The gap between rich and poor countries is substantial. Poorer countries lack much of what people in richer countries take for granted, such as access to electricity, safe drinking water, and paved roads. To reduce disparities between rich and poor countries, developing countries must increase their rate of growth. This means increasing per capita GNI more rapidly and using the additional funds to improve social and economic conditions.
Key Issue 3: Why Do Countries Face Development Challenges?
The gap between rich and poor countries is substantial. In order to increase their rate of growth, developing countries need to increase per capita GDI and spend funds to improve social and economic conditions for their people.
Two Paths to Development Developing countries are confronted with two fundamental obstacles in attempting to stimulate more rapid development:
Adopting policies that successfully promote development.
Finding funds to pay for development.
Developing countries can choose one of two models to promote development: self-sufficiency or international trade.
Self-Sufficiency Path In the self-sufficiency model, countries encourage domestic production of goods, discourage foreign ownership of business and resources, and protect their businesses from international competition. Key elements of the self-sufficiency path to development include the following:
Import limits—the use of barriers such as tariffs, quotas, and licenses, to limit the import of goods from other places,
Insulation—fledgling businesses are supported by isolating them from competition with large international corporations,
Equal investment—spreading investment as uniformly as possible across all sectors of a country’s economy and in all regions, and
Equal income—policies to encourage incomes in the countryside keep pace with those in the city.
International Trade Path In the international trade model countries open themselves to foreign investment and international markets. International trade became more popular beginning in the late twentieth century. Countries identify their unique economic assets, raw materials, food, or manufactured products, that are then are sold on the world market to provide funds to finance development.
Rostow Model This approach is idealized in W.W. Rostow’s five-stage model, where countries fit into one of the five following stages:
Traditional society—high percentage of people engaged in agriculture, funds allocated to military and religion,
Preconditions for takeoff—investment in infrastructure such as transportation systems,
Takeoff—rapid growth in a limited number of industries such as textiles,
Drive to maturity—technology diffused to a wide variety of industries, workers become more skilled and specialized, and
Age of mass consumption—economy shifts from heavy industry to consumer goods.
World Trade Organization The World Trade Organization (WTO) works to reduce barriers to international trade in two principal ways—the reduction of restrictions and the enforcement of trade agreements. Progressive critics of the WTO maintain that the decisions made behind closed doors increase the bottom lines of large corporations at the expense of those suffering from poverty. Conservative critics charge that the WTO undermines the power and sovereignty of individual countries because it can order changes in taxes and laws that it deems support unfair trading practices.
International Trade Examples Two groups of countries have followed the international trade approach: the four Asian dragons (South Korea, Singapore, Taiwan, and Hong Kong) and the petroleum-rich Arabian Peninsula states (Saudi Arabia, Kuwait, Bahrain, Oman, and the United Arab Emirates). The “four dragons” leverage low labor costs to produce clothing and electronics for sale in developed countries. The petroleum-rich Arab Peninsula states use monies from the sale of their petroleum resources to finance public projects and to provide access to a variety of consumer goods.
World Trade During the late twentieth century and early twenty-first century the preferred approach to development has been the international trade model.
International Trade Triumphs Trade grew more rapidly than wealth (as measured by GDP) during the late twentieth and early twenty-first centuries, reflecting the prominence of the international trade model in developing countries. The shift from the self-sufficiency to international trade approach is based on three observations: success of other countries, sales of resources to finance development, and international competitiveness.
Shortcomings of Self-Sufficiency The international trade approach was adopted because of the following short-comings of self-sufficiency: inefficient industries, lack of competitiveness, corruption, and the black market.
India under Self-Sufficiency For several decades after its independence from Britain in 1947, India was a leading example of the self-sufficiency model. India controlled imports by requiring difficult-to-obtain licenses, import limits, heavy taxes on imported goods, and a nonconvertible currency. India also set restrictions on its own companies including requirements for government permission to run a business, subsidies to unprofitable businesses, and government ownership of companies.
India under International Trade India dismantled its formidable collection of barriers to international trade with a relaxed permit policy for foreign businesses, reduction of elimination of taxes and quotas, and elimination of monopolies in some industries. Under self-sufficiency India’s GDP per capita increased from $80 in 1960 to $300 in 1990. After converting to international trade GDP per capita increased to $1,900 in 2017. Worldwide, GDP per capita increased more than 4 percent annually in countries strongly oriented towards international trade compared with less than 1 percent in countries strongly oriented toward self sufficiency.
Financing Development Developing countries do not have access to the funds necessary to fund development, so they obtain financial support from developed countries. Finance comes from two main sources: direct investment by transnational corporations and loans from banks and international organizations.
Foreign Direct Investment An investment made by a foreign company in the economy of another country is known as foreign direct investment (FDI). Foreign direct investment grew rapidly from $172 billion in 2002 to $646 billion in 2016. Development funds were not equally distributed. Nearly one-third all FDI went to developing countries and two-thirds to developed countries. Of the aid to developing countries one-third went to China and another one-third went to Singapore, Brazil, Russia, and Mexico. The major sources of FDI are transnational corporations that invest and operate in countries other than the one in which the company headquarters are located.
International Monetary Fund The two specialized agencies of the U.N. providing loans to developing countries include the International Monetary Fund (IMF) and the World Bank. The IMF provides loans to countries experiencing balance-of-payments problems that could affect expansion of international trade. The IMF does not lend monies for individual projects.
World Bank The World Bank includes the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Loans support reform in public administration and legal institutions, develop and strengthen financial institutions, and implement transportation and social service projects.
Microfinance for Development An alternative source of loans for would-be business owners in developing countries is microfinance. Microfinance is the provision of a small loan to individuals and small businesses that are unable to get a loan from commercial banks. The Grameen Bank, established in Bangladesh in 1977, is a prominent example of microfinance. The Grameen Bank specializes in making loans to women, who make up three-quarters of the borrowers. These women are often mothers and the sole wage earners in the home.
Structural Adjustment Some countries face difficulties in development and are unable to repay their loans.
Loan Debt and Repayment Developing countries often borrow monies for new infrastructure projects to support domestic and foreign businesses. Underlying this practice is the belief that investment in infrastructure will generate business investment and provide the country with funds to repay the loans. Projects in some countries fail because of faulty engineering, squandering of aid on armaments, graft and corruption, and the inability of the new infrastructure to attract other investment. Some countries have been unable to repay even the interest on the debt and in others, debt exceeds the country’s annual income. Banks in developed countries, the lenders of the funds, are adversely affected when countries do not repay the loans.
Stimulus or Austerity? Stimulus and austerity strategies as a solution for fighting economic downturns have deeply divided political leaders and independent analysts. Advocates of the stimulus strategy contend that during a downturn, governments should spend more money than they collect in taxes. Governments should stimulate the economy by putting people to work building bridges and other needed infrastructure. Advocates of the austerity strategy contend that government should sharply reduce taxes so that people and businesses can revive the economy by spending their tax savings. Governments should also sharply reduce spending on public programs in order to keep the debt from growing and hampering the economy in the future. If a country has taken out loans and is unable to pay them off, the IMF, World Bank, and economically healthy developed countries will often compel these countries to adopt austerity programs in exchange for debt forgiveness.
Structural Adjustment Programs Austerity is imposed through a policy framework paper (PFP) that outlines a structural adjustment program. A structural adjustment program contains economic “reforms” or “adjustments,” such as economic goals, strategies for achieving the objectives, and external financing requirements. These strategies may include spending only what a government can afford, or directing benefits to the poor, or reforming the government, among others. Critics of structural adjustment programs claim that poverty worsens under these programs. By placing priority on reducing government spending and inflation changes could result in cuts in health, education, and social services that help the poor or higher unemployment rates.
10.3
Ecotourism Tourism directed toward natural environments (often threatened) intended to support conservation efforts
Foreign direct investment (FDI) A company or individual from one country spending money in business interests in another country, in the form of either establishing business operations or acquiring assets
Free trade agreement A treaty between countries that eliminates tariffs on goods sent between the countries
Free trade zone Regions in LDCs where tariffs are waived by governments wanting to encourage MNCs to invest in their countries
International Monetary Fund (IMF) A supranational organization that aims to promote global economic stability and helping LDCs grow
Mass consumption The purchase of standardized products or services by large numbers of customers
Microfinance Provision of small loans and financial services to individuals and small businesses in developing countries.
Microloans A small sum of money lent at low interest to a new business
Structural adjustment program Economic policies imposed on less developed countries by international agencies to create conditions that encourage international trade.
Tariff A tax a country puts on goods that were created in an outside country encouraging people to buy locally produced goods
Textile Cloth or woven fabric
World Trade Organization (WTO) An economic supranational organization that deals with trade rules between countries and settling trade disputes