization (WTO) in 1995, which helps to reduce barriers

to international trade.

The WTO helps to eliminate trade restrictions between countries. It also enforcesinternational trade agreements.

Investment made by transnational corporations (TNCs) in foreign countries is known asforeign direct investment (FDI). The headquarters of most TNCs are in the U.S. and

western Europe.


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Financing Development

LDCs borrow money for major projects from two major international lenders. The World Bank includes the International Bank for Reconstruction and Development

(IBRD) and the InternationalDevelopment Association (IDA). They provide loans for thereform of public administration and legal institutions.

The International Monetary Fund (IMF) provides loans to countries that have balance-of-payment problems rather than for specific projects.

There are numerous problems associated with all of these loans. Many new projects inLDCs are expensive failures, and many LDCs have been unable to repay interest and

loans.

Neither of these organizations will cancel or refinance debts without strings attached. Before granting debt relief, an LDC is required to prepare a Policy Framework Paper

(PFP) outlining a structural adjustment program that includes economic goals and

strategies for achieving the objectives.

Fair Trade

Fair trade has been proposed as an alternative to the international trade model ofdevelopment.

Fair trade means that products are made and traded according to standards that protectworkers and small businesses in LDCs.

Standards for fair trade are set internationally by Fair trade Labeling OrganizationsInternational (FLO).

Ten Thousand Villages, which specializes in handicrafts, is the largest fair tradeorganization in North America.

Two sets of standards distinguish fair trade; one set applies to workers on farms and infactories and the other to producers.

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Chapter 9 Development Key Issue 4