Developing Countries
- It is a common practice to arrange all nations according to real income
and draw a dividing line between the advanced and the developing countries.
In the category of advanced nations
are included the countries of North America and Western Europe, plus Australia,
New Zealand and Japan.
Developing countries are most of those in Africa, Asia,
Latin America and the Middle East. (South Korea, Taiwan, Singapore and China are industrial countries at present. The argument that China should be treated as a developing country is becoming increasingly tenuous.
One of numerous brass plates from Benin City. British Museum. |
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What was life like for the middle class in Europe in the 1600s? It was much worse than
that of a developing country in the world today. The printing press had been just invented,
but newspapers were not widely circulated yet.
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- Why Developing Countries Are Poor
1. Lack of Infrastructure
Developing countries have not invested enough to build infrastructure that enhances
the productivity of both labor and capital inputs. Infrastructure installation
is costly, and hence requires a large capital expenditure. Capital poor countries
cannot afford to invest much in infrastructure. A certain amount of infrastructure investment is necessary to maintain the health of working population, to provide clean water and suitable housing, etc. Lack of good highways raises
transportation costs. Urban areas grow because investing infrastructure in urban areas is more profitable than than that in the middle of nowhere.
During the time of Jesus, life expectancy was a little more than 20-30, which did not change much through the Middle Ages. The average life expectancy rose to 47 years around 1900, and to 77 years in 2000.
2. Lack of Skills
Laborers in LDCs are generally employed in industries that require unskilled
labor or self-employed as in agriculture. Skilled workers are employed generally
in capital intensive industries. Capital intensive industries are located in
areas with substantial infrastructure.
3. Culture
Gunnar Myrdal thought that South and Southeast Asians are soft societies with
low expectations. He said that they are lazy and do not demand much. As a result,
they do not grow. However, the rise of Japan, the emergence of China as an industrial giant, and the
Newly Industrializing Countries (South Korea, Singapore, Taiwain and Hong Kong)
as well as ASEAN proved his foresight was limited. In France, it is almost impossible to fire
a worker, as exhibited by the outcry and sabotage of French workers to modify labor practices. It is an indication of monopoly
or monopsony power in a segment of the society (e.g., labor union). Such a system
is not conducive to developing a flexible modernn economy. Long dinner in some European countries cuts into their working hours.
4. Insufficient trade with the West
Developing countries do not fully exploit trade opportunities with the West.
Trade raises the wage of export sectors in developing countries. Free trade
with the west will eventually raise the wage of developing countries to that
of the West. (Factor price equalization) LDCs can accumulate trade surplus to build infrastructure and raise capital stock. Those who are successful in this transformation become newly industrializing countries (NICs).
5. Lack of Incentives
In the early state of development, some inequality stimulates human desires to achieve a better life. Lack of private ownership did not contribute much to economic growth in the former Soviet Union. The rich or aristocrats provide a role model for the poor to reach higher income levels. Welfare programs destroy incentives for the poor to work. In the former Soviet Union, people were reluctant to work because pay was not linked to work.
- Trade Characteristics of Developing Nations
- Developing nations are highly dependent on the advanced or developed
nations. A majority of the exports of developing nations go to the developed
nations. Most imports of developing nations originate in the developed
countries. Trade among developing nations is minor.
- Exports of developing nations are primary products (agricultural goods,
raw materials, and fuels). Some countries export drugs and low tech
military goods to gain international currencies.
- Exports of manufactured goods tend to be labor intensive (such as
textiles). The absolute value of manufactured goods produced by the
developing nations is low. The rise in manufactured goods in developing
nations is due to a handful of newly industrializing countries (NICs)
such as Korea, Taiwan, and Singapore until 1980s. However, these countries
have lost their export markets to China, which has emerged as an industrial
giant in the 1990s.
- Trade Problems of Developing Nations
Developing nations have become doubtful
of the distribution of trade gains between LDC and advanced economies.
Unstable Export Markets
One characteristic of many developing nations is that their exports
are concentrated in a small number of primary products. Dependence on
primary products, 1992
Country Major Expoirt Product Major Export Product as
a percentage of total exports
Saudi Arabia oil 87%
Zambia copper 85
Burundi coffee 79
Liberia iron ore 64
Rwanda coffee 57
Mauritania iron ore 42
Bolivia natural gas 36
Bangladesh jute goods 26
- Inelastic Demand and Supply
Since demand and supply are both inelastic, a small change in demand
or supply causes wide fluctuations in price.
Figure 1. Instability of commodity prices.
Revenue and price elasticity of demand (PED) There is a straightforward
relationship between TR and price elasticity of demand, PED. TR is defined by
PQ, and is described by the rectangular area generated by a point on a given
demand curve.
Useful Formula: Let Z be the product of two variables, X and Y, i.e.,
- Z = XY
Let the new value of Z be denoted by Z'. Then
Z' = (X+ΔX)(Y+ΔY) = (1 + ^X)X(1 + ^Y)Y
= (1 + ^X + ^Y + ^X^Y)XY
^Z = ^X + ^Y + ^X ^Y.
-
-
When the percentage changes are small,
Z = XY => ^Z = ^X + ^Y.
Z = 1/X => ^Z = - ^X. ( ^(1/X) + ^X
= ^(1) = 0)
Z = X/Y => ^Z = ^X - ^Y.
^R = ^P + ^Q = ^P(1 + ^Q/^P)
= ^P(1 - e).
e = price elasticity of demand
- Inelastic Demand. e < 1. Thus, ^P and ^R move
in the same direction. ex: e = 0.5. ^P = -10%. ^R
= - 10%(1 - 0.5) = - 0.5.
- Elastic Demand: e > 1. Thus, ^P and ^R move in
the opposite direction. ex: e = 2. ^P = - 10%. ^R
= - 10%(1 - 2) = 10%.
- Unitary Elastic Demand. e = 1, and hence ^R = 0.
-
Stabilizing Commodity Prices
In an attempt to stabilize export earnings, developing countries have
pressed for international commodity agreements. ICAs are typically agreements
between leading producing and consuming nations about stabilizing commodity
prices, assuring adequate supplies to consumers, and promoting economic
development of producers.
Producers want stability of prices. Consumers?
Figure 3.
-
- Expected gains from price instability = the average area of two trianges,
AB'C' and AB"C", which is greater than that of ABC.
-
-
-
International Commodity Agreement
Commodity agreements are usually made between producing and consuming nations
that want to introduce stability in the otherwise unstable commodity markets.
Agreements among producers within a single country are usually outlawed by
Antitrust laws, but such laws do not have jurisdiction over the national territory.
Thus, it is possible to have agreements on price stabilization schemes with
other producing nations.
Agreement Membership Stabilization tools
___________________________________________________________________________
International Cocoa Organization 26 C + 18 P buffer stock, export quota
International Tin agreement 16 C + 4 P buffer stock, export control
International Coffee Organization 24 C + 43 P export quota
International Sugar Organization 26 P + 41 C export quota, buffer stock
International Wheat Agreement 41 C + 10 P multilateral contract
___________________________________________________________________________
C = consuming nation, P = producing nation
Production and Export Controls
How to face a global recession.
Figure 5.
-
- Producer revenue can be riased with production control. Specifically, the
blue rectangle can be larger than the red rectange, which represents revenue
with production control. The area of the blue rectangle is greater than that
of the red when demand is price inelastic.
-
Export controls
Producers' associations have adopted export quotas. Export quotas must also
be accompanied by production control.
A stabilization agency needs to maintain Buffer Stock.
- price ceiling
price floor
problems
- can be a price support program
storage cost can be high. In the long run, profits from price stabilization
must be positive, i.e., (selling price - buying price)Q - storage cost >
0.
-
Figure 6. Maximum price
-
- Figure 7. Minimum price
-
Multilateral Contracts
Long term contract that establishes price and/or quantity. Such pacts
generally stipulate a minimum price at which importers will purchase guaranteed
quantities from producing nations, and a maximum price at which producing
nations will sell guaranteed amounts to importing nations.
Figure 8
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.
Life during the Middle Ages
