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[answered] 17 Diana Mayfield/Getty Images The Challenge of Economic De

Please help me answer this discussion question... must include a citation from the attached chapter, section 17.5, help from private sector: ?multinationals.

Need 100 word minimum. ?

Imagine you are in charge of development for a developing country and were approached by a multinational corporation interested in locating in your country.

Identify some of the benefits and some of the costs to the host country from allowing a multinational corporation to locate in a country with a developing economy. Discuss with your classmates if developmental assistance from world developmental agencies, such as the World Bank or the United Nations, would be preferable to private investment.?

17 Diana Mayfield/Getty Images The Challenge of Economic




Learning Outcomes


By the end of this chapter, you will be able to:


? Describe the distinctive characteristics of developing countries.


? Analyze the role of population growth and human capital and their effects on developing




? Explain the primary theories and strategies for economic development.


? Understand varying views on the role of government in promoting economic development.


? Discuss the role of developed countries in assisting developing countries. ama80496_17_c17_465-494.indd 465 12/4/12 4:44 PM Pre-Test CHAPTER 17 Introduction G reece was once one of the richest countries in the world. Ancient Greece was where


the first Olympic Games were played, where democracy was born, and where


Western civilization began. In 2010, Greece?s purchasing-power-adjusted GDP per


capita was the world?s 25 highest, and its health care system ranked as one of the best in


the world ( Since 2010, though, Greece?s economy has suffered from the European sovereign debt crisis. Before the debt crisis, Greece?s GDP had


expanded at an average annual rate of 4% from 2004 to 2007, one of the highest rates in


the Eurozone. But the GDP shrank by 3.4% in 2010 and again by 6.9% in 2011. Also in


2011, Greece?s ratio of public debt to nominal GDP stood at 165.3% (Oikonomakou &


Papandreou, 2012). What was once a healthy and vibrant country respected the world


over was suddenly on the brink of financial and economic breakdown. What happened?


What changed?


At different times in history, Egypt, Rome (Italy), Ethiopia (home of the Queen of Sheba),


and Babylonia (now Iraq) were all highly developed by the standards of their time. Other


countries that were poor in the past, like Taiwan, Thailand, and Mexico, are now prospering. Is there some explanation of why certain countries prosper while others decline? This


chapter attempts to unravel the secrets to success in the economic sphere for those countries classified as developing nations. Pre-Test


1. Most less developed countries have dual economies. a. True b. False


2. In industrialized countries, the crude death rate has fallen over recent years. a. True b. False


3. The founder of market economics is also considered the original theorist of economic development. a. True b. False


4. The laissez-faire view of government is essentially the same as the dirigiste view


of government. a. True b. False


5. Aid to developing nations comes mostly from the private sector. a. True b. False ama80496_17_c17_465-494.indd 466 12/4/12 4:44 PM Section 17.1? Characteristics of Developing Countries CHAPTER 17 Answers


1. a. True. The answer can be found in Section 17.1.


2. b. False. The answer can be found in Section 17.2.


3. a. True. The answer can be found in Section 17.3.


4. b. False. The answer can be found in Section 17.4.


5. b. False. The answer can be found in Section 17.5. 17.1? Characteristics of Developing Countries G rowth is a matter of concern for developed, industrial countries like the United


States. However, it is closer to a life-or-death matter for many developing countries (also referred to as ?less developed countries,? or LDCs). The problems facing


these countries encompass the whole operation of the economy. The term economic growth


used in Chapter 16 is too narrow to describe the goal of most of the poorer nations of the


world. Economic development is a total process of transformation. It means not only raising current standards of living but also building a solid foundation of human and physical


capital, technology, infrastructure, and economic institutions that will support continued


improvement in the future.


It is easy to blame the poor countries themselves for their failure to attain a high standard


of living, or to blame the rich for the problems of the poor. Some view that success economically is because one country is ?good? while others are ?bad??but the good guy/


bad guy argument does not fully capture the extent to which relations between rich and


poor countries affect the growth and development of both sides. However, the industrial


world does play a role in determining the future of the developing countries. Level of Per Capita Income


Although developing countries are diverse, they all have some important similarities. The


most obvious characteristic of a developing economy is low per capita income. The World


Bank considers any country with a gross national income (GNI) of less than $1,006 per


capita (in 2012 U.S. dollars) as a low-income country. Thirty-five countries were categorized as low income in 2011. Another 56 countries were classed as lower middle income,


with per capita GNI ranging from $1,006 to $3,975. Fifty-four countries were classed as


upper middle income, with a range from $3,976 to $12,275. Seventy countries made the list


of high-income countries, including both industrial market economies and high-income


oil exporters (?Country and Lending Groups,? 2012). Among this prosperous group, per


capita incomes ranged from $12,275 up. Figure 17.1 identifies the World Bank?s low-, middle-, and high-income economies. Table 17.1 presents per capita GNI and growth rates of


GDP for selected countries at various income levels. ama80496_17_c17_465-494.indd 467 12/4/12 4:44 PM Section 17.1? Characteristics of Developing Countries CHAPTER 17 Figure 17.1: Income levels by country Low income ? $1,005 or less


Lower middle income ? $1,006?$3,975


Upper middle income ? $3,976?$12,275


High income: nonOECD ? $12,275 or more


High income: OECD ? $12,275 or more


This map shows the world?s nations divided into three economic groups based on income levels. Lowincome economies have per capita GNI below $1,005. Lower middle-income countries range from


$1,006 to $3,975, and upper middle-income from $3,976 to $12,275 in per capita GNI. High-income


countries have per capita GNI of $12,275 and above.


Source: The World Bank Group, July 2011. Table 17.1 both exhibits and conceals a great deal of diversity. The high-income oil-exporting countries are subject to the fluctuations of the world oil market and must eventually


find other economic activities to replace dwindling oil reserves. Other countries we can


speak about that are not on the table include Bangladesh and Mexico. Bangladesh is very


poor and its growth in per capita GDP has been slow because of a high birthrate, but it has


made progress in agricultural production. Mexico graduated from lower middle income


to upper middle income in the last few years, partly as a result of good policy choices. ama80496_17_c17_465-494.indd 468 12/4/12 4:45 PM CHAPTER 17 Section 17.1? Characteristics of Developing Countries Table 17.1: GNI and GDP growth, selected countries


Income Group and Country Per Capita GNI, 2011 Average Annual GDP Growth


%, 2000?2009 Uganda 1,320 7.5 Rwanda 1,240 6.8 Ethiopia 1,110 8.5 Sierra Leone 850 9.5 Democratic Republic of the


Congo 350 5.2 Sri Lanka 5,560 5.5 Paraguay 5,310 3.4 Iraq 3.770 0.3 India 3,620 7.8 Nigeria 2,300 6.4 Bulgaria 13,980 5.3 Costa Rica 11,950 5.1 Brazil 11,500 3.6 South Africa 10,790 4.1 Peru 10,160 6.0 Singapore 59,790 6.5 Norway 58,090 2.1 Macao Special Administrative


Region, China 57,060 5.2 United States 48,890 2.1 United Kingdom 36,970 1.9 Low Income, 1,375 Lower Middle Income, 3,832 Upper Middle Income, 10,680 High Income, 38,637 Source: ?Gross National Income Per Capita 2011, Atlas Method and PPP,? by the World Bank, 2011.


Retrieved from ama80496_17_c17_465-494.indd 469 12/4/12 4:45 PM Section 17.1? Characteristics of Developing Countries CHAPTER 17 The figures in Table 17.1 must be used with caution. Per capita GNI may not be very reliable for comparison purposes. The problems of accurately measuring income and production are even greater in developing countries than in developed ones. Developing


countries cannot use sophisticated methods of gathering and processing data. In addition,


a much larger share of output in these countries is produced outside the market. In rural


areas especially, a family is likely to grow its own food, build its own house, and make its


own clothes. This output is difficult to estimate and value at market prices.


The spread in growth rates across the groups in the table is quite narrow. Compare the


3.6% per year average for the high-income group to the 4.8% for the upper middle-income


group and the 7.5% in the low-income group. However, the differences in rates of growth


do not imply that income gaps are closing. First, the averages conceal the fairly wide


country-to-country variation within each group, including some rates that are negative.


Second, starting from a lower base of per capita income, it is possible for one country to


grow at a faster rate than another and still fall further behind in absolute dollars. If country A starts at $100 per capita and grows at 5% a year while country B starts at $1,000 and


grows at 3% a year, at the end of 10 years country A will have a per capita income of $163,


and country B will have a per capita income of $1,344. The gap between the two will have


widened from $900 to $1,181.


However, even very small differences in growth rates can matter a great deal. Consider


country A, with a growth rate of 2.5%, and country B, with a growth rate of 3.5%. A 1% difference seems like a small amount; however, starting out at a per capita income of $1,000,


country B will see its income rise to $1,280 in 10 years at a 2.5% growth rate. The same per


capita income will rise to $1,411 in 10 years at a growth rate of 3.5%. The 1% difference in


growth becomes a 9% difference in per capita income. Agriculture


Most developing countries devote a large share of resources to agriculture. Some of this


agriculture is large scale and relatively modern, producing export crops such as cocoa, coffee, and bananas. Most of it, however, is basically subsistence agriculture. Simple, laborintensive technology is used to produce food for individual families rather than crops to


be sold for cash. Rural overcrowding, small landholdings that preclude modern cultivation, and low agricultural yields per acre are typical. A dominant role for the agricultural


sector is strongly linked to low levels of per capita income. In order to escape poverty, a


country must have some resources left over after feeding itself, either directly (by producing enough food for home use and export) or indirectly (by exporting enough nonfood


items to import needed foodstuffs).


Figure 17.2 shows significant differences in the agricultural sector across various groupings. In South Asia, about 18% of GDP is derived from agriculture. In Latin America, that


figure drops to 6%. In both low-income and lower middle-income countries, the agricultural sector is a major source of exports. In the United States, only 2% of the labor force


produces enough to feed the entire nation. In general, agriculture tends to be much more


productive in upper middle-income and high-income countries. In those countries, agriculture is highly mechanized, and a small part of the population produces an abundant


harvest, including some for export. Figure 17.2 shows a consistent pattern of declining


reliance on agriculture as a nation?s GDP increases. ama80496_17_c17_465-494.indd 470 12/4/12 4:45 PM Section 17.1? Characteristics of Developing Countries CHAPTER 17 Figure 17.2: Agriculture as share (value added) of GDP Share of




























1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010


South Asia


East Asia and Pacific Year


Sub-Saharan Africa


Europe and Central Asia Middle East and North Africa


Latin America and Carribbean A quick reading of this figure might suggest that focusing on other sectors of the economy at the


expense of agriculture is a recipe for economic growth. Of course, with the benefit of hindsight, most


observers today now agree that the agriculture sector contributes to economic growth, but that economic growth reduces the role of agriculture in terms of GDP.


Source: Meijerink, G., & Roza, P. (2007). The role of agriculture in economic development (Markets, Chains and Sustainable Development


Strategy & Policy Paper 4). Wagening, Netherlands: Stichting DLO. As a producing sector, agriculture faces certain problems in both developed and developing countries. Supply is unpredictable, depending on the weather. Demand is not very


responsive to price changes. Thus a bumper crop will lead to a big price drop. A poor


harvest will command high prices, but high prices are little comfort to farmers with little


or nothing to sell. Of course, these problems are more serious when agriculture is a large


share of GDP. For this reason, reducing dependence on agriculture is a goal of every development program. Development of new high-yield dwarf varieties of rice and wheat in the


1970s, with the support of the Rockefeller Foundation, helped to make some developing


countries more nearly self-sufficient in food and to increase their agricultural productivity. However, the new varieties also had drawbacks, including lower resistance to pests


and greater need for fertilizer, irrigation, and use of machinery. ama80496_17_c17_465-494.indd 471 12/4/12 4:45 PM Section 17.1? Characteristics of Developing Countries CHAPTER 17 Climate


Many of the world?s poorest countries are in tropical climates. Conversely, all industrialized countries are in temperate climates. This relationship between climate and development is so strong that it seems unlikely to be a coincidence. In fact, the gap between levels


of development between the regions is sometimes referred to by development economists as the ?north?south problem.? Some development economists have suggested that


warmer climates produce lower human effort, more diseases, and unfavorable agricultural conditions. There is no winter to wipe out large numbers of disease-bearing pests


and parasites. In addition, many tropical countries are largely jungle or desert, neither of


which is very hospitable to agriculture. Dualism


Almost all developing countries are really two societies in the same country?one modern, urban, and market oriented and the other made up of rural peasants who are illiterate


and largely employed in agriculture, with very little of their economic activity passing


through the market. This coexistence is called dualism.


Cities in developing countries contain many people who are poor but also have modern


transportation and plumbing, manufacturing and service jobs, culture, a concentration


of educated people, and a modern market economy. Birthrates are lower, and women are


more likely to have access to education and market opportunities. Rural areas, in contrast,


tend to maintain traditional lifestyles with centuries-old farming methods, early marriage


with many children, and much home production with few market transactions. Most citizens in rural areas live in poverty or near poverty, generating little saving and investment


and little interest in innovation.


China is one example of a nation with a dualistic economic structure. Following the opening of trade barriers and booming economic growth reaching a high of 14% per year in


1992 and still upwards of 7.6% in 2012, China is poised to offer its citizens a far greater


standard of living However, that greater standard of living


has not reached many regions of China, where access to running water and basic health


care is still very much a problem.


Dualism can be a major handicap to development. The urban population in a dual economy is too small to provide a market for manufacturing and services or to generate enough


saving and investment in human and physical capital. Dualism also complicates the challenge of development because growth is not enough; it must also include increases in


well-being for both the rural as well as the urban poor. Poverty and Inequality


As in developed countries, the distribution of income in developing countries shows


great inequality. Typically there are greater extremes of wealth and poverty, with a small


wealthy elite, a large mass of people who are poor in both urban and rural areas, and a


very small middle class. This distribution of income makes it difficult to save and invest


because the wealthy group is so small and most of the rest of the population is at a subsistence level of income. ama80496_17_c17_465-494.indd 472 12/4/12 4:45 PM CHAPTER 17 Section 17.1? Characteristics of Developing Countries The World Bank has established a poverty line of $1.25 per day (2005 U.S. dollars) as the


threshold for absolute poverty. At this level, almost 1.3 billion people remain below the


extreme poverty line. Figure 17.3 shows poverty rates from 1981 to 2008 for the developing world using both $1.25 and $2.00 as poverty thresholds. Figure 17.4 groups certain regions to further distinguish both the overall level and rate of decrease in poverty


over time. Although all regions have reduced the level of poverty, a large percentage of


the world?s population still faces extreme poverty. Other measures such as illiteracy and


infant mortality suggest that people who are poor still make up about 30%?50% of the


population in the developing world.


Figures 17.3 and 17.4: Poverty rates in the developing world, 1981?2008












60 $2 per day


$2 per day (less China)


$1.25 per day 40


$1.25 per day (less China)


20 0


1980 Population


living on


less than




in 2005 PPP




2,000 1985 1990 1995


Year 2000 2005 2010 Rest of the world


Sub-Saharan Africa 1,500






0 South Asia


East Asia and


the Pacific


1981 1984 1987 1990 1993 1996 1999 2002 2005 2008


Year Figure 17.3 shows poverty rates from 1981 to 2008 for the developing world using both $1.25 and $2.00


as threshold levels of poverty. Figure 17.4 groups certain regions to further distinguish both the overall


level and rate of decrease in poverty over time.


Source: Poverty. (2012). Retrieved June 15, 2012, from


0,,contentMDK:20040961~menuPK:34480~pagePK:36694~piPK:116742~theSitePK:4607,00.html. ama80496_17_c17_465-494.indd 473 12/4/12 4:45 PM CHAPTER 17 Section 17.1? Characteristics of Developing Countries In recent years, a number of developing countries have succeeded in reducing poverty,


some primarily through economic growth and others through investing in health and


education for people who are poor, guaranteeing their access to basic services, or some


combination of these strategies (?Poverty,? 2012). Economic growth does not automatically translate into poverty reduction. Some countries that have had high rates of economic growth, such as Brazil, have not improved such indicators as health and educational attainment. Growth can and does generate resources with which to address some


of the problems facing people who are poor. On the other hand, there are countries with


low incomes and slow growth, such as Nicaragua, that have made significant gains in life


expectancy, reduced infant mortality, and literacy. Poverty programs can be progrowth


if they involve investing in the health and skills of people who are poor or antigrowth if


they increase dependency and discourage work. Ideally, economic growth and reduction


in poverty will go hand in hand, but the combination is not automatic. Experience at the


World Bank indicates that providing basic social services, specifically in health and education, has been the most effective way to work toward both growth and poverty relief. Demographics


One striking difference between developing and more developed countries is in demographics?the birthrate, the population growth rate, and the age distribution of the


population. Figure 17.5 shows some important differences in population characteristics


between developing and more developed countries.


Figure 17.5: Trends in birth and death rates, 1850?2000 Births/deaths


per 1,000




50 Death rate in


developing countries 40 Natural population


increase Natural population






20 Birthrate in


developing countries Death rate in


developed countries 10 Birthrate in


developed countries 0


1850 1875 1900 1925


Year 1950 1975 2000 Birthrates and death rates have generally declined over time worldwide, although the decline has been


more rapid in developing countries since 1955.


Source: ama80496_17_c17_465-494.indd 474 12/4/12 4:45 PM Section 17.2? Population, Human Capital, and Economic Development CHAPTER 17 The crude birthrate is the number of births per thousand of population. There is a large


difference in the crude birthrates of poor and industrialized countries. As of 2012, the average global birthrate is 19.15 births per 1,000 total population, compared to 19.95 per 1,000


population in 2009 and 20.43 per 1,000 population in 2003. A high birthrate means a high


dependency ratio, or the percentage of the population not of working age (under 15 or


over 64). Low-income countries have much higher dependency ratios. A high dependency


ratio means that a smaller proportion of the population is available to engage in productive labor. More resources must be used to meet the needs of people who are dependent


(a few of them elderly, but mostly children) for food, clothing, shelter, medical care, and


basic education. Those resources will not be available to promote economic development


through building factories and power plants, providing worker training, and developing


transportation systems.


Why are birthrates so high? Women marry soon after puberty in many poor countries


because they have few economic alternatives to marriage. They bear children early because


children, especially sons, are useful as labor and for old-age insurance.


People in poorer countries also die younger. A shorter life expectancy reflects poor health


care, poor nutrition, and high infant mortality. A shorter life expectancy means that the


productive work life of the average adult is not as long. The consequence of a short life


expectancy and a high birthrate in developing countries is a large number of children with


relatively few adults to support them. A growing population with a high dependency


ratio is a major barrier to achieving the goal of increasing output and raising the standard


of living. Key Ideas: Developing Versus Developed Countries


Developing countries share some important characteristics, like


? ? ? ? ? ? low per capita incomes,


a large share of resources devoted to agricultural production,


tropical climates,


dualism, with greater extremes of wealth and poverty,


high birthrates, and


shorter life expectancies. 17.2? Population, Human Capital, and Economic Development I n 1800, the estimated world population was about 1 billion. In 1990, it was 5.3 billion.


By 2011, it surpassed 7 billion. By 2050, there could be as many as 20 billion people on


the planet. The world?s population is growing by 200,000 people per day, or 70 million people per year. The good news is that the growth rate is slowing down. The key to


controlling population growth is the total fertility rate (TFR), or the number of children a


woman will bear during her childbearing years. A TFR of 2.0 keeps population constant.


In 1960?1965, the world TFR was 5.0. By 2010, it had fallen to 2.5?only 1.6 in the industrial countries (?World Population Prospects, the 2010 Revision,? 2011). Even in developing countries, there has been some progress in reducing fertility rates. ama80496_17_c17_465-494.indd 475 12/4/12 4:45 PM CHAPTER 17 Section 17.2? Population, Human Capital, and Economic Development Figure 17.6: World population, 1750?2050


Developing nations Developed nations Billions












Total world


population 5












1750 1800 1850 1900 1950 2000 2050 Future population growth is expected to come almost exclusively from developing countries.


Source: The problem for development is that most of the projected growth will still occur in the


developing countries (see Figure 17.6). Today, medical advances, inoculations, and many


life-lengthening techniques have spread throughout the world, reducing death rates even


in developing countries. Birthrates did not decline in the developed world until most


countries had attained relatively high levels of per capita income. In most nations, death


rates fell first as better health care, better nutrition, and higher standards of living lengthened life spans. After a time, birthrates fell. A nation that has bridged the developmental


gap from falling death rates to falling birthrates, thus slowing population growth and


reducing the dependency ratio, has made the demographic transition.


Most economists consider a large number of dependent children as a drag on economic


development. Population growth due to high birthrates may, however, have positi...


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