Economics Principles & Practices

Chapter 19: Developing Countries

Chapter Overviews

Chapter 19 deals with developing countries—countries whose average per capita GNP is only a fraction of that in more industrialized nations.

Section 1 examines the problems of developing countries. These problems are similar to the ones that industrialized countries have, the main difference being that their problems are much larger. Developing countries face numerous obstacles, including population pressures from high crude birthrates and increasing life expectancies. A shortage of natural resources, limited education and technology, religious beliefs, a heavy burden of external debt, capital flight, corruption, and the aftermath of war add to their problems.

Section 2 discusses a framework for economic development. To begin, it helps to think of economic development as proceeding in stages, even if this does not always describe the pattern followed by every nation. The World Bank, an international agency that works with developing nations, recommends that industrialized nations help the developing countries by reducing trade barriers, reforming macroeconomic policy, increasing financial support, and supporting policy reform in the developing nations. The World Bank also recommends that developing nations invest in people, improve the climate for free enterprise, open their markets to free trade, and revise their macroeconomic policies.

Section 3 examines the sources of funds needed for economic development. Developing countries need savings to provide a domestic source of investment funds. External funds are sometimes available from foreign governments and banks. Other institutions like the World Bank and the International Monetary Fund also provide assistance. Some countries have helped themselves through regional cooperation. The European Union is a successful example of a customs union, and ASEAN is currently working to become a free-trade area. The OPEC nations organized a cartel to increase the revenues flowing to their countries. The remarkable success of South Korea—ravaged by war in the early 1950s and one of the poorest nations in Asia—demonstrates that economic development can take place.