DEVELOPMENT OF POORER NATIONS Development of poorer nations What do you see as the biggest development of poorer nations? Poorer nations are going through various developments to improve their economic status. The nations have suffered major economic setback in the past due to their dependence on traditional subsistence agriculture and poor international relations. Government control over the economy has also been a major and the main setback to the economy. Therefore, the biggest development of poorer nations is the reduction of government control over the economy and liberalisation. In the past, the economy of developing nations has been under total control of their governments.
The government intervenes in the market to control trading activities both in the country and with other countries. Excess intervention has created inefficiencies in the market for a long time. The market is a free place and if left alone with minimum government intervention, market forces can determine direction of trade. However, reduced government intervention is not to imply that the government plays no role in the economy. When the correct measures are taken and development focused policies formulated, the government can initiate development in a country. According to Todaro and Smith, a nation undergoes five stages of development1.
The stages are traditional society, precondition for take-off, takeoff into sustained growth, drive to maturity and high mass consumption. Poorer nations are moving from the traditional society to precondition for take-off. To be able to take off, the nations have to accumulate enough capital for development from both local and international sources. Poverty trap is a major factor affecting poor nations due to increasing population at a higher rate than capital.
Therefore the ratio of capital to population is declining. Resource mobilization is possible through industrialization in the country. Developing nations have taken steps to increase industrial development in the country to increase output and enable development of the country. Among the major changes that developing nations have gone through include development of the education sector, import substitution industrialization, shift from labor intensive farming to use of labor in industries and trade liberalization. Education is the key to economic development of poorer nations. Education is a tool for both social and economic well being of a nation2.
Economically, educated people are more skilled at work and earn more income than the uneducated people. Moreover, education unites people from different background to have a common understanding of the world. Through education, the developing nations have a chance to equip its labor force with the necessary skills required in the industry; thereby increasing skilled labor in the country. Having a common understanding of the world helps the people in the economy understand economic issues both locally and internationally thereby appreciating the role of economic factors in development. Import substitution is aimed at reducing dependence on imports from developing nations.
Policies are formulated to encourage local production and protect local firms from excessive competition from imports 3. The nations take up measure to ensure the success of the export substitution as follows. The local currency is overvalued to reduce cost of imported inputs, thereby encouraging local production. The government can undertake actual production through ownership of corporations in cases where no investor is willing to undertake production locally. Government spending is also another tactic used to encourage local production.
Through increased wage rate and increased government spending, more cash flows out to the people, stimulating demand thus increased sales for firms. The government encouraging multinational companies to produce locally will see a reduction in imports. Promotion of multinational companies comes in the form of reduced regulations on Multinational companies and providing an enabling environment for them to operate locally. Traditionally, poorer nations were more dependent on subsistent farming. Farming was not considered as a major trading activity and was more labor intensive. The shift from farming to industry saw labor withdrawn from the traditional farming sector to industries 4.
Labor in traditional farming was less productive compared to the output of the farming. Therefore, industrialization saw labor being used more productively to ensure more output. Industries are more concerned with output and will only employ workers whose output is higher than the wage rate to ensure profitability. Resultantly, optimum utilization of labor is achieved. Finally, trade liberalization in developing nations is another element of development that has fostered economic growth of developing nations.
Trade liberalization is aimed at removing barriers to foreign trade thus encouraging international trade 5. Through trade liberalization, both import and export are encouraged. There is reducing return on capital so that the poorer nations with less capital are receive more return on capital than the developed nations. The exogenous growth theory thus dictate that less developed economies grow faster than developed economies. Transfer of technology becomes easier with liberalized trade as foreign firms have a chance to invest in the developing nations, thus transferring technology from their home country to the developing nation.
Encouraging export is also a major development of trade liberalization. Through increased export, the developing country is able to improve her balance of payment. There is also an increase in gross domestic product due to larger market available internationally for locally produced goods. The marginal propensity to consume for poorer nations is higher than that of the rich thus demand is higher in poorer nations. Trading between countries also encourages good relations between countries, thereby fostering coexistence between nations. What can be done about it? However, with development in poorer nations, there are loopholes that can lead to major setbacks for the development of the nation.
With the shift from farming to industrialization, the country is able to undertake production using the locally available skills. As a result, there is a limit to the quality of what the country can produce due to low skilled labor. The country ends up being stuck in the middle income trap which requires government intervention to move the country forward. Higher quality productivity can only be achieved through industrial policy. Industrial policy will see the improvement of the quality in higher quality as well as the labor force to higher productivity workers. Moreover, there is need to study the trends in the market to guide the education sector.
Though education will see laborers acquire skills, there is a need to match the market demand and supply for skills in the labor market. Trend analysis, both locally and globally will help developing nations plan their education sector better giving priority to skills much needed in the labor market. Continued change of the education curriculum from the traditional theoretical education to a more practical based system will make education more relevant in the market.
The skills learnt can then be properly applied in the market. Further, proper resource mobilization for the purpose of production is important to ensure continued development of developing nations. Most poor countries are endowed with many natural resources that can be utilized in production. A combination of local and imported resources will see the country grow economically. Though the country may have plenty of natural resources, the technological resource may be lacking for processing, thus the need to mobilize technological resources internationally.
A balance between trade liberalization and import substitution is also necessary in poorer nations. In the process of encouraging import substitutions, developing nations have neglected agriculture and emphasized on industrialization resulting in food shortage. The countries should therefore balance agriculture and industrialization for a healthy economy. Excessive limits to imports create inefficiencies in the market. However, there is the need to protect local firms from unfair competition from foreign firms. Instead of focusing more on import substitution, firms can take advantage of optimum plant size and economies of scale to produce for export purposes. Neo-liberalism is also the way to go for poorer nations.
Instead of the government taking up loans, these loans should be advanced to capable business people who will make use of the capital to ensure a good return. Reforming of institutions is very key for liberalization. The licensing authority should be restructured to ensure equity and fairness in license acquisition. Neutral trade policies are also necessary to ensure a free market where forces of demand and supply determine prices.
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