The document summarizes key concepts about economic development and classifying economies. It discusses how the World Bank estimates Gross National Income to sort countries into high, middle, and low-income economies. High-income economies comprise a small portion of the global population but produce most of the world's output, while low-income economies face challenges like malnutrition, high birth rates, and low labor productivity that contribute to cycles of poverty. Developing strategies like import substitution and foreign aid have mixed records of success in promoting economic growth.

1. CChhaapptteerr 1199
EEccoonnoommiicc DDeevveellooppmmeenntt

2. HHooww ttoo ccllaassssiiffyy eeccoonnoommiieess
• The World Bank (an economic development
institution affiliated with the UN) estimates
gross national income (GNI)
– GNI measures the market value of all goods and
services produced by resources supplied by the
countries’ residents and firms, regardless of the
location of the resource.
– It measures both the value of output produced
and the income that output generates.

3. GGNNII ccoonnttiinnuuee
• It measures income per capita, then adjusts
figures across countries based on the purchasing
power of that income in each country.
• The World Bank then sorts into three major
groups:
– High-income economies
• About one-sixth of the world’s population produces three-fourths
of the world’s output
– Middle-income economies
• About 64% of the world’s population and account for about
25% of the world output
– Low-income economies
• About 20% of the world’s population and account for only
1% of the world output

4. GGNNII ccoonnttiinnuuee
http://www.nationmaster.com/graph/eco_gro_
nat_inc-economy-gross-national-income

5. DDeevveellooppiinngg aanndd IInndduussttrriiaall EEccoonnoommiieess
• Developing countries: the low- and middle-income
economies
– 50% of their labor force in agriculture
• Industrial Economies: the high-income
economies
– 84% of the world’s population in 2007 but
produce only 26% of the output

6. HHeeaalltthh aanndd NNuuttrriittiioonn
• Malnutrition
– In the poorest countries they consume only half
the calories of those in high-income countries.
– Contributes to more than half of the deaths of
children under the age of 5 in low-income
countries.
– Safe drinking water is often hard to find; thus,
causing many diseases

7. HHeeaalltthh aanndd NNuuttrriittiioonn
• Infant Mortality
– The rate is much greater in low-income countries
than in high-income countries.

8. HHiigghh BBiirrtthh RRaatteess
• Developing countries also have high birth
rates
• This year, more than the 80 million of the 90
million births will be added to developing
countries.
– WHY??

9. WWoommeenn iinn DDeevveellooppiinngg CCoouunnttrriieess
• Poverty is greater among women than men,
this is true for the world as a whole (on the
average that is)
• Women in developing countries tend to be
less educated than men.
– WHY???

10. WWhhyy aarree ppoooorr ccoouunnttrriieess ppoooorr??
• The simple answer:
– They are poor because they produce few goods
and services.

11. LLooww LLaabboorr PPrroodduuccttiivviittyy
• Labor Productivity: output measured by
worker
• Labor Productivity tends to be low in
developing countries.
– WHY??
• Quality of the labor
• Capital
• Natural resources

12. WWhhaatt ttoo ddoo??
• Invest in Capital:
– How?
• Foreign Aid
• Private Investment in Capital

13. TTeecchhnnoollooggyy aanndd EEdduuccaattiioonn
• Education helps people make better use of
the resources available.
• It also makes people more receptive to new
ideas and methods

14. IInneeffffiicciieenntt UUssee ooff LLaabboorr
• Developing countries use labor less efficiently
than do industrial nation.
– Underemployment and Unemployment
– Low productivity= Low Income= Less Saving= Less
Investment in human and physical capital
• Creating a “cycle of poverty”

15. NNaattuurraall RReessoouurrcceess
• Many developing countries have little in
natural resources.
– The exceptions are the oil-rich countries

16. FFiinnaanncciiaall IInnssttiittuuttiioonnss
• An important source of funds for investment
is the savings of household and firms
• In some developing countries, the people
have little confidence in the country’s
currency
– Governments finance a large fraction of outlays by
printing money
• Hyperinflation
– Zimbabwe

17. CCaappiittaall IInnffrraassttrruuccttuurree
• Roads
• Bridges
• Airports
• Harbors
• Reliable Mail Service
• Telephone Communication
• Clean Water
• Electricity

18. EEnnttrreepprreenneeuurriiaall AAbbiilliittyy
• Entrepreneurs are needed to bring together
resources and take the risk of profit or loss in
order for development to get off the ground
• Sometimes government officials create what
they believe the free market can do
– Favors for friends and relatives of the government

19. RRuulleess ooff tthhee GGaammee
• Laws
• Customs
• Conventions
• Property Rights

20. SSoocciiaall CCaappiittaall
• Social capital consists of the shared values
and trust that promote cooperation in the
economy
– Lower economies typically have poorly defined
property rights, and less social capital
– Bribery is often commonplace
– Government corruption in everyday practice

21. Trade Problems for Developing
Countries
• What makes up exports for developing
countries?
– Agricultural goods and other raw materials (about
half compared to about 20% from high-income
countries)
– Problem with this?
• Fluctuates in prices= cut in imported capital items

22. MMiiggrraattiioonn aanndd tthhee BBrraaiinn DDrraaiinn
• Migrants send money home to invest in their
country
– $238 billion in 2008
– Problems?
• “Brain Drain” from their home country

23. Import Substitution Versus Export
Promotion
• An economy’s progress:
– Agriculture to manufacturing to services
• Import Substitution: a development strategy
that emphasizes domestic manufacturing of
products that had been imported
– Tariffs and quotas

24. Import Substitution Versus Export
Promotion
• Why do this?
– The “What to Produce” question is answered
– To protect “Infant Industries”
– Favored domestic industries
• Problems?
– Erases specialization and comparative advantage
– Replace low-cost foreign goods with high-cost
domestic goods
– Often domestic production failed to be successful
when shielded from foreign competition

25. Import Substitution Versus Export
Promotion
• Export promotion concentrates on producing
for the export market.
– The emphasis is on comparative advantage and
trade expansion rather than on trade restriction.
– The force is on producers becoming more efficient
in order to compete in world markets

26. FFoorreeiiggnn AAiidd
• Foreign aid is any international transfer made
on concessional terms for the purposes of
promoting economic development
– Grants
– Loans
• Concessional Loan- low interest rates, longer
repayment periods, or grace periods during which
repayments are reduced or even waived
• Bilateral: Country-to-Country aid
• World Bank: multilateral infrastructure
• IMF: multilateral balance of payments

27. Does Foreign Aid Promote Economic
Development?
http://www.youtube.com/watch?v=CNWzYy186W8
OR
http://www.youtube.com/watch?v=8Y-E6sQ9DvI

28. Does Foreign Aid Promote Economic
Development?
• It does provide additional purchasing power,
but it is unclear if it supplements domestic
saving, thus increase investment!

29. TTrraannssiittiioonnaall EEccoonnoommiieess
• Types of Economic Systems
• Enterprises and Soft Budget Constraints
– Soft budget constraint: the budget condition faced
by socialist enterprises that are subsidized if they
lose money
• Inefficient uses of resources, non-responsive to
demand and supply changes, changes in prices by
central planners and not the market forces

30. Institutions aanndd EEccoonnoommiicc DDeevveellooppmmeenntt
How do they work?
http://www.youtube.com/watch?v=XxERamRMt24

31. TThhee BBiigg BBaanngg VVeerrssuuss GGrraadduuaalliissmm
• Gradualism ( the bottom-up approach): an
approach to moving gradually from a centrally
planned to a market economy by establishing
markets at the most decentralized level first,
such as on a small farms or in light industry
– China
• Big Bang Theory: the argument that the
transition from a centrally planned to a
market economy should be broad and swift,
taking place in a matter of months

32. PPrriivvaattiizzaattiioonn
• Privatization is the process of turning public
enterprise into private enterprises.
– Cannot be accomplished overnight