Economics of Developing Countries
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Development economics concerns the progress of economic development in the developing countries. Principally, it focuses on the promotion of economic growth through structural change aimed at improving the amount of production. It also involves the implementation of policies that promote economic development of the low-income countries and make their local industries more competitive in the global market. Currently, economic development is significantly stifled in the developing world. The more these countries try to spur their economic development, the less they progress economically. This unfortunate reality has been attributed to the fact of their unfavorable economic structure. Structuralist economics seeks to change the economic structure of the low-income countries to favor the industrialization, as opposed to commercial agriculture. According to structural economics, this cannot be undertaken solely by citizens or business players in the country. It requires significant input of the state to establish the new structural design for the economic development of the developing countries (Dietz & Street 1987).
For centuries, the economic stagnation in the developing world has been attributed to the over-reliance on the commercial agricultural economy as opposed to the manufacturing economy. Initially, it was considered that shifting to commercial agriculture would improve the economic growth. In the light of this idea, farmers acquired modern agricultural skills, in order to start commercial farming. For instance, modern equipment and advanced agricultural facilities were extensively used to increase agricultural productivity for sale. However, this has not proven effective in improving the economy of the developing world to the level of the developed world.
According to the economic experts, the relative cost of agricultural production per unit volume is much less than the same volume of manufactured products. This implies that, even after improving their agricultural yields, the developing world still cannot compete with the developed countries. This leaves the low-income countries with the only option of adopting the industrial economic model. Industrial economy, as experts argue, is the best bet for economic sustainability. This is due to the fact of agricultural products being used in the industrial economies for manufacturing their final products. As such, industrial products will always be economically superior to the agricultural products. This explains why structural economists insist on economic reforms aimed at industrializing the developing economies (Saad-Filho 2005).
The policy analysts insist on that strong government intervention is needed to fuel the industrial sector and establish a sustainable economic growth. For instance, the government can encourage local entrepreneurs to focus on the industrial sector by providing them with the required resources. This should be done effectively through entrepreneurial training and provision of a favorable environment. Most commonly, the government provides incentives to industrial entrepreneurs to boost their productivity. In addition, the state should set aside the economic zones where land has to be subsidized for industrial productivity. This will essentially reduce the cost of production and encourage investment in the industrial sector. According to Hunt (1989), the state has a duty of ensuring the security for the industrial economy.
Besides, the industrial economy significantly depends on the quality of the country’s infrastructure given that these industries require electricity to operate and good roads to ship their raw materials and finished products. These elements of infrastructure cannot be developed by individual industrial entrepreneurs due to the expensive costs. It is the duty of the state to improve them and eventually improve the sustainability of the industrial economy. This explains why the economic experts emphasize the strong participation of the state in the adoption of an industrialized economy (Dietz & Street 1987).
According to Kay (1989), the developing countries should stop their reliance on exporting the primary goods and importing the manufactured goods. This idea essentially creates undue advantage to foreign countries given the relative difference in the cost of primary goods and manufactured goods. Basically, the industrialized countries purchase the primary goods from the developing world at cheap prices, ship them to their countries for industrial processing, and sell them back to the developing countries at exorbitant prices. By trading industrial goods, they set much higher prices in the global market. This unfavorable state of the economy should be stopped in order to enable economic take-off of the developing world.
Regrettably, the developing countries have not been quick to take heed of the advice and invest in the industrial economy. In most cases, they hardly have any manufacturing plans to boast of. This makes them highly vulnerable economically in global business. They simply cannot compete in the global market. In fact, companies from the developed world could easily outdo their agricultural businesses due to the advantage of economies of scale. It is the reality of global economics, and the developing world will only move a step forward when they adopt structuralist economics as suggested by the economic experts (Saad-Filho 2005).
The other viable option in improving the economic development in the developing world is the adoption of the robust service industry. This is due to the fact that the service industry enjoys the global market. In every part of the world, people require high quality services offered by other professionals. For instance, service industry in technology has become quite robust in the recent years. Nearly all multinational corporations are looking for the best computer software to streamline their operations. The demand cannot be met by their local firms dealing with computer software.
This means that they have to outsource to the rest of the world at some point. The developing world should take advantage of this demand to achieve rapid economic growth. Notably, the service industry does not require a lot of capital to start. It only requires the best knowledge and skills in the specific area of technology. In this manner, people in the developing countries only need to go to educational institutions and acquire appropriate skills to invest in the service industry. It reduces the burden of huge capital requirement that significantly impedes the industrial growth in the low-income economies (Dietz & Street 1987).
Nevertheless, the state should play an active role in promoting the service industry. For instance, the state should put in place the right policies to promote the acquisition of the right skills. According to Lall (1975), the initial step in strengthening any economy depends on the governmental policies. For instance, if the governmental policies restrict access to education or specific areas of education, few people will acquire the required skills and eventually the service industry will stagnate. In fact, the government should provide the basic premises for the promotion of the service industry. In this way, the industry will emerge stronger and significantly drive the rapid economic development. This explains why structural economists are advocating for the improvement of the service industry in the developing countries (Saad-Filho 2005).
According to Palma (1989), the developing countries can achieve economic progress if only they erect trade barriers with the developed world. In addition, they need to overvalue their domestic currencies in such a manner that exports are encouraged at the expense of imports. This is due to the fact that most imports are basically primary goods of low prices in the market. Thus, discouraging importation and encouraging exportation is a sure way of achieving a favorable balance of trade in the global market. Indeed, it could be fatally disastrous for a developing country to allow free importation of goods from the developed world (Saad-Filho, 2005).
According to Saad-Filho (2005), the low-income countries should minimize trade with the developed countries to a bare minimum. They should principally erect trade barriers with the developed world in order to achieve this. In some cases, countries increase the cost of production to unbearable levels for all companies from the developed world. Essentially, the low-income countries have to trade among themselves in order to achieve rapid economic development. Trading among themselves is considered the best way to rise up economically because both trading partners benefit. According to economic experts, trading between the developed and developing economies is fundamentally skewed in favor of the developed economies. They gain nearly all the economic benefits at the expense of the developing world.
This is because they have a more advanced technology and can afford to sell goods at relatively low prices due to the economies of scale. Most businesses in the developing world do not enjoy this advantage thereby making them less competitive in the market. In the light of this assumption, protectionism has been considered the best way to protect the young industries (Khayum 2003).
According to the infant industry argument, young industries cannot compete in the global market as they lack the experience and economies of scale that most foreign industries enjoy. Thus, the established foreign industries can produce high quality products at relatively low prices effectively. Eventually, they are able to sell goods in the market at the relatively low prices. This gives them a competitive advantage over the infant industries. It goes without mentioning that these infant industries require protection in the free market to enable them to establish themselves. This explains why protectionism has lately become popular in the developing countries. Notably, it is the state that can protect the local infant industries from global competition by minimizing trade with the industrialized world. This is usually done through the implementation of policies that effectively impede trade with the developed countries. In this manner, it becomes increasingly difficult for foreign businesses to establish in the local markets (Saad-Filho 2005).
Although protectionism is highly discouraged in the global market, it has been employed in the developing economies with a great success. It basically implies protecting the young industries from the competition from the established companies and corporations until they develop the capacity to compete in the global market. In the end, they become economically stable enough to operate in the free market. According to the economic experts, the developing countries should discourage any type of competition between their young industries and foreign industries. For instance, they need to acquire the managerial capacity, as well as the right technologies, to enable them enjoy the same economies of scale that are enjoyed by the foreign businesses (Dietz & Street 1987).
According to structuralists, the third world countries can only develop through strong action of the state. Nevertheless, the states have been reluctant to act swiftly to chart new economic paths for their countries. Instead, their governments focus on the petty politics of ethnicity and religious animosity. These essentially erode the entrepreneurial culture as investors feel insecure in the market. Investors need to be assured that their capital is safe and that they will make profits from their investments. If this is lacking, people tend to shy away from the investment. Eventually, economic development stagnates thereby leading to slow economic growth (Kay & Gwynne 2000).
The idea of structuralism originated in Chile, South America where governments tried to adopt structuralism. The country had relied on the agricultural economy since times immemorial. It was the bold stand of the state that gave them a new sense of direction. It started by stopping all foreign trade activities with the developed countries. Later on, the country focused on helping their local firms develop capacity for international competition. This was instrumental in setting the stage for their economic take-off. Indeed, the country has made significant economic strides in the recent years. It is highly expected that it will keep that pace of robust economic development in the future. Clearly, the developing countries should focus on the industrial economy and pay little attention to the agricultural sector. This should not be mistaken with the total neglect of the agricultural sector because food security is an important factor in economic prosperity. They should strike a balance so that they ensure food security without inducing the over-reliance on the agricultural economy (Hunt 1989).
In conclusion, the development economics concern the progress of economic development in the developing countries. Structuralist economics seeks to change the economic structure of the low-income countries to favor the industrialization as opposed to commercial agriculture. For centuries, the economic stagnation in the developing world has been attributed to the over-reliance on the commercial agricultural economy as opposed to the manufacturing economy. Thus, it was suggested that shifting to commercial agriculture would improve the economic growth.
However, this did not appear to yield the desired economic development. This explains why adoption of industrialized economy has been considered the best bet for the developing economies. The other viable option in improving the economic development in the developing world is the adoption of the robust service industry. This is due to the fact that the service industry enjoys global market and requires little or no capital to start. According to the infant industry argument, young industries should be protected because they cannot compete in the global market as they lack the experience and economies of scale that most foreign industries enjoy. This can only be achieved through swift action of the state to provide protection and minimize trade with the developed world.