Theories about the problems of lower income countries, International Economics

Theories about the Problems of LICs are discussed below:

In order to explain this big problem of poverty and of the asymmetric ownership of the wealth and income in the world, economists have come up with various theories.

Poverty trap theories:

Poverty trap theories elaborated the relative poverty of the Third World in the context of the twin gaps: foreign exchange gap (exports being less than needed imports) and an underlying savings gap (domestic savings being less than needed investment). As a result of which, the LICs’ economies were caught in the vicious cycle of the low saving, low scale of investment, low productivity gains (due to absence of scale economies), low per capita growth (remember productivity and the technological progress were engines of PCI growth/development), low savings …….

The Prebisch-Singer Hypothesis (PSH) is explained below:

A rival theory was the Prebisch-Singer Hypothesis (PSH), which located the reasons behind this persistent poverty in the structure of trade between the rich and poor countries. The PSH maintained that the LICs were stuck in the production of primary products (as prescribed by static comparative advantage theories like Hechscher-Ohlin prescribed) which were subject to volatility and declining prices both relative to manufactures and capital commodity.

Some economists pointed out the lack of human, social and public capital in LICs as the single most important factor distinguishing them from, say, post-WW2 Germany and Japan, countries which were able to rebuild themselves from total destruction to great economic prosperity on the back of a strong and skilled workforce (human capital), well-developed institutions like trust, meritocracy and accountability and explain communications, energy and housing infrastructures (public capital).

Others drew attention to very fast rising populations in the LICs, and the particular social and economic pressures formed thereby. Also coupled with the disease and severe ethnic and regional conflicts, some saw situation in LICs as practically ungovernable.

Lack of precious natural resources (such as oil, gas, iron, gold, copper etc.) was also cited by some as reason for the LICs’ continued poverty, and examples were known of South Africa and OPEC countries, a lot of of whom were able to raise living standards solely on the back of natural resource exports. Strong counter-argument exist against the theory, for instance, the LICs which registered the maximum rates of industrialization and GDP growth during last four decades, namely: Korea, Hong Kong, Taiwan, Singapore, did not possess any important natural resources. The same is right for Japan in the 20th century and the European countries in the 18th and 19th centuries.

Posted Date: 7/19/2012 5:10:07 AM | Location : United States

Related Discussions:- Theories about the problems of lower income countries, Assignment Help, Ask Question on Theories about the problems of lower income countries, Get Answer, Expert's Help, Theories about the problems of lower income countries Discussions

Write discussion on Theories about the problems of lower income countries
Your posts are moderated
Related Questions
Q. Suppose E is fixed at E 0 and that the asset markets are in equilibrium. Suddenly output rises. What monetary measures keep the current exchange rate constant given unchanged e

Economic Theory 1. Explain the procedure of factor price determination under imperfect competition. 2. Discuss the Wage Fund Theory of Wage Determination. 3. Explain the

Q. Who are the main actors in the international capital market? Answer: 1. Commercial banks. 2. Corporations. 3. Non-bank financial institution

Q. What are the main factors determining the aggregate money demand? Answer: Three major factors: the price level, interest rate and real national income. A increase i

Discuss the differences between Absolute PPP and Relative PPP . Answer:  Absolute Purchasing Power Parity (PPP) states that the exchange rate between two currencies equals the

Q. Explain how Brazil was able to reduce the rate of inflation from 2,669 percent in 1994 to less than 10 percent in 1997? Answer: By initiating a new currency and init

It is often argued that firms compete only through diversifying their prices. Do you agree with this view? Justify your answer using examples / case studies form the Greek and/or t

Q. Explain how the AA schedule is derived. Answer: For a fixed real money supply an enhancement in output leads to an increase in the domestic interest rate. In the foreign e

Habrrler''s oppirtunity cost theory