Developing Countries: Growth, Crisis, and Reform - Coursework Example

Developing Countries: Growth, Crisis, and Reform Introduction The developing countries or the least developed countries of the world are known to bethose countries which, in the most general sense, are known to be poor and economically underdeveloped. In the news, we come across information about their economic and political hardships and how most people in such nations are experiencing difficulties in finding jobs and in supporting their families. The situation in these countries is also riddled with political and armed conflict most probably caused by the depressing levels of poverty. This paper shall discuss the growth, the crisis, and reform in these developing countries. It shall particularly focus on the gap between the rich and the poor; the structural features of developing countries; the global capital flows and the global distribution of income; and the lessons which can be learned from the crisis felt by these developing countries. Discussion Developing countries are basically characterized as those with lower industrial development and relatively a low standard of living (Pate, p. 80). These countries are also characterized as: having low GDP, economy which is based on subsistence agriculture, poor health conditions, low literacy rates, and rapid population growth (Pate, pp. 80-81). These countries are also described as having an underdeveloped industrial base and a low Human Development Index (The Millennium Campaign, p. 279). The World Bank lists about 144 countries based on 2009 figures as developing countries; some of these countries include: Afghanistan, Argentina, Bangladesh, Belarus, Brazil, Bolivia, Cambodia, Chile, Ethiopia, Ghana, Haiti, Indonesia, Jamaica, Mexico, Pakistan, Rwanda, Turkey, Uganda, Vietnam, and Zimbabwe, among others (World Bank, p. 1). More specifically, Krugman (pp. 669-670) describes the different features of developing countries and he discusses that these countries have had a history of widespread government control over the economy, as well as restrictions in international trade and government ownership of large industrial firms. These countries also have a high history of inflation and the government has been unable to pay for heavy expenditures through its imposed taxes. In some cases of economic crisis felt by these developing countries, “tax evasion was rampant and much economic activity was driven underground, so it proved easiest simply to print money” (Krugman, p. 669). In instances when these weak economies have been liberalized, weak credit institutions in these countries have also been prevalent. The banks have also been known to lend funds which they have borrowed in order to finance risky projects (Krugman, p. 669). The exchange rates in these countries have been managed and controlled by the government. And this expresses a desire “to keep inflation under control and the fear that floating exchange rates would be subject to huge volatility in the relatively thin markets for developing country currencies” (Krugman, p. 669). In other words, the government now creates an illusion in the economy that it has the purchasing power to support its good and services. In truth however, its production rate is very much limited. Another characteristic of developing countries is the fact that their natural resources and commodities represent an important share in their exports including Russian oil, Malaysian timber, and even Colombian coffee. Lastly, Krugman (p. 669) describes that the efforts to circumvent government controls have led to many corrupt practices in these countries. The gap between rich and poor countries registers at exceedingly high rates. The average per capita annual income is actually at $28,000 in Western Europe, United States, Canada, and Japan as compared to the per capita income for developing countries which averages at $5,000. (Newman, p. 156). Studies and researchers reveal that about $2.7 billion individuals in developing countries live on less than $2 per day; with those in Sub-Saharan Africa living on $1 a day (Newman, p. 156). Only about 20% of the world’s population comes from the developed nations and yet about 65% of the world’s income comes from the developed nations; the majority of the world’s population comes from developing nations, but they only contribute about 18% to the world’s income (Newman, p. 156). It is however important to note also that although only about 20% of the world’s population comes from developed countries, they still consume 86% of the world’s goods, and about 85% of the world’s water (Shah, as cited by Newman, p. 156). There is also a pattern of inequality seen in the economy of the developed and the developing countries. The US agriculture produce is twice higher than India, US per capita output is also 25 times higher and US per capita output of services is thirteen times as high (Singer & Ansari, p. 25). “First of all, the absolute level of present inequality between the rich and poor countries is certainly not of unmanageable proportions, at least if we can afford to take a philosophical long-run view (Singer & Ansari, p. 25). When the per capita production of developing countries would be improved by 5% annually and sustained for the next 50 years, it is possible for a developing country to attain the status of a developed nation. However, this is easier said than done considering the fact that the population growth rates in developing countries is fast and uncontrolled (Singer & Ansari, p. 25). It is also important to note that there is a technological gap between rich and poor countries. This technological gap prevents developing countries from producing “by themselves goods that require modern technical knowledge as an important input, let alone to develop an autonomous alternative technology to substitute” (Singer & Ansari, p. 26). Consequently, they cannot develop and produce goods as fast and as efficiently as developed countries. In order for these countries to be capable of making a major global player, they have to compete well with developed countries. These developed countries have the technological capability of producing globally competitive goods and services. The developing countries have yet to overcome the technological hurdle in order to be globally competitive. Poverty is the main economic problem seen in developing countries. “Compared with industrialized economies, most developing countries are poor in the factors of production essential to modern industry: capital and skilled labor” (Krugman, p. 665). Because of low levels of capital and skilled labor, the income of these countries is consequently lower and this often prevents them from realizing the benefits which many developed countries enjoy (Krugman, p. 665). Other problems such as political instability, unstable property rights, and misguided economic policies are problems which often discourage the investment of capital and skills in these countries; and lack of investment ultimately reduces the economic efficiency of these countries. In the current globalization trend, the problems of the developing countries, like that of poverty, terrorism, social unrest, and illicit drugs, have a way of affecting the developed nations. “We now see plainly that economic, environmental, and political problems do not need passports to around the globe. Many of these threats stem directly or indirectly from poverty, inequity, joblessness, and social disintegration” (Dernbach & Environmental Law Institute, p. 166). We have seen how social unrest and terrorist activities have managed to affect the United States and other developed countries who are somehow being accused by the poorer countries of imperialistic practices. These problems cannot easily be resolved, and cannot certainly be resolved without the assistance of other developed countries. Most developing countries were able to benefit from foreign investments and such investments are actually considered substantial -- considering that the economy of developing countries is minimal as compared to the economies of developed nations (Krugman, p. 672). The dilemma in extending foreign investments to these developing countries is that the rate of return from these investments is often low. In most instances, these investments often end up being in default (Krugman, p. 672). Consequently, for the foreign investors, which are mostly from developed nations, the investments are as good as non-profitable transactions. These foreign investors suffer financially from these defaulted investments. And their losses are often greater because their capital investments are put at risk. They are made to bear the costs of investments and in the end, to make the necessary adjustments in their own countries. Financial adjustments made in order to cover the cost of the defaulted loans consequently end up being borne by the developed country where the loans and investments come from. The developing countries repeat these patterns with other countries and investors as well. And the pattern often emerges with lost investments and money not at all well spent. There are some clear lessons which have been learned from the economic crisis which was seen at various points of the world’s economic history. For one, Krugman (p. 697) discusses that there is a need to choose the correct exchange rate regime. It is not a proper and profitable practice for a developing country to set its own exchange rate when it does not even have the means and capability to maintain it as such. This was seen in the case of many East Asian countries that set their own exchange rates and sought out to increase their foreign loans (Krugman, p. 697). In the end, when their exchange rates were devalued, the corporations who benefited from foreign loans became insolvent because the GDP did not match the values of the circulating currencies. The inflation rate of these developing countries has largely been affected by the control and manipulation of the country’s exchange rate (Krugman, p. 697). And those countries which have been able to stabilize their inflation rates “have adopted more flexible exchange rate systems or moved to greater flexibility quickly after an initial period of pegging aimed at reducing inflation expectations” (Krugman, p. 697). Another lesson that the crisis in developing countries have also revealed is the fact that banking is centrally important (Krugman, p. 697). Studies reveal that the financial crisis felt in Asia and in other developing countries was not a purely currency crisis, but a currency crisis as well as a financial crisis. Collapsing banks interrupted the economy by interrupting flows of credit and making it difficult for small and big businesses to run their business (Krugman, p. 697). In this sense, the smooth financial transactions by businesses was interrupted and later translated to lost profits and more difficulties in business. The vulnerability of the banks to financial downfalls became much more apparent with the economic crisis in these developing countries. And it taught them a lesson that “wise governments will devote a great deal of attention to shoring up their banking systems to minimize moral hazard, in the hope of becoming less vulnerable to financial catastrophes” (Krugman, p. 697). Another lesson learned from financial crisis felt in Asia and in other developing countries is the proper sequence of reform measures. The implementation of reform measures must follow a certain sequence in order to be successful and when a nation suffers from several problems or issues, the solution of one would not necessarily mean a better economy – it may even mean the worsening of the situation (Krugman, p. 698). Many developing countries suffer from multiple issues and when considering capital account liberalization, it is important to ensure that “sound safeguards and supervision are in place for domestic financial institutions” (Krugman, p. 698). It is important to ensure such processes in order to prevent reckless lending by domestic banks. When the economy would again slow down and foreign capital is released, these domestic banks often end up being insolvent (Krugman, p. 698). It is therefore also important for developing countries not to open capital accounts until the domestic system is stronger in handling the inconsistencies of the globalized world. Finally, another lesson learned from the economic crisis felt by Asia and by other developing countries is the fact that contagion is important (Krugman, p. 698). What happens in the other side of the world, which may seemingly be too far away to affect the United States, or other developed countries for that matter, is part of the domino effect or the contagion (Krugman, p. 698). This effect was seen when the crisis experienced by Thailand also affected South Korea; and when Russia experienced a plunge in its ruble, it also created massive doubts on Brazil’s real (Krugman, p. 698). We are living in a global economy where many countries are largely dependent on each other for their financial transactions. “The problem of contagion, and the concern that even the most careful economic management may not offer full immunity, has become central to the discussion of possible reforms of the international financial system…” (Krugman, p. 698). Conclusion The developing countries have historically experienced much financial, economic, and political turmoil. These financial difficulties have not existed in a bubble – they have managed to affect the rest of the world as well, including the developed countries. Problems in their political stability, their currency and monetary efficiency, as well as their problems in poverty has set in motion events in developed countries which we now see in the current global financial crisis. Works Cited Dernbach, J. & Environmental Law Institute. “Stumbling toward sustainability”. 2002. Washington: Environmental Law Institute. Krugman, P. “International economics: theory and policy”. 2003. China: Pearson Education Asia Limited List of developing countries. p. 1. 2009. World Bank. 09 April 2010 from http://icce2010.emu.edu.tr/docs/developingCountries.pdf Newman, D., “Sociology: Exploring the Architecture of Everyday Life.” 2010. California: Sage Publishers Pate, S. “CliffsTestPrep Praxis II: Social Studies Content Knowledge Test (0081)”. 2006. Massachusetts: John Wiley & Sons Singer, H. & Ansari, J. “Rich and Poor Countries: Consequences of International Disorder.” 2003. New York: Routledge The Millennium Campaign. “Student Voices Against Poverty: Lesson Plans and Resources Manual for Teachers”. 2007. New York: United States Millennium Campaign Read More