Economic problems of development


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Unit 4 - Economic Problems of Development

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Economic problems of development

  1. 1. <ul><li>In all societies there is some inequality in the distribution of income and wealth, although the extent of inequality varies between countries. Indeed, one of the gravest economic challenges facing the world today is the global inequity in the distribution of resources. Worldwide, it is estimated that in 1999 more than 1bn people were living in absolute poverty (UN criteria). There were 114 m primary age children not enrolled, 1bn people without access to safe water, 24bn without access to sanitation. </li></ul>
  2. 2. ‘ Developing’ Countries <ul><li>2007/08 UNDP Report Human Development Report – lists 137 countries or areas as developing. In addition 28 transition economies in C and E Europe and the CIS. </li></ul><ul><li>However the range of countries that fall into this definition is very wide, including countries such as Singapore and South Korea – which are also classified as being in the ‘high income’ bracket. </li></ul><ul><li>In broad terms LDCs are concentrated in four major regions – SS Africa, Latin America, South Asia and South East Asia. China may need to be treated separately due to sheer size and as it has followed a rather different development plan. </li></ul><ul><li>It is very important when discussing economic development to remember that there is a wide diversity between the countries that are classified as LDCs. Different countries have different characteristics, and face different mixes of problems and opportunities. A policy that might work in one country might not work in another. </li></ul>
  3. 3. Economic Problems of Developing Countries <ul><li>Problem of Underdevelopment </li></ul><ul><li>International Trade and Development </li></ul><ul><li>Structural Problems within Developing Countries </li></ul><ul><li>The Problem of Debt </li></ul><ul><li>Policies to affect the distribution of income and wealth. </li></ul>
  4. 4. The Nature and Extent of the Poverty
  5. 5. Most of Africa, large parts of Asia and Latin America… <ul><li>Majority live in Poverty </li></ul><ul><li>Life a daily struggle for survival </li></ul><ul><li>Large proportion of population live in the countryside </li></ul><ul><li>Large families on small parcels of land </li></ul><ul><li>Income too low to invest in Machinery, Pesticides etc </li></ul><ul><li>Rapid Growth of population – less and less land to go around </li></ul><ul><li>Inheritance – splits land up even further </li></ul><ul><li>Selling land to local landlords – landless, low wage labourers – Plantations </li></ul><ul><li>Borrowing on worth of next harvest – pray to loan sharks / local landlords Debt Bondage </li></ul><ul><li>debt bondage </li></ul><ul><li>Tea Plantations SriLanka Leftovers from Colonialism? </li></ul><ul><li>Phillipines Land Grab Part 1 </li></ul>
  6. 6. Urban Poverty <ul><li>Urban Poverty in China Mixed Worlds.. </li></ul><ul><li>Migration to rapidly growing cities – jobs yes but supply of labour far out numbers demand. </li></ul><ul><li>Unemployment rising rapidly. Take any job, legal or illegal. </li></ul><ul><li>Shanty towns </li></ul><ul><li>Work rather than go to school </li></ul>
  7. 7. Some Statistics <ul><li>85% of the world’s population lives in developing countries but earns only 20% of the world’s income. </li></ul><ul><li>The GNY per capita of the 20 poorest countries of the world (2003) averaged $220. For the richest it was $29, 100. </li></ul><ul><li>The average annual GNY per capita growth rate between 1975 and 2003 was 5.8% in East Asia but was -0.5% in SS Africa. It was 2.0% in the advanced industrialised countries. REMEMBER STARTING POINTS IN 1975. </li></ul><ul><li>Average life expectancy at birth in the 10 poorest countries of the world is 42 years. It is 79 years in the 10 richest countries. </li></ul><ul><li>Developing countries tend to suffer higher rates of inflation than advanced industrial economies </li></ul><ul><li>Inflation hits Cambodia Hard (2008) </li></ul>
  8. 8. Causes of Inequality and Poverty <ul><li>Ownership of Assets </li></ul><ul><li>inherited wealth – inequality not arising from current state of the economy or state of the markets. ‘Wealth’ can be very unevenly distributed. </li></ul><ul><li>UK </li></ul><ul><li>2003 – most wealthy 1% of households owned 21% of marketable wealth. Most wealthy 50% of households owned 93% of the country’s marketable wealth. </li></ul><ul><li>Recently greater distribution of wealth as house prices increased and share prices fell. It’s the renters who are falling behind. </li></ul><ul><li>In developing countries </li></ul><ul><li>Financial markets are much less developed with less people having access to the formal financial institutions. Therefore there is a concentration in the ownership of financial assets. </li></ul><ul><li>Ownership of land concentrated, e.g. Latin America. Weak property rights.. </li></ul><ul><li>All this inequality in the ownership of assets can lead to inequality in income distribution also. </li></ul>
  9. 9. <ul><li>Labour Market Explanations </li></ul><ul><li>A change in the structure of the economy, e.g. from unskilled to semi skilled production creates inequality as those without the skills are left behind. </li></ul><ul><li>Decline in power of Trade Unions – but need a balance between a free and flexible work force and worker protection. </li></ul><ul><li>Gender Divide </li></ul><ul><li>LDCs – inefficient and underdeveloped labour markets – rural, urban formal and urban informal labour markets. Large areas still operating on subsistence grounds, no formal wage labour developed. </li></ul>Causes of Inequality and Poverty
  10. 10. <ul><li>Government Intervention </li></ul><ul><li>Governments have a range of transfer payments and taxation tools to influence the distribution of income. </li></ul><ul><li>UK </li></ul><ul><li>In 2003 the ‘original income’ of top quintile of households in the UK was 15 times the bottom quintile. After adjusting for benefits and taxes, the ratio was 4:1. Remember cash benefits and benefits in kind (health, education). </li></ul>Causes of Inequality and Poverty
  11. 11. The Meaning of Development <ul><ul><ul><ul><li>Normative Concept – its definition will depend on the goals that the economist assumes societies want to achieve. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Economic Growth / increasing Production Potential? Or more, with that as an essential ingredient. Growth must be of the right kind and increased resources must be used wisely. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>No country can be considered developed if a substantial portion of its population is living in absolute poverty. Development also requires Structural Change and possibly changes in institutions, cultural and political attitudes. </li></ul></ul></ul></ul>
  12. 12. Millennium Development Goals <ul><li>MDCs </li></ul><ul><li>2000 – UN Summit – a global recognition of the extreme inequality that is a feature of the world distribution of resources. </li></ul><ul><li>Set quantifiable targets for a number of dimensions of development, in order to monitor progress. </li></ul><ul><li>MDG progress reports 2010 </li></ul><ul><li>Goal 8 – Develop a global partnership for development </li></ul><ul><li>Open, rule based, predictable, non-discriminatory trading and financial system – commitment to good governance, development and poverty reduction. </li></ul><ul><li>Improve Market Access; Debt sustainability [HIPC Initiative], goals for youth employment, access to affordable essential drugs, access to new technology, </li></ul>HOMEWORK 1 – Compile a Fact File on HIPCs – who they are, how they qualify, what is the program to aid them, what are criticisms of the program. HOMEWORK 2 – Choose 2 or 3 LDCs in different regions of the world. Visit the MDG website at . Write a brief report on the extent that progress is being made towards the goals in your chosen countries.
  13. 13. Measuring Development <ul><ul><ul><ul><li>Basic Needs Approach </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Adequate food, shelter, warmth and clothing </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Universal access to Education </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Availability of adequate health care </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Availability of non-demeaning jobs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sufficient free time to be able to enjoy social interaction. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Freedom to make one’s own economic decisions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Freedom to participate in decisions of government and other bodies that affect their lives. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>DO ANY SURPRISE YOU? Any missing? </li></ul></ul></ul></ul>
  14. 14. Problems with the Basic Needs Approach <ul><li>4 Major Problems </li></ul><ul><li>With any ‘list’ solution its to decide what is included – should freedom of religion, freedom from servitude, ‘self esteem’ be included? </li></ul><ul><li>How to measure each item. Some easy e.g. mortality rates, others difficult – self esteem </li></ul><ul><li>Arriving at a single measure of the level of development – adding average calorific intake to the number of doctors to the population to the percentage of homes with basic facilities etc. Need to express in same units or have appropriate weights attached. Controversial decisions regarding weights.. </li></ul><ul><li>Looking at the distribution of the various items – e.g. average calorific intake in Country A increases but the poorest sections of the population have less to eat – has the country really experienced an increase in the level of development? </li></ul><ul><li>BUT A USEFUL CHECKLIST – TO SEE WHETHER A COUNTRY’S DEVELOPMENT IS BROADLY BASED OR CONFINED TO JUST ONE OR TWO INDICATORS. </li></ul>
  15. 15. Using GDP <ul><li>A single measure </li></ul><ul><li>Universally used. </li></ul><ul><li>Takes into account all the goods and services produced in a country and converts them into a single measure by the use of market prices </li></ul><ul><li>Markets (not perfect) indicate the strength of demand and opportunity costs of supply </li></ul><ul><li>Universally agreed rules of measurement </li></ul><ul><li>Doesn’t include every item that affects human welfare but a sustained rise in GNY is generally agreed to be a necessary condition for a sustained rise in welfare. </li></ul><ul><li>There is a fairly close correlation between the level of per capita GNY and other indicators such as mortality rates, literacy rates, and calorific and protein intake. </li></ul>
  16. 16. Using GDP <ul><li>4 Main Criticisms </li></ul><ul><li>Many items excluded – production that doesn’t get bought or sold escape record. Think rural subsistence economies. Underestimate level of production. As societies develop, urbanise – growth in external costs of production and consumption: pollution crime destruction of traditional ways of life, competitive uncaring environment – growth in GNY overstates growth in welfare </li></ul><ul><li>Market prices may be highly distorted – monopoly power of companies or landlords, governments might put up price controls on food, power to give very low wages. </li></ul><ul><li>Exchange rates may not reflect local purchasing power. Exchange rates reflect demand and supply of traded goods, not non-traded goods. Better to factor in PPP – but again that doesn’t show…. </li></ul><ul><li>Income distribution – simple GDP per capita ignores the distribution of income. Since early 1980s many developing countries have achieved relatively rapid growth in per capita GDP as they have sought overseas investment, privatised their industries and cut levels of public provision. But deepening of poverty – growing inequality in distribution of income and increase in unemployment – IS THIS GENUINE DEVELOPMENT? </li></ul>
  17. 17. Further Research <ul><li>UNDP – Human Development Report 2007/8 137 countries / areas are ‘developing’ with additional 28 transitioning in C and E Europe and the CIS. </li></ul><ul><li>WFP - </li></ul>