Chapter 28 Summary

A. Economic Growth in Poor Countries 1. Most of the world's population live in developing countries, which have relatively low per capita incomes. Such countries often exhibit rapid population growth and low literacy and have a high proportion of their population living and working on farms. 2. The key to development lies in four fundamental factors: human resources, natural resources, capital formation, and technology. Population causes problems of explosive growth as the Malthusian prediction of diminishing returns haunts the poorest countries. On the constructive agenda, improving the population's health, education, and technical training has high priority. 3. Investment and saving rates in poor countries are low because incomes are so depressed that little can be saved for the future. International finance of investment in poor countries has witnessed many crises over the last two centuries. The most recent cycle came in 1997-98 when many East Asian countries borrowed heavily and were unable to repay their loans. 4. Technological change is often associated with investment and new machinery. It offers much hope to the developing nations because they can adopt the more productive technologies of advanced nations. This requires entrepreneurship. One task of development is to spur internal growth of the scarce entrepreneurial spirit. 5. Numerous theories of economic development help explain why the four fundamental factors are present or absent at a particular time. Geography and climate, custom, religious and business attitudes, class conflicts and political systems - each affects economic development. But none does so in a simple and invariable way. Development economists today emphasize the growth advantage of relative backwardness, the need to respect the role of agriculture, and the art of finding the proper boundary between state and market. The most recent consensus is on the advantages of openness. B. Alternative Models for Development 6. Other approaches have competed with the mixed market economy as models for economic development. Alternative strategies include the managed-market approach of the East Asian countries, socialism, and the Soviet-style command economy. 7. The managed-market approach of Japan and the Asian dragons, such as South Korea, Hong Kong, Taiwan, and Singapore, have proved remarkably successful over the last quarter-century. Among the key ingredients are macroeconomic stability, high investment rates, a sound financial system, rapid improvements in education, and an outward orientation in trade and technology policies. 8. Socialism is a middle ground between capitalism and communism, stressing government ownership of the means of production, planning by the state, income redistribution, and peaceful transition to a more egalitarian world. 9. Historically, Marxism took its deepest roots in semifeudal Russia. A study of resource allocation in the Soviet-style command economy shows great central planning of broad elements of resource allocation, particularly the emphasis on heavy industry. The Soviet economy grew rapidly in its early decades, but stagnation and collapse have today put Russia and other formerly communist countries at income levels far below those of North America, Japan, and Western Europe. 10. Faced with slowing economic growth and the desire for economic reform, Russia and other formerly communist countries are making the difficult transition to market economies. Transition raises many obstacles, such as soft budget constraints, frozen and distorted prices, and an inadequate legal framework. Two major transition strategies are the shock-therapy approach of multiple simultaneous measures and the more cautious step-by-step approach, in which reforms are sequenced to prevent disruption. The lessons of the transition are broadly applicable to countries hoping to cast off government controls for a market-oriented system.