Economics - Chapter 19: Economic Growth in Developing Nations & Chapter 20: The Global Economy

developed nations

nations with relatively high standards of living and economies based more on industry than agriculture

developing nations

nations with little industrial development and relatively low standards of living

___ out of ___ world nations are considering developed nations, the rest are considering developing nations.

35; 192

Economics Characteristics of Developing Nations

• very low GDP per capita

• natural and human resources available, but not enough capital or knowledge to use those resources to their full potential

• agricultural economies

• most families live at a subsistence level

  • subsistence agriculture: growing just enough food by a family to take care of its own needs

• poor health conditions (shortages of doctors and high infant mortality rate)

• low literacy rates

• rapid population growth

Weak Property Rights of Developing Nations

• less well-defined, government-protected private property rights

  • ex. Peru; 80% land has no property owner

• no large-scale farming occurs because individual farmers cannot buy and sell land

• peasant farmers have little incentive to improve the value of the property

Financing Economic Development in Developing Nations

• basic problem is how to finance equipment and training necessary to improve their standard of living

• one source of financial capital is domestic savings

• two major outside sources of capital: investment by foreign business and foreign aid from developed nations

Foreign Investment in Developing Nations

• foreign corporations set up branch offices or companies in the developing nations due to low wage rates

• foreign investors take a risk as there may be political instability in the developed nation

• citizens of developing nations lose economic control when foreigners control their resources

Foreign Aid to Developing Nations

• foreign aid: money, goods, and services given by governments and private organizations to help developing nations and citizens

• forms of foreign aid: economic assistance, technical assistance, military assistance

economic assistance

providing loans and money or capital donations

technical assistance

providing professionals to train and teach skills to local population

military assistance

providing the nation’s armed forces with money or people who teach or train

Who Supplies Foreign Aid?

• while the US gives a large dollar amount in foreign aid, it is a low percent of its GDP compared to other countries

  • $23 billion in foreign aid

  • $14 billion in foreign military assistance

• aid channeled through Agency for International Development (AID)

• United Nations has agencies that distribute funds to developing nations

• International Monetary Fund has recently become a foreign aid agency

• many developing nations are unable to repay the loans they have received in foreign aid

Reasons for Giving Foreign Aid

1. humanitarianism: the desire to relieve human suffering; a major goal of private aid organizations

2. it is in the best economic interests of developed nations to help because it will create more trading partners and investment opportunities

3. political objectives, such as creating allies; to help develop a military alliance, a developed nations will give economic aid; if the developing nation’s government changes hands, the new government may be hostile to the developed nations and use its military equipment against them

Four Obstacles to Growth in Developing Nations

1. Attitudes and Beliefs: people do not trust innovation and technology; comfortable with the old way; innovations: new ways of doing things

2. Continued Rapid Growth: the population is growing faster than the GDP

3. Misuse of Resources: corrupt government and poor allocation of resources (capital flight)

4. Trade Restrictions: make it difficult or impossible to increase exports from developing nations to developed nations; trade restrictions: quotas or tariffs that prevent consumers from purchasing cheaper foreign substitutes

pure capitalism

one of the most important aspects is well-define private property rights

China’s Economy

notes

Improved Telecommunications

• improved telecommunications have significantly reduced cost of business

• global integration has increased dramatically over the past decades due to improved telecommunications

• inventions and factors that have influenced rapid improvement in worldwide telecommunications: communication satellites, fiber optic cables, the Internet

• this increase in communications affects the world: nations are changing their cultural tastes and buying habits; many want to learn English as a second language

The Globalization of Financial Markets

• US government securities, foreign exchange, and stock are now traded continuously around the world

• because of the speed and power of computers and the affordability of telecommunications, the world has become one financial market

• trading in US government securities is the world’s fastest growing 24-hr market

• one problem with worldwide stock market is that when the US stock market falls, so do the stock markets worldwide

• an advantage with worldwide stock market is that it is possible to spread both banking and investment risks around the globe

• developments in technology are tied to growth of global market

Foreign Investment Then and Now

• direct foreign investment in the US has grown as global integration of economic activity has progressed

• long history of foreign investment in US

• today, direct foreign investment (DFI) has increased in the US to the point where some American want to restrict it

• foreign corporations cannot directly influence the government, but may indirectly have an influence

• the US government cannot make the business climate too difficult for these corporations or they will go elsewhere

• US government has control over foreigners because they own 50% of the US public debt

Investment Here and Abroad

• consumers care more about the quality and price of a company’s product than about the extent to which foreigners control that company

• foreign ownership of American industries is about 10%

• US share of worldwide direct investment is more than 40%

• economic imperialism: when one culture takes over everyone else’s

• some consumers argue that we should encourage direct investment and debt purchases by foreigners

multinationals

firms that do business in many countries; over 60,000 multinational corporations in the world

The Size and Number of Multinationals

• top 100 account for almost 50% of all cross-border assets

• most invest in regions close to home

• firms in different countries are forming alliances—joint ventures or licensing deals

  • alliances: each firm’s acceptance of its own limitations, whether financial, technological, or geographical

The Global Village and Tolerance

• economic globalization has potential to promote greater tolerance of diversity within society

• one of the social results of globalization is increased immigration

• because of this, the need for tolerance and open-mindedness is more important than it ever has been

• another result of globalization is the hiring of firms from other countries to handle customer service