Why are third world countries unable to increase their gross domestic output per capita?
Countries are classified as LDCs if their GDP per capita is less than $700 (they are low income countries).
People living in LDCs typically have lower life expectancy, literacy rates, and social conditions. In Africa, for example, one third of its people have inadequate food consumption. Often, only unsafe water is available for drink in LDCs such as Haiti. Such third world countries are also unable to increase their gross domestic output per capita because GDP must increase at a rate faster than population, and with generally faster population growth than more developed countries, this is difficult.
There are many barriers to the growth of an LDC. In countries like China, many laborers are actually doing little or nothing that contributes to total output. This disguised unemployment, along with a steadily increasing population makes economic growth difficult. State enterprises may also contribute to disguised unemployment, which results in no increases in output. In order to gain political support they may hire many more workers than they need, but gain nothing economically. All the things LDCs lack are things that are required for economic growth. Even larger than disguised unemployment, is the lack of human capital development. Human capital refers to the knowledge and skills possessed by the work force. Due to the fact that all available income must be spent on simple subsistence, there are no funds remaining for savings or investment. There is also no money left for furthering education, getting medication, or creating any other human capital development. LDCs simply do not have enough educational tools to advance their people into fields that require more than just manual labor. Even in manual labor, such as agriculture, they can improve through newfound technologies and procedures.
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The lack of savings, however, also creates a lack of financing for investments. Even though capital resources such as plants and high tech equipment would further LDCs greatly, they cannot afford them. Capital flight as well removes any money that might be invested later. Those who make money in LDCs often send their money to more developed economies where their money will be safe and/or gain value. All this results in the above problems, a lack of infrastructure, and social unrest.
Developing nations should request (and accept) more foreign aid from other countries. The United States only allocates .15% of its total GDP to official developmental assistance. If more money were available for investment in LDCs there would be more potential for economic growth. LDCs must also promote free trade and learn to specialize in what they are best at producing so that foreign money will come into the country through consumption. The country that has the comparative advantage, or the ability to produce a specific good at a lower opportunity cost than its trading partners, should produce that specific good. Free trade results in an increase in the purchasing power curve and allows all interacting countries to gain. A small inflow of capital, skilled labor, or technology from abroad also expands an LDC’s production possibility curve.
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LDCs should focus on export promotion. Not only does an LDC gain foreign currency, it can (and should) trade domestic resources for the capital and technology it needs. It is true that relying on exports has its risks. Countries that export similar products as an LDC hopes to manufacture may create tariffs, quotas, or other trade barriers that will reduce an LDC’s potential gains. However, history has shown that LDCs that specialize and promote their exports, such as Korea, Malaysia, and Costa Rica, have all been successful because they funded their growth through exports, and then had money to save for investment.
It appears that an LDC should also begin economic growth by developing its agriculture. A little technology or a new planting technique can go a long way towards developing a country that has been producing its foods the same way for hundreds of years. Although immediate industrialization is enticing for its look of prestige and its potentially large gains, it is much harder to jump into industry than to first gain the capital through export promotion of the easiest goods to improve, which tend to be agricultural. Since LDC populations are so massively concentrated on agriculture, its development also has the potential to spread benefits that are acquired by economic growth quickly throughout the population (rather than increase the disparity between the rich and poor).
Following this agricultural growth, an LDC should begin to promote industry in ways such as having low capital taxes so that it can again specialize in industries it is best at. A good example of this is South Korea which moved in the 1960s from an agriculturally based country to a technology based one in the 1980s and 90s with an average of over 10% GDP growth a year. Finally, more investment must be made in infrastructure and human capital development. Roads and communications make trade and business easier, quickening the velocity at which money cycles through the economy, and thus increasing GDP as well. Human capital development such as education, also allows people of LDCs to merge into bigger industries and more advanced professions such as medicine, which in turn helps raise life expectancy.