19.4: Review and Practice

Summary

Developing nations face a host of problems: low incomes; unequal distributions of income; inadequate health care and education; high unemployment; and a concentration of workers in agriculture, where productivity is low. Economic development, the process that generates widely shared gains in income, can alleviate these problems.

The sources of economic growth in developing countries are not substantially different from those that apply to the developed countries. Market economies with legal systems that provide for the reliable protection of property rights and enforcement of contracts tend to promote economic growth. Saving and investment, particularly investment in appropriate technologies and human capital, appear to be critical. So, too, does the ability of developing nations to match their population growth rate with the ability of the economy to increase real output.

Dependency theory, the notion that developing countries are in the grip of the industrialized countries, led to import substitution schemes that proved detrimental to the long-run growth prospects of developing nations. The movement of Latin American countries such as Mexico and Chile to market systems is a rejection of dependency theory. There is a general movement toward market-based strategies to support economic development in the future. But even market-based strategies will work only if efforts are made to ensure an adequate infrastructure, including the development of financial institutions capable of providing the required signals to guide individual decision making.

Concept Problems

1. What is the difference between economic development and economic growth?
2. Look at the Case in Point on the relationship between growth and development. Why do you think that the distribution of income is more likely to become more unequal during economic downturns?
3. What are the implications for the long-run development of a society that is unable to reduce its population growth rate below, say, 4% per year?
4. Explain how technological progress averts the Malthusian trap.
5. China reduced its rate of population growth by force (see the Case in Point). Given the likely effects of population growth on living standards, do you think such a policy is reasonable? Are there other ways a government might seek to limit population growth?
6. On what basis might a poor country argue that its poverty is a result of high incomes in another country? Do you think Mexico’s poverty contributed to U.S. wealth?
7. Given the arguments presented in the text, what do you think the United States should do to assist Mexico in its development efforts?

Numerical Problems

1. Consider two economies, one with an initial per capita income of $16,000 (about the income of Israel) growing at a rate of 1.8% per year, the other with an initial per capita income of $600 (about the income of Guinea) growing twice as fast (that is, at a rate of 3.6% per year). Using the rule of 72 from the chapter on economic growth, calculate how long it will take for the lower-income country to achieve the per capita income enjoyed by the richer one. How long will it take to literally “catch up” to the richer nation, assuming that the growth rates continue unchanged in the future?
2. Use the most recent copy of the World Development Report available in your library (or at www.worldbank.org) to determine the five poorest countries in the world. Look up data on the distribution of income, education, health and nutrition, and demography for each country (information on some of these variables will not be available for every country). Do you think that low incomes cause the observations you have made, or do you think that low levels of education, health, and nutrition and high rates of population growth tend to cause poverty?
3. A country’s rate of GDP growth is 3% per year. Its population is growing 4% per year. At what rate is its GDP per capita changing?