Econ: Global Economy


un-world flagsSometimes it is difficult for those living in the United States to grasp the fact that about 2.8 billion people, or nearly half the world population, live on $2 or less a day. And about 1.2 billion live on less than $1 a day. Hunger, squalor, and disease are the norm in many nations of the world.

Developing nations struggle with life threatening challenges such as widespread poverty and hunger. In many cases, developing nations must deal with keeping their people alive. Developing countries are usually characterized by low GDP per capita, emphasis on agriculture, poor health conditions, low literacy rates, and rapid population growth. They also encounter weak property rights which frequently undermine economic development. In comparison, developed countries have increased their standards of living by moving from agricultural to industrialized economies.

Most nations pass through three stages of economic development: agriculture, manufacturing, and finally a service based economy. Developing countries face numerous obstacles, including population pressures from high birthrates and increasing life expectancies. A shortage of natural resources, diseases, substance abuse, limited education and technology, a heavy burden of external debt, corruption, the aftermath of war, and capital flight add to their problems.

The World Bank classifies countries into high-income, medium-income, and low-income countries on the basis of national income per capita.

The high-income nations are known as the industrially advanced countries (IACs). These nations have well developed market economies based on large stocks of capital goods, advanced production technologies, and well educated workers. In 2008 this group of economies had a per capita income of $37,665.

The remaining nations of the world are called developing countries (DVCs). They have wide variations of income per capita and are mainly located in Africa, Asia, and Latin America.

The middle-income nations include such countries as Brazil, Iran, Poland, Russia, South   Africa, and Thailand. Per capita output of these middle-income nations ranged all the way from $925 to $11,906 in 2008 and averaged $3251.

The low-income nations had a per capita income of $925 or less in 2008 and averaged only $523 of income per person. The sub-Saharan nations of Africa dominate this group. Low-income DVCs have relatively low levels of industrialization. In general, literacy rates are low, unemployment is high, population growth is rapid, and exports consist largely of agricultural produce such as cocoa, bananas, sugar, raw cotton and raw materials such as copper, iron ore, natural rubber. Capital equipment is minimal, production technologies are simple, and labor productivity is very low. About 15 percent of the world’s population live in these low-income DVCs, all of which suffer widespread poverty.

Scarcities of natural resources make it more challenging but certainly not impossible for a nation to develop. The large and rapidly growing populations in many DVCs contribute to low per capita incomes. Increases in per capita incomes frequently induce greater population growth, often reducing per capita incomes to near-subsistence levels. The demographic transition view, however, suggests that rising living standards must precede declining birthrates. Most DVCs suffer from unemployment and underemployment. Labor productivity is low because of  insufficient investment in physical and human capital. In many DVCs, formidable obstacles impede both saving and investment. In some of the poorest DVCs, the savings potential is very low, and many savers transfer their funds to the IACs rather than invest them domestically. The lack of a vigorous entrepreneurial class and the weakness of investment incentives also impede capital accumulation. Appropriate social and institutional changes and, in particular the presence of the will to develop, are essential ingredients in economic development.

The vicious circle of poverty brings together many of the obstacles to growth, supporting the view that poor countries stay poor because of their poverty. Low incomes inhibit saving and the accumulation of physical and human capital, making it difficult to increase productivity and incomes. Overly rapid population growth, however, may offset promising attempts to break the vicious circle.

The nature of the obstacles to growth the absence of an entrepreneurial class, the dearth of infrastructure, the saving-investment dilemma, and the presence of social institutional obstacles to growth suggests that government should play a major role in initiating growth. Economists suggest that DVCs could make further development progress through such policies as establishing the rule of law, building infrastructure, opening their economies to international trade, setting realistic exchange rates, encouraging foreign direct investment, building human capital, encouraging entrepreneurship, controlling population growth, and making peace with neighbors. However, the corruption and maladministration that are common to the public sectors of many DVCs suggest that government may not be very effective in instigating growth.

Advanced nations can encourage development in the DVCs by reducing IAC trade barriers and by directing foreign aid (official development assistance) to the neediest nations, providing debt forgiveness to the poorest DVCs, allowing temporary low-skilled immigration from the DVCs, and discouraging arms sales to the DVCs. Critics of foreign aid, however, say that it (a) creates DVC dependency, (b) contributes to the growth of bureaucracies and centralized economic control, and (c) is rendered ineffective by corruption and mismanagement.

In recent years the IACs have reduced foreign aid to the DVCs but have increased direct investment and other private capital flows to the DVCs. Little of the foreign direct investment, however, has gone to the poorest DVCs. Also, foreign direct investment plummeted during the worldwide recession of 2007–2009.

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