0:12
In our last several modules of this lesson,
we have explored the question,
of why do some developing countries like Chile,
Costa Rica and Vietnam enjoy relative prosperity while others like Chad,
Senegal and Gabon's stagnate.
This figure sums up the development economist argument by providing
an overview of the vicious circle of poverty that some countries fall prey to.
The root of this circle of poverty is rapid population growth, outpacing, economic growth.
This leads to low per capita income.
A low level of per capita income in turn translates into
a low level of savings and a low level of aggregate demand.
This in turn leads to low levels of investment in both physical and human capital.
Result is low productivity and
low per capita income and the circle and cycle of poverty continues.
Other elements of poverty are likewise reinforcing.
For example, poverty is typically accompanied by low levels of education,
literacy and skill which in turn prevent the adoption of new and improved technology.
Just how can this circle and cycle of poverty be broken?
Take a minute now to jot down a few of your own ideas before we end this lesson with
a brief discussion of just a few of
the development strategies economists frequently debate.
2:04
One key issue and development strategy is whether a country should rely primarily
on industry or agriculture to lift it out of poverty.
In the past, such a choice was typically resolved in favor of
industrialization as developing countries sought
to mimic the success of the industrialized nations.
Today however, the lesson of decades of attempting to accelerate industrialization
at the expense of agriculture has led many analysts to rethink the role of farming.
Here's the problem, industrialization is capital intensive.
The Tracks workers in the crowded cities
and it often produces high levels of unemployment.
On the other hand rising productivity on farms,
typically requires far less capital while
providing productive employment for surplus labor,
but wages can be systematically low.
For example, if a poor country like Bangladesh could
increase the productivity of its farming by just 20%,
that advance would do more to release resources for the production of
other goods and trying to construct a domestic steel industry to displace steel imports.
3:26
The second major issue and development strategy is
whether a country is better off relying more
upon a market oriented economy or a state run socialist or communist style economy.
The important elements of a market oriented policy include low tax rates,
a favorable regulatory climate and
the encouragement of entrepreneurship and small business.
Such a free market orientation and profit seeking behavior
can however conflict with traditional practices,
religious beliefs, vested interests or
a ruling political system of socialism or communism.
This is despite decades of experience suggesting that a more extensive reliance on
markets typically provides the most effective way of promoting rapid economic growth.
So, a third major issue in
development strategy is determining how open or
close the nation's economy should be to international trade.
One key concept here is that of import substitution.
The strategy of import substitution,
a country will try to build domestic production facilities to displace imports.
The hope is that these infant industries
under the protection of trade barriers one day grow up,
become national champions providing a strong base of employment.
One problem however, is that it can be very
difficult for a nation to build competitive industries.
And in the meantime,
any country that pursues a strategy of import substitution,
may saddle its population with
much higher cost products and thereby help perpetuate the cycle of poverty.
The alternative is a more open economy and a nation
that freely trades with the rest of the world to meet its needs.
This free trade paradigm,
the idea is for your country to produce the products it is best at produce.
It's the principle of comparative advantage
and it's a linchpin of international trade theory.
Your country then trades the surplus of these products to
other nations to get what it needs from the rest of the world.
Resultant gains from trade should thereby benefit
all trading nations or so the classical theory of international trade goes.
As to whether an open or closed economy is better for any given nation,
whether there's classical trade theory really works in the real world,
we will leave those questions for our next two lessons.
So, take a well-deserved rest now, when you are ready, let's take what should be
a very interesting and useful trip around the world of trade and global finance.
From the Merage School of Business at the University of California,
Irvine, I'm Peter Navarro.
Dr. Peter NavarroProfessor
