Public Policy

Lecture 7

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Developing countries

Which country is a developing country?

The most widely accepted definition of a developing country is one with

• a low level of industrialization and
• a poor Human Development Index
• a high degree of economic dependence on developed countries.

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However, using only GDP for classification does not give the correct result.

Economic dependence is not measurable

Human Development Index

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a statistic composite index of:

• life expectancy,
• education, and
• per capita income indicators

This index often framed in terms of whether people are able to "be" and "do" desirable things in life.

Being: well fed, sheltered, healthy;

Doings: work, education, voting, participating in community life.

The freedom of choice is central

Which country is a developing country?

There is no strict definition, and in practice, developing countries usually include countries that are not members of the Organization for Economic Cooperation and Development (OECD).

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OECD members committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies of its members.

Unlike OECD members, developing countries have low democratic standards, low levels of free market economies, industrialization, social programs and human rights guarantees for their citizens.

Founding member countries (1961)

Other member countries

38 countries

18% global population

60% global GDP

Success of USA and Europe made an example

Video

GLOBAL GOVERNANCE: How America become a superpower

Recommendations:

• Use the model of open economy – the advantage the global trade
• Grow GDP per capita – encouraging consumption
• Attract Investors – educate the local labor force
• Produce competitive products – increase the export

The goal – create the middle class in the country

However:

All modern developed countries started out as metropolises: they began mass colonization of other countries in the late 18th century, suppressed weak economies, accumulated resources and wealth.

18th century the poorest region (Africa) was only 2.5 times poorer than Europe. Now it is more than 12-15 times… Using GDP per capita it would be more than 300 times...

Now the reach countries have better policies and they are able to dictate to use them for success.

before 17th century Britain’s economy was dominated by export of raw materials, so for promoting domestic manufacturing the government use very aggressive protectionism by high tariffs (up to 55%). And at the same time, the UK encourages other countries to use free trade... Even in the 20th century, tariffs in developing countries were twice as high as they are now.

The foreign enterprising was limited and even prohibited in some industries. Now international investment is proclaimed as a solution.

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Free trade vs Protectionism

• Free trade is a trade policy that does not restrict imports or exports (like tariffs, quotas, subsidies or prohibitions on goods and services);
• it is the idea of the free market as applied to international trade.
• also called a laissez-faire approach (18th century, "let you do") - nothing needs to be done to protect or promote trade because market forces will do so automatically.

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• In contrast, protectionism requires the regulation of international trade in order to ensure the proper functioning of markets.
• Protectionism exists in many different forms, but the most common are tariffs, subsidies, and quotas.
• These strategies attempt to correct any inefficiency in the international market, but are criticized as antagonists of free trade.

International trade

• allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets.
• As a result, the economy will
• grow more efficiently and can more easily become competitive economic participants.
• These raise employment levels, lead to a growth in the gross domestic product.
• For the investor, FDI offers company expansion and growth, which means higher profits.

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Can you give examples of how a developing country has been able to get rich by entering into open trade?

International trade can be harmful

• Usually international trading consider as a only solution for the developing countries, but in reality trade within Globalization is not so beneficial, require the special limitations and rules, so have to be protected

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• trade may be beneficial to overall economy, but harmful to the most vulnerable members of society:
• low labor and environment standards in developing countries attracts corporate offshoring. As a result – child labor, long hours and low wages. Environment issues.
• “Economic colonialism” vs investments, microcredit and direct access to World Market
• Very often wealth of trade goes to the richest and most powerful, at the expense of everyone else.
• In richer countries people worry that free trade will make it easier for their jobs to be moved overseas and try to protect their market.
• In poorer countries people worry that free trade will give international corporations too much control over their economies (and politics, and culture).
• Poorer countries can get stuck specializing in lower wage industries like mining, fishing or farming and only some degree of protectionism can help create more advanced industries.

“Trading away poverty”(2min)

The global trade is not a solution for the poor

• Global trade allows wealthy countries to use their resources—whether labor, technology or capital— more efficiently.
• Specialization leads to the Dutch disease and as a result – to corruption
• Balance of trade is negative because developing countries exporting cheap products, mostly raw materials
• To encourage trade and get fats profit, governments sometimes lower tax or non-tariff barriers such as environmental, health or safety standards
• Or they may artificially restrain the exchange rate

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Even for USA :�Free trade – good or bad?

A poll by NBC and The Wall Street Journal in Feb 2017 asked Americans, “In general, do you think that free trade between United States and foreign countries

• has helped the US,
• has hurt US, or
• has not made much of a difference either way?”

Even for USA : �Free trade – good or bad?

A poll by NBC and The Wall Street Journal in Feb 2017 asked Americans, “In general, do you think that free trade between United States and foreign countries

• has helped the US,
• has hurt US, or
• has not made much of a difference either way?”

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43% of responders said it helped

34% said it hurt

23% no difference

The free trade is one of the requirements if an open economy:

• An open economy is an economy in which there are economic activities between the domestic and international communities.

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• Trade in goods and services

(including management, technology etc.)

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• Funds can flow as Investments across

the border.

Open economy may be different by scale :

It may be different by magnitude of impact on the international market and on the level of the world interest rate

• large (makes a significant impact on the international market and on the level of the global interest rate),
• small (not a significant impact on the processes in the world market).

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To be open, economy in the country must have:

• favorable investment climate,
• open flow of investment,
• high technology level,
• open information flow
• be competitive in international markets (macro and microeconomic levels)

Guess who has larger impact in the international market?

The advantages of an open economy:

A national economy with a high degree of involvement in international economic relations, contributes to:

• the deepening of international specialization and cooperation;
• rational and effective allocation of resources,
• the sharing of world experience (business, technology…);
• increased competition between domestic producers, stimulated by competition in the global market.

Really work for developed countries

Can an economy be a closed economy?

Yes, but in our modern world – only theoretically.

The opposite of open economy is autarky - economic independence or self-sufficiency (from the Greek: αὐτάρκεια).

Autarky nowadays is not a real economic concept, but a tool for economic analysis.

Sometimes the meaning of autarky may be related to the size of the country.

It is believed, for example, that small countries should be attract to the “open economy” pole, because they receive more benefits from external relations (new technology, capital etc.).

Large countries with their huge domestic market may gravitate to the “autarky” pole.

Autarky – negative and positive

• Autarky as an ideal or method has been embraced by a wide range of political ideologies and often confused with patriotism and used in most nationalist movements, as well as, for example, in traditionalist conservatism.
• However, Autarky may be a policy of a state or other entity when it seeks to be self-sufficient as a whole, but also can be limited to a narrow field such as possession of a key raw material. For example, many countries have a policy of autarky with respect to foodstuffs and water for national security reasons.
• And opposite, autarky may be a result of economic isolation or external circumstances in which a state or other entity reverts to localized production when it lacks currency or excess production to trade with the outside world.
• Therefore, the Autarky is an extreme form of economic nationalism and protectionism.

Examples – Autarky as an ideology

Germany, Italy, USSR and Japan in XX century

The Autarky as a political goal usually reflects unhealthy condition of the economy.

Economic self-sufficiency is presented as a patriotic movement, but the real goal is to conceal the low competitiveness of the economy and poor governance of the country.

Poverty level in such countries is tremendous

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Republic of Albania and North Korea in XXI century

How North Korea’s Economy Thrives On Its Black Market (4.5 min)– the example how whole economy could depend on Informal (Black) Market

Examples - Economic self-efficiency and � isolation

• For large and powerful countries Autarky could be related to question of national security – all key products have to be manufactured within its territory. Autarky there means absolute sovereignty.
• Examples – USA, Great Britain and European Union, Russia

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• Another category – remote, distant, isolated territories.
• Examples – Alaska and Yakutia

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Sakha (Yakutia) Republic

Area 1,190,555 sq mi

(more than Argentina, which is 8^th largest country)

Population 958,528 (0.8 per mi)

Oymyakon

Nominal GDP per capita

17,830 (Russia avr. 11,290)

Native peoples are hunters, fishers and

reindeer herders.

Oymyakon - is one of the coldest permanently inhabited locales on Earth.

The life expectancy is 10 years higher

than country’s average:

Udachnaya pipe diamond mine.

The mine has estimated reserves of 225.8 million carats of diamonds and an annual production capacity of 10.4 million carats.

Russia – Main Problems: �corruption and centralized power

Moscow –

• the capital and largest city (12.5 millions)
• 9^th most expensive city in the World
• before 2008 had more billionaires than NY city (74)
• Accumulate up to 80% taxes

Russia turning time back

• Path to Economic Autarky leads whole country to economic and social degradation.
• Blind following ideas of fast and formal developing, like specialization on natural resources and large numbers in GDP, makes vulnerable not only the poorest members of society, but the middle class as well.
• Fast transition to “wild capitalism” with absence of social programs, which was usual in the country for generations, drive the nation back in time, in 1900s (everyone on its own)

GDR composition by sector

agriculture: 4.7%

industry: 32.4%

services: 62.3%

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25% population lives less than $10/day

Labour force

agriculture: 9.4%

industry: 27.6%

services: 63%

• Poverty growth

(USA - 2.75%)

Why developing countries are poor?

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• Bad Institutions and corruption
• Culture and religion
• Geography and climate

Why developing countries are poor?

• Institutions and corruption
• Culture and religion
• Geography and climate

The top 9 causes of global poverty

1. Inadequate access to clean water

and nutritious food

2. Little access to livelihoods or jobs

3. Conflict

4. Inequality

5. Poor education

6. Climate change

7. Lack of infrastructure

8. Limited capacity of the government

9. Lack of reserves

Why developing countries are poor?

• Institutions and corruption
• Culture and religion
• Geography and climate

The top 9 causes of global poverty

1. Inadequate access to clean water

and nutritious food

2. Little access to livelihoods or jobs

3. Conflict

4. Inequality

5. Poor education

6. Climate change

7. Lack of infrastructure

8. Limited capacity of the government

9. Lack of reserves

Which are the causes, and which are consequences ?

Clean water and nutritious food

Water – which is safer? What food is more nutritious?

Central African Republic

Russia

Clean water and nutritious food

Water – which is safer? What food is more nutritious?

Central African Republic

Russia

The energy value of fresh insects, 499-1272, kcal / 100 g, protein - up to 50, g / 100 g (beef - up to 26, fish - up to 28)

Loss of local cultural traditions leads to dependence on outer aid

New York, 1900

Porridge

Misunderstanding and ignorance of other cultures leads to their rejection

Culture and religion

The Lykov family was a Russian family of Old Christian Believers. The family of six is known for spending 42 years in complete isolation from human society in an otherwise uninhabited upland in southern Siberia.

In 1936, when religion was banned, Karp and Akulina Lykov with their children fled from their native city to the taiga, and settled 160 miles from any settlement.

In 1978, their location was discovered by a helicopter pilot flying to the area with a geological team. Geologists contacted the family, but the Lykovs decided not to leave the place.

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In conditions of complete isolation, everyday distress and hardship, their religion and culture has undergone significant changes. Everything that they were deprived of, they began to consider a sin - (like milk when their cow died, or canned food when they ran out, ordinary clothes and shoes). While the basic cultural skills and traditions were lost as not necessary for survival .

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Extreme poverty has changed their cultural and religious norms

Little access to livelihoods or jobs� = corruption and lack of legal system

Law and Order? Yes….

Corruption is a system

Conflict breaks any system

1. Starvation

2. Lack of workers, lack of jobs

3. Conflict

4. Children labor

5. No education

6. Change of nature background

7. Broken infrastructure

8. No help from government

9. No reserves

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1. Inadequate access to clean water

and nutritious food

2. Little access to livelihoods or jobs

3. Conflict

4. Inequality

5. Poor education

6. Climate change

7. Lack of infrastructure

8. Limited capacity of the government

9. Lack of reserves

Geography and climate ?

Not necessary:

Liberia

14th poorest country in the World

Unemployment 25%

55% of the population is below the IPL

120th country by GDP/capita in the World (228)

Unemployment 8%

29% of the population is below the IPL (= Italy)

North Korea

Third poorest country in the World

Unemployment 85%

83% of the population is below the IPL

Mongolia

Kazakhstan

71st GDP/capita in the World, similar to Greece and Turkey

Unemployment 5%

2.6% of the population is below the IPL better than in Austria and China)

Geography and climate ?

Not necessary:

Syria

Southern developed countries are control malaria and other tropical diseases

USA, Australia

125th poorest country in the World

USA - 187th

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Canada

Norway

Finland

Cold climate in developed countries is not an obstacle for economic and social success

Mexico

The poorest country in the World (82.5% below poverty line)

Limited capacity of the government

• GDP is a monetary measure of the market value of all the final goods and services produced in a period (quarterly or yearly) of time

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Which is a developing country?

Which is a developing country?

Dominican Republic

United States

52nd poorest country in the World, 30.5% BPL

108th poorest country in the World, 15.2% BPL (= Great Britain)

~ $11.300

~ $1.449

The developing countries can afford far less for public policy, than developed ones….

World Bank, define a country as developing when the annual per capita income is below $12,275. (List of countries by GDP (nominal) per capita)

The measure of development is consistently linked to industrialization and standards of living. The income levels and population growth rates playing key factors

To address and encourage development, several varying academic theories exist.

The developing countries can afford much less for public policy, then developed ones….

World Bank, define a country as developing when the annual per capita income is below $12,275.(List of countries by GDP (nominal) per capita)

To address and encourage development, several varying academic theories exist.

Some theories suggest that investing in human development would lead to more productivity and, in turn, an improving economy.

Others argue that investing in jobs and infrastructure would have a more direct impact and result in improved qualities of life.

How much is enough?

Social advantages in socialist countries lead to collapsing the economy in general

Is balance the answer?

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Some modern ideas

• the electronic money for poor
• minimal money support, free food, housing

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What really works

• Providing the “fishing rod, not the fish – it gives the opportunity and choice” to those who is ale to work
• Providing “fish” to hungry and vulnerable members of society

Relative poverty

(socially defined = income inequality)

Situational poverty

(caused by sudden event: a divorce, death of the family head, illness, a natural disaster or loss of job)

Generational poverty

(permanent; two and more generations in poverty)

Absolute or extreme poverty

$1.9/day

Secondary poverty

(unreasonable spending of income)

Urban and rural poverty

Causes and consequences

1. Inadequate access to clean water

and nutritious food

2. Little access to livelihoods or jobs

3. Conflict

4. Inequality

5. Poor education

6. Climate change

7. Lack of infrastructure

8. Limited capacity of the government

9. Lack of reserves

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• Institutions and corruption

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• Culture and religion

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• Geography and climate

Causes and consequences

Public Policy

• stable bank system
• regulation of local markets - marketing, storage, quality control, cooperatives for fair pricing

What can be done?

• Poverty isn’t a lack of character; it is lack of cash (15 min)
• Aid in Africa (10 min)
• 3 reasons why we can win the fight against poverty (13min)
• Globalization and the poor -- a look at the evidence (15 min))

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Summary 1

• Culture usually support ideas and knowledge about local sources for normal everyday life. Placed in different environment they can become the root of problems, including a poverty trap
• Religion is never the cause of poverty, but often an excuse
• Global governance requires foreign (inorganic) solutions. It is necessary to consider local resources for the livelihood
• Corruption usually much larger system than it looks: it serves interests not only the corrupted functionaries, but community as well, so it is really difficult to break.
• Conflict, especially long one, is reason for chain reaction leading to poverty. It requires immediate help for the poor, but any these instant measures could not resolve the problem itself.

Summary 2

• Measures aimed at accelerating economic development cannot be universal.
• Protectionism in international trade is necessary for weak economies.
• The reasonable part of autarky could protect local economics, even if it is weak one. However the course on disintegration with global economy leads to economic and social backwardness.
• Success of public policy programs depend on availability of adequate budget, provided by the government. So standard approached will not work in countries with high inflation and corruption
• Poverty is not homogeneous, so approaches for the solution have to be diverse

Really good policy/macroeconomic lecture

Why Are Some Countries Rich and Others Poor? |

Economics for People with Ha-Joon Chang

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Dr Ha-Joon Chang is a South Korean institutional economist

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Institution

University of Cambridge, UK

Field

Development economics

Awards

Gunnar Myrdal Prize 2003, Wassily Leontief Prize 2005

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