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Causes to Slow Economic Development in Less Developing Countries

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  • Category: Economics

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Economic development is the process of growth and structural change across the world, which aimed at improving people’s living standard. The basic method of measuring economic development is to calculate real Gross National Product (GNP) per capita of the country. GNP is composed of value of all goods and services produced within a country and the property income from abroad. It is real in the sense that it takes inflation into account, thus the term purchasing power parity dollars (PPP dollars). The annual World Development Report, conducted by the World Bank, puts nations in a rank order based on GNP per capita and its rate of change.

This is normally how we distinguish between more developed countries (MDCs) from less developed countries (LDCs). The United Nations Development Programme (UNDP) launched a new composite indicator in 1990, which is considered as more sophisticated. HDI, refers to Human Development Index, includes three people’s choices which are deemed to be critical: access and purchasing power of resources (GNP per capita in PPP dollars); a long and healthy life (life expectancy); and education (adult literacy rate and enrolment attainment rate).

It is published each year in Human Development Report (HDR) with information of 160 countries. However, the HDI does omit some important issues concerning the standard of living, such as, gender issues, racial discrimination and environment quality, which are very difficult to be calculated as figures. In the following essay, it is going to discuss the main factors that contribute to slow economic development in LDCs: rapid population growth, the lack of education opportunities and deficit of balance of payments (BOP), each topic is followed by a case study: China, South Korea and Venezuela.

Population Growth LDCs give a general impression that they experience a high to moderate population growth rate. There are exceptional cases where population growth rate is not very high compared to other LDCs; instead, the size of population may be very high. India and China are the best examples. LDCs usually have very high birth rate as well. In recent years, economists have begun to research in the microeconomic household theory of fertility.

It is found that the conventional theory of consumer behaviour is applicable to the demand of children in a household. Especially in regions of high mortality, parents may produce more children than they actually desired simply because some may not survive. Children in LDC are commonly seen as economic investment goods. They are expected to provide child labour to the family and financial security for parents in old age. If they (their children) do not do so, they will be regarded as a disgrace of the family.

As technological and medical advancement came forward, it has gradually resulted as a situation called ‘population explosion’. Death rate is slowing down while birth rate is still out of control. One of the main implications of such population explosion has been the growth of the proportion of people who live on the ‘poverty line’, which is defined as the line of minimum calorie intake to stay alive in LDCs. There are a number of implications for economic development in the case of high population growth in LDCs.

First of all, evidence shows that rapid population growth usually lowers per capita income growth in most LDCs. The famous ‘Malthusian’ picture of the population problem of most LDCs is that if GNP per capita is regarded as rough approximation of the standard of living of people, then it is quite obvious that in a LDC with stagnant GNP and rising population, the standard of living can only be worse off. That is if the population growth rate is faster than the real income growth rate, the average standard of living can only fall.

Secondly, it is normally agreed that large family size and low incomes restricts the chances of parents to educate all their children, which generates low enrolment ratios of primary, secondary and tertiary education in comparison to MDCs. At the national level, a large population or its high rate of growth would mean that there is more demand on social capital such as, health, education and hosing. Education expenditure provided by the government is also to be spread thinly because of high population growth. This further lowers adult literacy since people have less chance to go into higher education.

Thirdly, high fertility is harmful to the health of mothers and children. It increases the risks of giving birth. Moreover, close spaced births have shown to reduce birth weight and increase child mortality rates. These affect negatively on every components of HDI, which is GNP per capita, education attainment and the life expectancy of people. Besides, rapid population growth in LDCs means that more food is demanded. Statistics at HDR shows that over 90 percent of additional LCD food requirements are brought about by population increases.

More surprisingly, referring to the information from United Nations Children’s Fund (UNICEF), meeting the needs of all children for adequate nutrition, it would cost only 16 billion pound a year. This is fifty times smaller than global military spending. This drives the conclusion that any shortage of food, for children at least, is due to the lack of political will instead of the lack of capital. High population growth rate or a high level of population could lead to pollution and many environmental problems such as the growth of shantytowns, which could definitely cause a fall in the standard of living.

It can be supported by saying the increase in population lowers the man-land and the man-resources ratios because if there is no technical progress being carried out, the economy will experience greater poverty. Case Study: China According to Reuters (1999), Chinese President Jiang Zemin said his biggest problem was the country’s large population when focusing on economic development and open China wider to the outside world. He stressed that even China has made great achievements in the last 50 years, these become very small achievements when they are shared among almost 2 billion people.

Should we take a closer look at the most recent statistics of China given by HDR (2001) before we judge whether Jiang’s statement was right. The People’s Republic of China had a total population of 1,285. 2 millions, and its annual population growth rate in 2000-2015 was estimated as 0. 6, both were ranked the third in the world. GNP per capita (PPP US $) was raised from 530 to 4,020 during the period of 1995-2001. Since 1970, infant mortality rate per 1,000 live births had decreased from 85 to 31. Adult illiteracy rate of age 15 and above in percentage was 14. . With these figures, HDI value was calculated as 0. 721. Now that population growth rate has been decreasing, yet, parts of China with dense population still suffer from poverty, pollution and lack of health services. The epidemic Severe Acute Respiratory Syndrome (SARS) was one big problem during the year 2003. From Ming Pao, a newspaper in Hong Kong (March 2003) says that The World Health Organization explains one of the reasons why the disease spread so quickly in Guandong (province of China) is the huge population and the crowded situation.

The SARS was and has become again a threat to the rapid economic growth because of reduced business travel and tourism. Foreigners stopped traveling to China for business and some of them even closed their company branches. Hotels and Guestrooms received no customers for months. Three hundred people died from the disease. Loss of human lives, capital and economic activities caused by the disease must have been a significantly negative influence on the Chinese economic development since its trade, tourism and retail sales rely hugely on foreign countries.

It seems that Jiang was right about the population growth problem looking at this single incident’s effects. In the year of 1979, China adopted the ‘one-child policy’ as its birth control program as part of its attempt to break out of the underdevelopment trap. Traditional Chinese thinking suggests that financial security of a family should be supported by sons working and only sons can receive inheritance from their parents. This gives ideas why there is a need of giving birth to more children than parents actually expected.

The ‘one child policy’ stipulates each couple living in the cities should only have one child, unless one or both of the couple are from an ethnic minority or they are both only children. China’s annual population growth rate had slowed down by 0. 7% since 1975. Before that, if fertility rates remain unchanged, its population will reach 2 billion by 2050. However, critics of the policy maintain it has led in some case to the killing of female infants because of the traditional preference for boys. The number of men is thought to outnumber women in China by more than 60 million.

Some people have even made comments on China’s family planning program, criticizing it as a ‘violation of human rights’ and ‘inhumane’ because they think that people should have rights over their sexual habit and reproduction preference. The Chinese Government White Paper claimed that it was a must for China to get rid of problems brought by dense population in order to further its development in economic and social sense and these people who criticized have tried to impose their values and ideas on China, using the excuse of ‘protecting human rights’ to put pressure on China and to interfere in China’s internal affairs.

Clearly, it is not only an economic, but also a political issue and it takes time and effort to genuinely solve the population problem. Education Opportunities In most LDCs, apart from large population and high population growth rate, the second serious problem would be the lack of education opportunities. As I have mentioned earlier, there is a linkage between large population and education. Furthermore, LDCs often spend proportionately more of its government expenditure on foreign debt and military than MDCs. Therefore, LDCs usually have higher illiteracy rate.

One might suspect that many LDC educational systems are unfair, in the sense that poor students have less chance of completing given educational cycle than more affluent students. This is because the private costs of sending children to school are often considered as high in a poor family; child labour is one of the opportunity costs. The poor students are therefore likely to drop out during early years of school. When we compare the total school enrolment of LDCs to MDCs, there is a large gap between the numbers of people attending tertiary education.

For instance, from World Development Report (1995), there was 51% of age group in MDCs getting higher education while there was only 1% to 6% in low-income LDCs. Labour productivity, unemployment rate and the standard of living of people are greatly related to the level of education that they have completed. In the primary sector, even farmers require some technical knowledge in order to use today’s advanced agricultural equipments. Having attended a certain level of education would without doubt improve productivity of the farming sector.

No need to mention the secondary sector, labour in different fields must possess higher level of special skills so as to utilize more complicated machines. As for the tertiary sector where most of the jobs are providing services rather than goods, labour necessitate a certain level of literacy and communication proficiency instead of only technical skills. For example, a person working in a bank should have obtained education on accounting skills and also the ability to communicate and understand the need of customers coming to the bank. An accounting degree would further his ability, productivity and prospect in this field.

Illiteracy in LDCs has been one of the biggest causes of underdevelopment since most of the people stay in the primary sector, normally the agricultural sector where their income greatly depends on vulnerable weather and exchange rates. Unemployment rate is the percentage of people who are unemployed while they are able and willing to work. LDCs often have very high unemployment rate simply because of there are not enough jobs. Since not many people in LDCs are properly educated, very few of them possess the skills to work outside the primary sector where it requires higher level of skills and knowledge.

However, limited numbers of people can be employed in one farm. This causes unemployment. In some cases, it could be referred to skill mismatch. People who used to work in a coalmine that is now closed because of the change of taste in the market are very difficult to find a job in some other fields. They do not have the mobility to change from one industry to another and it takes time for the government to train them so that they can become capable of other jobs. This is called structural unemployment, which is quite common in LDCs. The lack of education opportunities and unemployment contribute to low standard of living in LDCs.

As a result of their illiteracy, people find it very hard to be employed to a higher paid job. Poor families with low incomes cannot support their children to proper education. This becomes a cycle which is generating more and more serious poverty and unemployment in LDCs. If we look at this from an economic view, it also drags the rate of development as education attainment and GNP per capita remains low. Case study: South Korea During the last 50 years, South Korea has undergone enormous improvement. It has a population size of 44 million. Its GNP per capita grew by more than 7% annually for the period 1965-1990.

According to HDR (2001), GNP per capita has reached 15,090 and life expectancy at birth is 75. 2. It has been rapidly increasing agricultural productivity by carrying out thorough land reforms. In addition, it was very efficient in shifting labour from agriculture to industry by the steady growth of the capital stock and of education and skills. It spent 17. 4% of government expenditure (3. 8% of GDP) on education in 2001. It also tackled its population problem by controlling fertility. Fertility rate per woman has dropped from 4. 3 to 1. 4 after 1970.

Judging from the given statistics, South Korea’s key to success was mainly the ability and the will to educate its people so that they have now become more mobile labour. Some economists have observed that education actually has significant impact to status of female in the society and the labour force. Before 1970, most of the women were still housewives. They earned less and were less educated then men. By 2001, female professional and technical workers have gone up to 34% of the labour market. Education also holds an important role in population control since people now realize the inconvenience and burden brought about by large families.

As a result, its HDI has risen from 0. 701 to 0. 879 during the period of 1975 to 2001. Conversely, some might argue that the Korean’s success was largely dependent on foreign aid and international relations. Before 1945, South Korea was still a colony of Japan. It later received a large sum of capital in the form of U. S. aid in 1950s for defending itself from the invasion of North Korea. Some even claim that it could be the self-interests of the countries that gave aid; they saw themselves fighting against communism.

The achievement of economic development is therefore conditioned in some sense. Deficit of the Balance of Payments The balance of payments is a record of all economic transactions between residents in one country and residents in the rest of the world ever a period of a year. The BOP has three components are the current account, the capital account and the balance item. The current account is made up of two sections, which are the balance of trade and the invisible balance. The balance of trade is also called the visible balance. It shows exports and imports of goods, for example, cars, clothing.

Within the invisible balance, it includes the net total of services like tourism and banking; interest, profits and dividends; transfers, including government grants overseas and subscriptions to international organizations. The capital account is made up of two sections, which are the transactions in external assets and that in external liabilities. Finally, the balancing item is an accounting device that is used to correct errors and omissions. It is used to ensure that at the end of the accounting period the BOP balances. For instance, if there is a deficit, the reserves will give out the amount of money to cover the deficit.

If there is a surplus, the money will be stored in the reserves. A deep, persistent deficit is a sign of weakness. It has to be financed. But a small short-term deficit can be desirable because it might indicate that domestic industries are restocking as the economy recovers from a recession. This will generate new industrial capacity, which will create future jobs and enable more potential exports. It is a very common phenomenon of LDCs to accumulate external debt at the stage of economic development where current account deficits are high, which means imports exceeded exports.

One of the causes might be LDCs usually specialize in primary sector of production and hence cheap exports and dear imports. In early 1970s, most loans were on low interest and were for implementing development projects and expanding imports of capital goods. However, the expansion of commercial banks and their recycling surplus OPEC ‘petrodollars caused the debt crisis. The 1980s marked a key transition in most of the LDCs’ BOP accounts with the rest of the world.

Before 1980, LDCs have large current account deficits mainly due to imports of capital goods required to provide the machinery for rapid industrializations. Export earnings paid the most but not all of these imports. Large resource transfers in the form of foreign aid financed these deficits. LDCs also received help from the World Bank and other international banks like the International Monetary Fund (IMF). Capital account surpluses were then created by accumulating international reserves. Even so, after 1980 LDCs experienced a considerable deterioration in both current and capital accounts.

This was the result of fall in commodity prices, global recession and increasing protectionism in the developed world against LDCs. The Third World was again in large international debt during the 1980s and early 1990s. In some cases, money was sent to finance projects with little chance of producing income-generating goods and services because they were poor business projects whose future profitability had not been properly appraised; in some other cases, the money was not spent on business projects at all, it was usually spent on military either for dictatorship or self-defense instead.

Money was generally not spent wisely in LDCs while MDCs normally have had proper budget that states how much the government should spend on a country’s crucial concerns, such as, health services, education, military and welfare. Moreover, due to the need to repay large foreign debt, not surprisingly, LDCs would have less money for improving people’s standard of living than MDCs.

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