Why Do Less Developed Countries Face Obstacles to Development? Chapter 9 Key Issue 4
Terms in this set (25)
What are elements of the Self-Sufficiency Model?
* Self sufficiency or balanced growth
* Most of the 20th century was most popular of development alternatives
* Two most populous countries- China and India adopted this strategy, as did African and Eastern European countries
* According to the model a country should spread investment as equally as possible across all sectors of its economy and in all regions
* Pace of development may be modest but system is fair b/c residents and enterprises throughout the country share the benefits of development
* Incomes on countryside same as those in the city
* Reducing poverty more important than few people becoming wealthy
* Supports small businesses in an LDC by isolating them from large international companies
* Promote self-sufficiency by setting barriers that limit the import of goods from other places
* Tariffs (high taxes) on imported goods to make them more expensive than domestic goods
* Fixing quotas to limit quantity of imported goods
* Requiring licenses to restrict number of legal importers
What are problems with the Self-Sufficiency Model?
* Inefficiency and large bureaucracy
* Protects inefficient industries
* Businesses can sell all they make at high gov controlled prices so they are not motivated to improve quality or lower production costs
* Companies who aren't pressured by international competition don't do rapid technological changes
* Large bureaucracy needed to administer the controls
* Complex administrative system encouraged abuse and corruption
* Entrepreneurs saw that producing goods and services was less financially rewarding than helping people get around gov. regulations
* Other entrepreneurs earned more money illegally importing goods and selling hem at inflated prices on the black market
Case Study: India for the Self-Sufficiency Model?
* Used many barriers to trade
* To import goods, foreign companies had to have a license
* Process long, several dozen gov. companies had to approve of it
* Once a company had a license, gov. restricted quantity it could sell
* Gov. imposed heavy taxes on imported goods (doubled for consumers)
* Businesses discouraged from producing goods for export
* Money couldn't be converted to other currencies
* Businesses supposed to produce goods for consumption inside India
* Businesses needed gov. permission to sell new products, modernize a factory, expand production, set prices, hire/fire workers, change job classifications, etc.
* Private companies unable to make profits by selling goods only inside India were given gov. subsidies (cheaper electricity, wiped out debts, etc.)
* Gov. owned communications, transportation, power companies, insurance companies, automakers, etc.
What are elements of the International Trade Approach (Rostow's Development Model)?
* Calls for a country to identify its distinctive or unique economic assets
* What animal, vegetable, or mineral resources does the country have in abundance that other countries will buy
* Products manufactured and distributed at a higher quality and a lower cost than other countries
* Country can develop economically by concentrating scarce resources on expansion of its distinctive local industries
* Advocate of this approach was W.W. Rostow
* 5 Stages: the traditional society, the preconditions for takeoff, the takeoff, the drive to maturity, the age of mass consumption
THE TRADITIONAL SOCIETY:
* Defines a country that has not yet started a process of development
* Contains high % of people engaged in agriculture and high % of national wealth put into "nonproductive" activities, military and religion
THE PRECONDITIONS FOR TAKEOFF:
* Process of development begins when an elite group initiates innovative economic activities
* Country starts to invest in new technology and infrastructure
* Stimulate an increase in productivity
* Rapid growth in limited economic activities (textiles, food products)
* Achieve technical advances and become more productive
* Other sectors of economy remain dominated by traditional practices
THE DRIVE TO MATURITY:
* Modern technology diffuses to a wide variety of industries
* Workers become more skilled/specialized
THE AGE OF MASS CONSUMPTION:
* Shift from productivity to heavy industry
* From steel/energy to consumer goods (vehicles, etc.)
What are problems of the International Trade Approach (Rostow's Development Model)?
UNEVEN RESOURCE DISTRIBUTION
* Arabian Peninsula, some countries had increased petroleum others did not
* LDC selling one product suffered b/c the price of their leading product didn't rise as rapidly as the cost of the products they needed to buy
* Zambia has lots of copper but can't use it b/c of world decreasing prices for the sale of copper
* Countries (4 dragons) that depend on selling low-cost manufactured goods find that the world market for many products is expanding slower than in the past
* To increase sales LDCs may need to capture sales from established competitors rather than share in a growing markets
INCREASED DEPENDENCE ON MDCS
* Building industries to sell to MDCs causes LDCs to cut production of food, cloth, and other needs of the people
* Rather than fund development, sales from products go towards buying these necessities
Case Study: Persian Gulf States International Trade Approach (Rostow's Development Model)?
* Arabian Peninsula: Saudi Arabia, Kuwait, Bahrain, Oman, United Arab Emirates
* Went from most LDC to one of the wealthiest countries, due to petroleum
* Use petroleum revenues to fund large-scale projects
* Diffusion of consumer goods: TV, motorcycles, etc.
* Supermarkets have Anglo-American foods
* Islamic religious principles interfere with business practices in MDCs
* Women excluded from most jobs and visiting public places
* Business halts when Muslims are called to pray
Case Study: Four Asian Dragons International Trade Approach (Rostow's Development Model)?
* South Korea, Singapore, Taiwan, Hong Kong (British colony at the time)
* Singapore and Hong Kong have few natural resources
* Both have large cities surrounded by little rural land
* Adoption of international trade approach influenced by Japan's success
* Lacking resources, promoted development by concentrating on producing a handful of manufactured goods (clothing and electronics)
* Low labor costs allow them to be inexpensive
Which of the two models for development has shown the most success?
Rostow's Development Model/ International Trade Approach
TRUE OR FALSE:
The WTO was formed by countries which conduct the majority of international trade.
TRUE OR FALSE:
The WTO seeks to increase import quotas and reduce import and export tariffs.
* The WTO seeks to reduce or eliminate international trade restrictions on quotas on imports and tariffs on both imports and exports.
TRUE OR FALSE:
Though it can hear accusations, the WTO cannot order remedies.
* The WTO is authorized to rule on the validity of the charges and order remedies.
TRUE OR FALSE:
The WTO seeks to eliminate restrictions on the flow of money between countries.
Why have each of the following groups been critical of the WTO: Liberals?
* charge that the WTO is antidemocratic, because decisions made behind closed doors promote the interest of large corporations rather than the poor
Why have each of the following groups been critical of the WTO: Conservatives
* charge that the WTO compromises the power and sovereignty of individual countries because it can order changes in taxes and laws that if considers unfair trading practices
What are the two principal ways in which LDCs obtain money to finance development?
* Loans from banks
* Loans from international organizations
Identify the two main sources, both controlled by MDCs, of loans for LDCs.
* International Monetary Fund (IMF)
* World Bank
What is the THEORY behind using loans for infrastructure projects in LDCs?
* Theory is that new roads and dams will make conditions more favorable for domestic and foreign businesses to open or expand
* New or expanded businesses are attracted to an area because improved infrastructure will contribute additional taxes that the LDC uses in part to repay the loans and in part to improve its citizens' living conditions
In PRACTICE, what has usually happened when loans have been used for these infrastructure projects?
* Many infrastructures projects are expensive failures
* Billions in aid have been used, stolen, or spent on armaments by recipient nations
What are structural adjustment programs?
* includes economic goals, strategies for achieving the objectives, and external financing requirements
Why do LDCs enact structural adjustment programs, even though they may be unpopular with the citizens of their countries?
* By placing priority on reducing government spending and inflation, structural adjustment programs require cuts in health, education, and social services that benefit the poor
* Unemployment may rise, workers in state enterprises and the civil service may lose their jobs, and support may be cut for those in need (poor pregnant women, nursing mothers, young children)
What is a transnational corporation?
* A company that conducts research, operates factories, and sells products in many countries, not just where its headquarters or shareholders are located
List the five countries in which most transnational corporations are headquartered.
* United States
* United Kingdom
Foreign Direct Investment
Investment made by a foreign company in the economy of another country
The flow of money in transnational corporations is not balanced. This is true in TWO ways. Explain.
* Only 1/3 of foreign investment went from a MDC to a LDC in 2004, whereas the other 2/3's went from one MDC to another MDC
* FDI (foreign direct investment) is not evenly distributed among LDCs, nearly 1/2 of all FDI destined for LDCs went to China in 2004, nearly 1/4 to all other Asian countries, 1/4 to all Latina American countries, and less than 10% to all African countries
Who is making the primary investments in South America? in Asia?
* IBRD (International Bank for Reconstruction and Development) loaned about $400 billion primarily to Latin America and Europe
* IDA (International Development Association) loaned $150 billion primarily to Asia and Africa