Economic Development in Third World Countries

A report submitted to the Department of Investment Management in partfulfillment of the requirements of the Final-term Examination in
Doing Business in Bangladesh
Section-A

Prepared & Submitted by:

Rashedi, Mashfiqur Rahman
08-11983-3

Faculty
M Taseen Chowdhury

Date of Submission
August 14
Summer 2011

Preface

This term paper is specially designed to give some ideas about the course Doing
Business in Bangladesh.
By this term paper I get the opportunity to know about Economic Development in
Third World Countries. Through all the papers I tried our level best to give you some idea
about how the Economic Development in Third World Countries influences economic
behavior in Bangladesh.

I do not claim that this assignment is original in presentation. I have collected materials
from different source. I greatly acknowledge all suggestions received to enhance further the
value of this project. The suggestion has been incorporated whenever possible. I have tried to
give my best efforts not withstanding small errors do creep into the project.

I am extremely grateful to our faculty, M Taseen Chowdhury, Department of Finance,

who constantly took keen interest in boosting our morale and inspire of his busy schedule.

While every effort has been made to ensure accuracy, it cannot be claimed that the
assignment is absolutely error-free. In case of any confusion or doubt on any aspects of this
report, I am available for contact in any time.

Contents
Introduction

Objectives & Limitations

Literature Review

The development experiences of Third World countries

17

The Macroeconomic Foundation

22

Multinational Corporations in the Third World: Predators or

31

Allies in Economic Development

Thinking about the world economy

35

Conclusion

49

Bibliography

50

Introduction
It is commonly reported that the birthrate is much higher in the Third World than the First
World, and therefore the Third World's population will grow relative to the First World's
population. What this ignores is economic growth is transforming Third World countries into
First World countries.
In the past few decades the rise of countries like South Korea, Greece, the Czech Republic, and
others to developed status and immigration from the Third World to the First has largely
balanced the higher birth rate of the First World. But with the very rapid economic growth rate of
China, India, and much of the rest of the Third World we will see the Third World shrink and the
First World grow over the course of this century.
We can reasonably hope that most of the world's people will live in counties with economies rich
enough to support extremely stable democratic governments long before the end of the Twenty
First Century.
Current Success of the Third World
Even the marginally well informed know that China has been growing rapidly, more than
doubling its economic output per person every decade, for almost three decades. China has one
quarter of the Third World population, so China's success is a large part of the total picture.
Chinas growth is based on labor intensive industrial exports, and is similar to the rapid growth
of Japan, South Korea, Taiwan, Hong Kong, and Singapore. So China is following a proven
formula that has rapidly transformed several Third World nations into First World nations. On
the down side, a country of 1.3 billion may not be able to follow this path to First World status as
rapidly as the others because it will flood world markets for the goods it exports.
India is about one fifth of the Third World and through Internet outsourcing it has recently
achieved super growth, growing fast enough to double per person output in a decade. Between
China and India 45 percent of the Third World will have reached super growth. What was once

the miracle of Japan and then a few other Far Eastern Tigers like Korea and Hong Kong will be
the norm for almost half of the Third World.
Much of the rest of the Third World has also been growing rapidly recently. The Economist
magazine has a table every week on the economic growth of twenty Third World countries and
five high income economies. In late 2005 when this article was originally written, all twenty of
the Third World countries had economic growth that exceeded their population growth. All but
one had a per capita economic growth rate that exceeded the normal First World per capita
economic growth rate of two percent. The exception, Mexico, had a growth rate roughly equal to
the typical economic growth of the most highly developed First World nations. The story the
statistics told is that in the previous year the majority of the Third Worlds population lives in
countries at or near super growth, seven percent or more per capita growth per year, and much of
the rest of the Third World is not only growing faster than its population, its per person economic
growth is faster than the First World.
The growth of the Third World before the recession was very impressive, perhaps the best ever.
Even during the current recession and slow recovery the low income and lower middle income
countries are continuing to grow rapidly, even though not quite as fast.
Several years ago when I originally wrote this web page I said the Third World's growth rate
would fall from this peak, and it did. The Third Worlds growth was also very impressive before
the East Asian financial crisis of 1997; probably the best ever up to that time. Unfortunately, the
rapid growth declined in several countries. As just as the Third World fell back from that peak in
the 90's, I expected it to fall from the pre-recession growth rate, but I also expect it to eventually
rise to future peaks of even faster growth.
Low Income Category Rapidly Declining
In 1998 almost sixty percent of the world's population lived in low income countries. Low
income is the lowest of the World Bank's four categories: low, lower middle, upper middle, and
high income. By 2008 that was down to about 15 percent as India, Pakistan, and Nigeria all made
it to lower middle income status by June 2008. That is a three quarters reduction in ten years.

Granted, to transform all the Third World nations into First World nations we will have to empty
the middle income category and emptying the middle income categories is much more difficult
than emptying the low income category. The border between low income and middle income
was 976 in 2008. The border between middle income and high income was 11,906. Still the rapid
decline in the population of the low income category can at least lend some plausibility to my
assertion that the nations of the Third World can be absorbed into the First World over the course
of this century.
How the Third World Will Join the First World
Over the last several decades light industry has been a major route into the First World. A major
difficulty with this route has been that the people of the First World rarely wear more than one
pair of underwear at a time. As there is limited demand for the products of low skill, light
industry, most countries had to more or less wait while light industry transformed a few countries
like China.
The rapid growth of India based on Internet outsourcing suggests there may be a second route.
So while a large portion of the Third World can grow to First World status through light
industry, another large portion can take this second route, the Internet, without hindering the first
group.
In fact quite the contrary, if the countries that are growing through outsourcing buy the light
industrial goods of the light industrial exporters then the new group, the outsourcers, will
actually help the old group, the industrial exporters to grow.
Finally, the success of these two routes is pushing up natural resource prices which might
provide a third route. Several routes to success means that Third World nations may not have to
wait their turn, or at least wait as long, to get on a path to rapid development.
Furthermore, there is a race between the higher birth rate of the Third World and the assent of
Third World countries to First World status through economic growth. The opening of new
routes to the First World, particularly through the Internet, may dramatically shift the advantage
to economic growth.

Objective of the study

The main goal of making this project is to analyze the concept of Economic Development in
Third World Countries and to give you good concept and very sufficient information about this
topic. I tried to convey what is Third World Countries, where from it came, how people are
affected by Economic Development and I also tried to find out some solutions for this concept.

To accomplish our goal, we divided it into several objectives. These are:

Found out the data source and collected data as much as possible.

Set out the methodology for doing report.

Interpreted the results and make an analysis on it.

Then we prepared the main paper.

And finally tried to found out some solutions.

Limitations of the study

In making this report I had some limitations that I could not across. As I am a student, I had a
shortage of time because I have some other courses to study which are also very important and I
am also involved in extracurricular activities.

I had to depend on the information that I have gathered from various sources like journal papers,
conference papers and internet. So, maybe I could not visualize the whole scenario of
Economic Development in Third World Countries, as I have a limited knowledge about it.

I hope you will consider if there is any lack of information in this project for these limitations.

Literature Review
Measure and concept of Development
The development of a country is measured with statistical indexes such as income per capita (per
person) (GDP), life expectancy, the rate of literacy, et cetera. The UN has developed the HDI, a
compound indicator of the above statistics, to gauge the level of human development for
countries where data is available.
The IMF uses a flexible classification system that considers "(1) per capita income level, (2)
export diversificationso oil exporters that have high per capita GDP would not make the
advanced classification because around 70% of its exports are oil, and (3) degree of integration
into the global financial system."
The World Bank classifies countries into four income groups. These are set each year on July 1.
Economies were divided according to 2008 GNI per capita using the following ranges of
income:[14]

Low income countries had GNI per capita of US$995 or less.

Lower middle income countries had GNI per capita between US$996 and US$3,945.

Upper middle income countries had GNI per capita between US$3,946 and US$12,195.

High income countries had GNI above US$11,906.

The World Bank classifies all low- and middle-income countries as developing but notes, "The
use of the term is convenient; it is not intended to imply that all economies in the group are
experiencing similar development or that other economies have reached a preferred or final stage
of development. Classification by income does not necessarily reflect development status.
Developing countries are in general countries which have not achieved a significant degree of
industrialization relative to their populations, and which have, in most cases a medium to low
standard of living. There is a strong correlation between low income and high population growth.

The terms utilized when discussing developing countries refer to the intent and to the constructs
of those who utilize these terms. Other terms sometimes used are less developed countries
(LDCs), least economically developed countries (LEDCs), "underdeveloped nations" or Third
World nations, and "non-industrialized nations". Conversely, the opposite end of the spectrum is
termed developed countries, most economically developed countries (MEDCs), First World
nations and "industrialized nations".
To moderate the euphemistic aspect of the word developing, international organizations have
started to use the term Less economically developed country (LEDCs) for the poorest nations
which can in no sense be regarded as developing. That is, LEDCs are the poorest subset of
LDCs. This may moderate against a belief that the standard of living across the entire developing
world is the same.
The concept of the developing nation is found, under one term or another, in numerous
theoretical systems having diverse orientations for example, theories of decolonization,
liberation theology, Marxism, anti-imperialism, and political economy.

Third World Countries in Terms of Poverty: worlds most impoverished countries

The least developed countries (LDCs) are a group of countries that have been identified by the
United Nations as "least developed" following three criteria for the identification of the LDC1. A low-income estimate of the gross national income (GNI) per capita.
2. Weak human assets and
3. High degree of economic vulnerability.

There are 50 countries listed in the United Nations comparative analysis of poverty,
34 African countries, 10 Asian countries, 5 Pacific Island Nations and one Caribbean nation.

List of Least Developed Countries (LDCs)

Africa
Angola

Benin

Burkina Faso

Burundi

Cape Verde

Central African Republic

Chad

Comoros

Congo, Dem. Rep. of the

Djibouti

Equatorial Guinea Eritrea

Ethiopia

Gambia

Guinea

Guinea-Bissau

Lesotho

Liberia

Madagascar

Malawi

Mali

Mauritania

Mozambique

Niger

Rwanda

Sao Tome and Principe

Senegal

Sierra Leone

Somalia

Sudan

Tanzania

Togo

Uganda

Zambia

Asia
Afghanistan

Bangladesh

Bhutan

Cambodia

Lao PDR

Maldives

Myanmar

Nepal

Timor-Leste

Yemen

Australia and the Pacific

Kiribati

Samoa

Solomon Islands

Tuvalu

Vanuatu
Caribbean
Haiti

Definition of Least Developed Countries

The term "Least Developed Countries (LDCs)" describes the world's poorest countries
with following 3 criteria:

Low-income criterion
based on a three-year average estimate of the gross national income (GNI) per capita (under
$750 for inclusion, above $900 for graduation)

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Human resource weakness criterion

involving a composite Human Assets Index (HAI) based on indicators of:
(a) nutrition; (b) health; (c) education; and (d) adult literacy.

Economic vulnerability criterion

based on indicators of the instability of agricultural production; the instability of exports of
goods and services; the economic importance of non-traditional activities (share of
manufacturing and modern services in GDP); merchandise export concentration; and the
handicap of economic smallness.

Why Third World countries are poor

Most rich countries are in the North of the globe, and most poor countries are in the South, but
its not geography that causes wealth or poverty. After all, Australia and New Zealand are part of
the Southern hemisphere, and both are doing fine. You couldnt say this of Papua New Guinea,
which is the Asian country closest to Australia and New Zealand.
A superficial view is to blame racial differences. Black Africa is the poorest and most disordered
part of the world, and Haiti, with an almost entirely black population, is the poorest country of
the Americas. But the coincidence is accidental.
What makes some countries rich, and others prone to poverty is not related to skin color or racial
factors. Many immigrants from poor nations do very well in the US and Canada (though one has
to admit that both countries are likely to make immigration easy only for the best and the
brightest of those who hail from Third World countries).

Natural Resources

It is also not the presence or lack of natural resources what makes a country rich or poor in the
long run. Japan is a country with very limited natural resources, and it has been the richest

11

country in Asia for a long time. On the other hand, it is easy to predict that some Third World
countries that currently are rich because of immense reserves of natural wealth while not being
burdened with large populations will slide back when the natural resources are depleted.

Many Causes

Why are the people of some countries doing well, in spite of the destruction brought by lost
wars, and in spite of the lack of natural resources, or an unfavorable climate? Its wrong to
search for just one answer. There are many aspects that determine how well, or haw badly, a
country will fare economically.
Some aspects relate to the attitudes of people (and the roots of such attitudes can date back many
generations). Other aspects are just of a matter of the political system (think North and South
Korea). And I assume that in the coming world, with an ever higher degree of globalization,
providing a favorable political and social environment will become ever more relevant.
Educational systems certainly play a role. Richer countries typically have better educational
systems, and the discrepancy normally reaches back more than just a generation or two.
Furthermore, in some cultures, parents and the society put more value on education than in
others. Societies that have been influenced by Confucian teaching, from Singapore to Korea, will
likely feature more educational drill than, for example, Islamic societies.
As in protestant Christianity, societies guided by Confucian teachings will also be more likely to
regard business success as a consequence of righteousness, thus propagating an ideology that is
conducive to the accumulation of riches.

The Common Good

One aspect that determines the likelihood of economic success in a given society is the emphasis,
or lack of emphasis, that is put, psychologically and philosophically, on the common good. This
emphasis can be measured by the degree to which, emotionally or consciously, people agree that
a common good justifies restrictions on the individual, including oneself. It could also be

12

described as the degree to which the members of a society are willing to forego individual
advantages if thereby a larger advantage is secured for the community.
A cultural mentality that emphasizes self-sacrifice for the common good has played a major role
in the economic development of Japan and other East Asian nations in the second part or the
20th century.
From the perspective of the individual with advanced self-cognition, emphasizing the common
good (and therefore solidarity) sometimes makes sense, and sometimes it doesnt. When
emphasizing the common good results in an advantage for the individual during his life time, it is
philosophically sound for the individual to act in solidarity. When such an advantage cannot be
derived during a persons lifetime, or when such an advantage cannot be realistically expected, it
makes better philosophical sense for the individual to emphasize his own good, an not the
common good.
And please note that my activism is firmly based on the idea that there is a chance that it will
result in a society in which my own life will be better. But even though, I would only go so far in
my fight, and I would not sacrifice myself for a better world for my progeny or posterity. I would
also not expect this from those who join me in my endeavor, for ours is not a movement of
lunatics but of people with a high degree of self-cognition and a healthy mind.
Nevertheless, from the perspective of the society as a whole, is may well be better when
individual members of a society always emphasize the common good, even when it would lead
to self-destruction. It is for this anachronism that sometimes, societies based on an irrational
ideology, even a foolish religion, can be stronger, and economically stronger, than societies in
which the people have a philosophically more sound approach towards the question of when to
emphasize the common good, and when ones individual advantage.
While lip service is paid to the common good anywhere around the globe, the degree to which
individuals are put under restrictions, or choose self-restriction, for the common good varies
from society to society, and both psychological and philosophical factors have to do with this.

13

Ethnic Homogeneity

Psychological factors depend, for example, on the ethnic fabric of a country. If a society is
ethnically homogenous to a very high degree (as are, for example, Japan and South Korea); it
will be more likely that individuals will strongly identify with the community and thus be willing
to emphasize the common good.
The opposite situation, we have in many countries of sub-Saharan Africa where the borders of
countries have been determined by how European powers had previously divided their colonies.
In a worst-case scenario, newly independent nations were made up of two major ethnic groups
who have been bitter enemies in pre-colonial times, and who then competed for dominance over
the newly independent state. Such creations have spelled humanitarian disaster in various central
African countries.
A bit luckier are countries that have just one dominant ethnic group, combined with a multitude
of smaller ethnic groups.
However, any country that is fractionated into ethnic groups that not only compete with each
other but also hate each other will make psychological identification with a common good more
difficult than a country with an ethnically homogenous population.
The lack of ethnic homogeneity, to a certain degree, explains why the economies of countries of
sub-Saharan Africa fare so poorly. Africa is by far the ethnically most fractionated continent of
the earth, and practically no country there has boundaries that match ethnic territories. The
people primarily identify with their clans, and beyond their clans, they identify with their ethnic
relatives (by and large those who speak the same language). People dont identify with their
central governments, and not even with the organizational structures of the town they live in.
This creates an atmosphere that isnt conducive to economic development. Hence, these
countries are poor and will likely stay poor.
In spite of the rules and restrictions, governments in African countries try to impose, the
sociopolitical and economic systems of all these countries is best classified as radically liberal. It
is so liberal that even physical violence is a tool of commerce. And because being out of power

14

often is synonymous with being repressed, a common attitude towards political change is to not
accept it if one can avoid it. Any party or politician will subscribe to democratic principles if
they help into power or preserve power. But if democratic principles favor opponents, the
principles are abandoned, not the claim to power.
On the other hand, this is an attitude shared by many a common man and many a common
woman in Third World countries. Most people in Third World countries have a good sense on
what is advantageous for them and what isnt, and they dont have qualms to abandon principles
or change sides when it is advantageous for them.
The above also goes a long way to explain corruption. Corruption is not just a problem of
political systems; its an attitude problem in countries where people are little inclined to accept
personal disadvantages for the common good, or where they are quick to take personal advantage
at the expense of the common good.
For many ethnically fractioned Third World countries, especially in Africa, an important first
step for economic development would be the creation of smaller countries along ethnic
boundaries, as this would likely allow a countrys people to better identify with a common good.
The quagmire of this path, however, is that the smaller a country, the easier it is dominated by
the military might, and the moral imperialism, of a superpower.
The trend towards smaller countries of course already exists in the Third World. Newly
established countries include Eritrea and Timor (with Somaliland a candidate in line), and civil
wars or low intensity conflicts for independence along ethnic lines are fought in many parts of
the Third World. But independence doesnt come easy, and until it comes, if it comes, the
enormous costs of internal wars, along with a prevailing lack of identifying with a common
good, will keep many Third World countries poor.

Identification With Traditional Authorities

Countries with respected traditional authorities are in a better position. In countries like Thailand
and Japan, where old monarchies are revered, they contribute to the identification of individual

15

members of society with a common good, represented by the monarchy. By contrast, many of the
poorest countries of the world are so-called republics where there isnt even a respected
presidency.
Yes, there are numerous other factors that determine economic success; but other factors being
equal or just comparable, the degree to which the individual members of emphasize the common
good reliably predicts how well a society will fare economically.

Road Traffic as Indicator

One can measure the degree to which, in daily life, the individual members of a society value the
common good through a simple indicator: road traffic
When a large number of participants in road traffic are willing to give way because it makes
sense for traffic flow overall, people uphold the common good versus individual advantages. The
opposite is a me-first attitude, even at red lights. Traffic chaos indicates little respect for the
common good, as well as the inability of the authorities to implement rules of the common good
against me-first traffic participants. Either way, traffic chaos indicates a decreased likelihood for
successful economic development, while countries in which road traffic discipline is observed
will usually do much better.
Traffic discipline is excellent in Northern Europe and North America, which goes hand in hand
with countries in these locations being the richest in the world. Traffic discipline is better in
Bangkok than in Manila or Jakarta, which is in line with the development progress in the
respective countries over the past decades. Traffic rules are largely ignored in much of subSaharan Africa.
It does not mean that economic progress of countries depends on road traffic conditions. Road
traffic conditions are an easily observable overall indicator for the likely economic development
path of a country in the coming years. In Third World countries, the degree of observance of
traffic regulations corresponds fairly well to the economic development potential. In general, you
will find that the less the people of a country are willing to put the common good ahead of their
own personal advantage, the less a country will develop economically.

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The Development experiences of Third World Countries

The development experiences of Third World countries since the fifties have been staggeringly
diverseand hence very informative. Forty years ago the developing countries looked a lot more
like each other than they do today. Take India and South Korea. By any standards, both countries
were extremely poor: India's income per capita was about $150 (in 1980 dollars) and South
Korea's was about $350. Life expectancy was about forty years and fifty years respectively. In
both countries roughly 70 percent of the people worked on the land, and farming accounted for
40 percent of national income. The two countries were so far behind the industrial world that it
seemed nearly inconceivable that either could ever attain reasonable standards of living, let alone
catch up.
If anything, India had the edge. Its savings rate was 12 percent of GNP while Korea's was only 8
percent. India had natural resources. Its size gave its industries a huge domestic market as a
platform for growth. Its former colonial masters, the British, left behind railways and other
infrastructure that were good by Third World standards. The country had a competent judiciary

and civil service, manned by a highly educated elite. Korea lacked all that. In the fifties the U.S.
government thought it so unlikely that Korea would achieve any increase in living standards at
all that its policy was to provide "sustaining aid" to stop them falling even further.
Less than forty years latera short time in economic historySouth Korea's extraordinary
success is taken for granted. By the end of the eighties, its per capita income (in the same 1980
dollars) had risen to $2,900, an increase of nearly 6 percent a year sustained over more than three
decades. None of today's rich countries, not even Japan, saw such a rapid transformation in the
deep structure of their economies. In contrast, India's income per capita grew from $150 to $230,
a rise of about 1.5 percent a year, between 1950 and 1980. India is widely regarded as a
development failure. Yet over the past few decades even India has achieved more progress than
today's rich countries did over similar periods and at comparable stages in their development.

17

This shows, first, that the setbacks the developing countries encountered in the eightieshigh
interest rates, debt-servicing difficulties, falling export priceswere an aberration, and that the
currently fashionable pessimism about their future is greatly overdone. The super achievers of
East Asia (South Korea and its fellow "dragons," Singapore, Taiwan, and Hong Kong) are by no
means the only developing countries that are actually developing. Many others have also grown
at historically unprecedented rates over the past few decades. As a group, the developing
countries134 of them, as conventionally defined, accounting for roughly three-quarters of the
world's populationhave indeed been catching up with the developed countries.
The comparison between India and South Korea shows something else. It no longer makes sense
to talk of the developing countries as a homogeneous group. The East Asian dragons now have
more in common with the industrial economies than with the poorest economies in South Asia
and sub-Saharan Africa. Indeed, these subgroups of developing countries have become so
distinct that one might think they have nothing to teach each other, that because South Korea is
so different from India, its experience can hardly be relevant. That is a mistake. The diversity of
experience among today's poor and not-so-poor countries does not defeat the task of analyzing
what works and what doesn't. In fact, it is what makes the task possible.

Lessons of Experience
The hallmark of economic policy in most of the Third World since the fifties has been the
rejection of orthodox free-market economics. The countries that failed most spectacularly (India,
nearly all of sub-Saharan Africa, much of Latin America, the Soviet Union and its satellites)
were the ones that rejected the orthodoxy most fervently. Their governments claimed that for one
reason or another, free-market economics would not work for them. In contrast, the four dragons
and, more recently, countries such as Chile, Colombia, Costa Rica, Ivory Coast, Malaysia, and
Thailand have achieved growth ranging from good to remarkable by following policies based
largely on market economics.
Among the most important ideas in orthodox economics is that countries prosper through trade.
In the sixties and seventies the dragons participated in a boom in world trade. Because the

18

dragons succeeded as exporters, they had abundant foreign exchange with which to buy
investment goods from abroad. Unlike most other developing countries, the dragons had price
systems that worked fairly well. So they invested in the right things, in ways that reflected their
comparative advantage in cheap, unskilled labor.
Some economists still dismiss the dragons as special cases, but for reasons I find specious. They
argue that Hong Kong and Singapore are small (hitherto smallness had been regarded as a
disadvantage in development); that they are former colonies with traditions of excellence in
public administration (like India and many others); that they have been generously provided with
foreign capital (like Latin America). These economists also argue that Taiwan and South Korea
received generous foreign aid (like many other developing countries), and have even argued that
their lack of natural resources was an advantage. What was most unusual about these countries,
in fact, was a relatively market-friendly approach to economic policy.
The countries that failed, often guided by "experts" in the industrialized world, are the ones that
gave only a small role, if any, to private enterprise and to prices that are unregulated by
government. Government planners concentrated on broad aggregates such as investment,
consumption, and savings. Their priority was investmentthe more, the better, regardless of its
quality.
Most governments also thought that their economies were inflexible and could not adjust to
changing conditions. The export earnings of developing countries were regarded as fixed, for
instance, and so was the import requirement for any given level of domestic production. The
possibilities for substituting one good for another in response to a change in price were denied or
ignored. The idea that workers respond to changes in incentives was likewise dismissed. This
assumed lack of responsiveness led the planners to believe that prices, rather than providing
signals for the allocation of resources, could serve other purposes instead. For instance, with
direct controls they could be kept low to reduce inflation, or raised here and there to gather
revenue for the government.
Taken to the limit, this "fixed-price" approach leads to regulation by input-output analysis. The
idea is to tabulate the flow of primary, intermediate, and finished goods throughout the economy,

19

on the assumption that each good requires inputs of other specific goods in fixed proportions.
When all the cells in the table have been filled in, a government needs only to decide what it
wants the economy to produce in order to know exactly what the country needs to import, good
by good.
India went in for this sort of planning in a big way. More than a few of today's leading freemarket economists have worked within India's planning system or have studied it in detail, and
intimate contact with it leads them to one inescapable conclusion: government planning of the
economy does not work. Professor Deepak Lal of London University, a leading proponent of
market economics for the Third World, mentions his experience with India's planning
commission in his book The Poverty of Development Economics. He calls the anti-market
approach favored in so many countries the "dirigiste dogma."

From Peru to Ghana

In the noncommunist world, the most striking recent example of this dogma at work is Peru.
When Alan Garcia's government came to power in the summer of 1985, Peru was already in a
bad way, thanks largely to high tariffs and other import barriers, restrictive labor-protection laws,
extensive credit rationing, high taxes, powerful trade unions, and an extraordinarily elaborate
system of regulations to control the private sector. One result was Peru's justly celebrated black
market, or "informal economy," described by Hernando de Soto in his modern classic, The Other
Path. The other result was great vulnerability to adverse economic events. The early eighties
delivered several, including a world recession, high interest rates, a drying up of external finance,
and declining commodity prices.
Garcia's policy was based, he said, on two words: control and spend. After imposing price
controls, he sharply increased public spending. The program succeeded at first. Gross domestic
product (GDP) grew 9.5 percent in 1986 and 7 percent in 1987. But by the spring of 1988
inflation was running at 1,000 percent a year; by the end of the year it was 6,000 percent. After
that, output and living standards collapsed. In 1990, the economy a wreck, Garcia was voted out
of office.

20

The dirigiste dogma has proved equally damaging in Africa. Take Ghana. When it became
independent in 1957, it was the richest country in the region, with the best-educated population.
It was the world's leading exporter of cocoa; it produced 10 percent of the world's gold; it had
diamonds, bauxite, and manganese, and a flourishing trade in mahogany. Its income per capita
was almost exactly equal to South Korea's at $490 (in 1980 dollars). By the early eighties,
however, Korea's income per capita had risen fourfold, while Ghana's had actually fallen nearly
20 percent to $400 per head. Investment slumped from 20 percent of GDP in the fifties to 2
percent by 1982, and exports dropped from more than 30 percent of GDP to 4 percent.
The country's leader at independence, Kwame Nkrumah, was a spokesman for the newly
independent Africa. He said the region needed to develop its own style of government, suited to
its special circumstances. He spent vast sums on megaprojects. As economic troubles mounted,
he nationalized companies and followed with capital repression. Under his regime capital flew
abroad, and people with skills and money did the same. The kleptocrats (government officials
who steal large amounts) ran the country into the ground. In the early eighties a new government
came to power and at last began to steer the economy along orthodox lines. Until then, Ghana
had been to Africa what Peru is to Latin America: a distillation of everything that has gone
wrong with the continent's economies.
In the Third World, where so many people live off the land, agricultural development is crucial.
Ghana provides a startling case study in how to wreck the farm sector. The means was the
agricultural marketing boarda statutory monopoly that bought farmers' crops at controlled
prices and resold them either at home or abroad. The prices paid to farmers were kept artificially
low, on the assumption that farmers ignored price signals.
Between 1963 and 1979 the price of consumer goods went up by a factor of twenty-two in
Ghana. The price of cocoa in neighboring countries went up by a factor of thirty-six. But the
price paid by the cocoa marketing board to Ghana's farmers went up just six fold. In real terms,
therefore, the returns to cocoa farmers vanished. The country's supposedly price-insensitive
farmers responded by switching to production of other crops for subsistence, and exports of
cocoa collapsed. Peru and Ghana are extreme cases, but they show in the starkest way that prices
do matter in the Third World and that rejecting market economics carries extremely high costs.

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The essential elements of a development strategy based on orthodox economics are

macroeconomic stability, foreign trade, and strictly limited intervention in the economy. With
policies under these three headings, governments can foster enterprise and entrepreneurship, the
irreplaceable engines of capitalist growth.

The Macroeconomic Foundation

Experience shows that high and unstable inflation can harm growth. A noninflationary
macroeconomic policy is, therefore, a prerequisite for rapid development. Control of government
borrowing is the crucial element in such a policy. When public borrowing is excessive,
governments are soon obliged to finance it by printing money, and rising inflation then follows.
That is why the conventional approach to stabilization (a term that covers steps to reduce an
unsustainable trade deficit as well as anti-inflation policies) usually advocates lower public
spending and/or higher taxes. The International Monetary Fund has long made programs of this
sort a precondition for financial assistance to countries in distress.
These so-called austerity programs have aroused two sorts of controversy. First, some
economists question whether big changes in fiscal policy are really needed. In Latin America, for
example, some governments sought "heterodox" policies to reduce inflation without the
recession that the orthodox approach almost always brings on. The heterodox approach argues
that in high-inflation countries, the budget deficit is caused mainly by inflation, not the other way
round. The argument is twofold. First, because there is a lag between when people earn income
and when they must pay taxes on it, high inflation reduce real tax revenues. Second, inflation
increases the nominal interest rate (and hence the budgetary cost of servicing past government
debt).
Hence the heterodox logic: reduce inflation with direct controls on prices and incomes and a
currency reform, and the budget deficit will shrink of its own accord. This method has been tried
repeatedly in Brazil and Argentina, where brief success has generally given way to a worse mess
than at the outset, and in Israel, where the results were more encouraging. Israel shows that the

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heterodox can workthat falling inflation does cut public borrowing. What matters is whether
the deficit that remains after the heterodox measures are in place is low enough to be
noninflationary. In practice, the remaining deficit is almost always too high, and the program
fails. Countering inflation almost always requires a dose of austerity.
The second controversy over austerity concerns the costs of this remedy. Many economists argue
that orthodox programs put too much of the burden on the poorest parts of society. To cut their
budget deficits, governments can either raise taxes or cut spending. Raising more revenueeven
if that could be done without harming incentivesis hard because of weak tax administration.
So stabilization nearly always involves cuts in public spending. If the cuts fall on food subsidies
and welfare spending, goes this argument, they hurt the most vulnerable.
This argument sounds plausible, but in many countries it is wrong. A study by Guy Pfeffermann
of the World Bank shows that the beneficiaries of social spending in the developing countries are
not the poor. First, more public spending of any sort means more public employment.
Bureaucracies in developing countries do not give many jobs to the landless rural poor, to small
street traders, to unskilled manual workers, or to the urban unemployed. They recruit from the
middle classes, who are, therefore, the first to benefit from public spending.
They often are the second and third to benefit as well. In some countries subsidies have
amounted to more than 10 percent of GDP. These mainly go toward making electricity, gasoline,
housing, and credit artificially cheaper for consumers. Quite apart from the massive
microeconomic damage that these price distortions cause, such subsidies do not reach the poor.
Many of the poor do not live in houses, which greatly reduces their need for electricity, and most
do not own cars. (Gasoline subsidies alone in Ecuador and Venezuela have been equivalent to
several percentage points of GDP.) Although some of the poor would benefit from credit,
subsidized credit is not aimed at them and makes the unsubsidized kind harder to get and a lot
more expensive. Spending on education is also, as a rule, heavily biased toward the middle
classes. In some developing countries, spending per capita on university education exceeds
spending per capita on primary education by a factor of thirty. Many of the poor lack access to
the most basic primary education, while the universities remain the publicly funded preserve of
the middle class. And in most developing countries the coverage of heavily subsidized social

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security systems is strongly skewed against the poor. In Brazil in 1984, only 8 percent of workers
in the poorest broad sector of the economy (farming) were covered by a social security system.
Nearly 80 percent of workers in the most prosperous sector (transport and communications) were
covered.
By and large, the scope for cutting public spending in developing countries without hurting the
poor is more than enough for stabilization to succeed. In some cases (subsidized credit, for
example) a reduction in public spending would actually help the poor directly, even before the
broader benefits of macroeconomic stability began to flow back. Admittedly, this is not much
help in political terms. It is easy to neglect the poor. That is precisely why this vast system of
subsidies does not help them. But the middle classes can shout loudly when the economic
distortions that help them are taken away. So the political barriers to getting economic policy
right are formidable.

The Gains from Trade

For its World Development Report in 1987, the World Bank classified forty-one developing
countries according to their openness to trade since the sixties. It classed economies as either
inward looking (exports were discouraged) or outward looking (exports were not discouraged),
with a further division according to the strength of any trade bias. The World Bank then plotted
these groups against a variety of economic indicators.
Growth in income per capita was highest in the strongly outward-looking economies and lowest
in the strongly inward-looking ones. The same was true for growth in total GDP and in value
added in manufacturing, and for the standard measure of the efficiency of investment. On all
these criteria the moderately outward-looking countries also outperformed inward-looking
economies, although by a smaller margin. The failure of a strong inward orientation to promote
domestic manufacturingnot just exports of manufacturesis particularly striking. The whole
point of looking inward had been to industrialize faster.

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The three strongly outward-oriented countries in the World Bank's report were Hong Kong,
Singapore, and South Korea. Taiwan would have been the fourth if it had been included in the
sample, and would have reinforced the message. The four dragons, however, have been more
diverse in their policies than is usually assumed. Hong Kong's outward orientation is due to
unalloyed free trade. The other three have been interventionist to varying degrees, using export
incentives to offset the export-discouraging effects of domestic protection.
South Korea, by some measures the most interventionist dragon, is often cited as proof that
intelligent dirigiste, rather than a broadly outward-looking trade policy, is the key to rapid
development. This judgment is often based on the false premise that Korea has protected its
domestic producers as much as if not more than the inward lookers have protected theirs, with
the difference that it has then piled on a lot of incentives for exporters. This is incorrect. In
reality, South Korea has had a moderate and declining degree of domestic protection with just
enough export promotion to achieve broad neutrality in trade incentives.
Korea's growth surge began in the mid-sixties. Policy began to change in the late fifties. At that
time Korea's government placed quantitative restrictions on almost all imports, but the
restrictions were looser than in many other developing countries. The government began to
provide export incentives to offset its protection for producers of import substitutes. At first this
failed to work, perhaps because the currency was overvalued, leaving too great a bias against
exports. In the early sixties the government dismantled its multiple exchange-rate system,
devalued the currency, and (because devaluation helped exporters) reduced its export subsidies.
These liberalizing reforms were the turning point. Exports began to grow rapidly.
In 1967 the government reformed its import control system, greatly reducing the number of
imports subject to quotas and began to reduce its tariffs. So as the miracle proceeded in the late
sixties and seventies, the background was not just outward orientation (domestic protection
offset by export promotion), but a low average level of domestic protection, with relatively little
variation in the rates of protection from one sector to another. Toward the end of the seventies,
when Korea did increase its support for heavy industry, the economy began to run into trouble.
Policymakers acknowledged their mistake and moved back toward liberalization.

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The clear consensus among mainstream economists is that outward-looking trade policies are
one of the keys to development. But why? The answer from orthodox economics is that trade
allows countries to exploit their comparative advantage. Trade enables a country to consume a
mix of goods that is different from the mix it produceswith prices in world markets acting as
the mediator between the two. Conventional theory proves that trade, as a result, makes both
partners unambiguously better off. So long as import barriers and other policies do not drive
domestic prices too far away from world prices, market forces are enough to push production and
consumption in the right direction. But trade does more than bring about the right mix of
products. It also eliminates the inefficiencies in production caused by protection.
Protection may make some domestic producers monopolists or near monopolists, thus
introducing an inefficiency directly (because monopolists exploit their market strength by
producing less and charging more) and indirectly (because, lacking competition, they have no
incentive to keep costs low).
Two of the world's top trade specialists, Professors Jagdish Bhagwati of Columbia University
and Anne Krueger of Duke University, have emphasized yet another source of inefficiency
pervasive in developing and industrial countries alike: "rent-seeking," or more generally,
"directly unproductive profit-seeking." These springs from the efforts of business are to exploit
or evade the distortions caused by protection. For instance, import licensing may drive a wedge
between the official price of an intermediate good and the price that a domestic producer is
willing to pay.
This "rent" is a potential source of profit for somebody. Resources will be spent in trying to
corner the market in licenses, or in bribing the bureaucrats who decide which firms will get them,
or in lobbying governments to alter the pattern of protection in ways that favor the lobbyists.
Worst of all, resources will be spent in trying to win an increase in the overall level of protection.
A study of Turkey (see Grais et al.) found that the costs of rent-seeking in the late seventies were
between 5 percent and 10 percent of GDP. Because the study made no allowance for the effect of
protection on domestic monopoly power, this is an under-estimate of the cost. A study by Joel
Bergsman, which did take monopoly effects into account, found that the annual costs of
protection were 7 percent of GDP in Brazil, 3 percent in Mexico, 6 percent in Pakistan, and 4

26

percent in the Philippines. Such results speak for themselves. The evidence shows that trade
works; orthodox theory shows why.
Where to Intervene
It is often argued that all the dragons (except Hong Kong) have had highly interventionist
governments. Even on the assumption that these interventions, by luck or judgment, left the
economies with outward-looking trade regimes, this poses a question. Might their success be due
to nothing more profound than the fact that good intervention is better than bad? It is not the
extent of intervention that matters, the argument goes, but the skill with which it is done.
It is true that these countries, especially South Korea, have had interventionist governments. This
they have in common with almost all developing countries. The difference is not only that they
pursued an outward-looking approach to trade (broad lesson number one), but also that this
approach molded the forms of intervention they undertook in the domestic economy (broad
lesson number two). The net effect (broad lesson number three) was to leave the price system
largely intact as a signaling device for the private sector.
More generally, an outward-looking approach to trade does not require laissez-faire (though
laissez-faire does require an outward-looking approach to trade). The state has a vital role in
development. Paradoxically, however, most of the Third World's highly interventionist
governments neglect this role because they are too busy doing things they should not.
Government has several vital jobs to do and no spare resources to waste on other things. The cost
of an effective legal system, for instance, is public money well spent. This means countries need
rules that define property rights, contracts, liability, bankruptcy, and so on (which most
developing countries already have). It also means enforcing those rules effectively (which fewer
manage to do). Spending on physical and social infrastructure is essential, for there are good
(orthodox) reasons to think that the private sector will provide too little. Numerous studies have
shown that the economic returns to spending on primary education, especially for girls, are
extremely high. Governments need to do more in such areas, not less, though none of these tasks
requires the government to be a monopolist.

27

Governments have done too little in the areas where they can do some good because they have
spread themselves too thin and been far too ambitious in areas where intervention is, at best,
unnecessary. Instead of building roads, schools, and village health centers, Third World
governments have built prestigious airports, universities, and big-city hospitals. Instead of letting
businesses compete, they have created state-run industries and sheltered their extraordinary
inefficiencies from foreign and domestic competition.
Advocates of state intervention often claim to be realists. Markets are not perfect, they say, so
governments have to step in, especially in developing countries. They are right up to a point. The
price system never works perfectly, least of all in developing countries. But it is important to be
realistic about governments, too. The past forty years of development experience have shown
that no resource is in scarcer supply than good government, and that nothing market forces could
devise has done as much harm in the Third World as bad government.
Two Myths
A common argument is that many developing countries will be condemned to economic
stagnation, regardless of the economic policies their governments pursue, by two factors beyond
their control: their insupportable debts and their lack of home-grown entrepreneurs. Both ideas
are wrong.
First, consider debt. The costs of the debt crisis of the eighties have indeed been great. At the
margin, foreign capital matters a lotnot just in quantitative terms, but because of the foreign
expertise that often comes with it. But the problem of debt, serious though it is, is by no means
an insuperable obstacle to growth in the Third World. Even in good times, foreign capital has
financed only a small part of the investment undertaken in developing countries. Debt needs to
be kept in perspective.
In its World Development Report 1989, the World Bank compiled data on financial balances for
a sample of fourteen developing countries (some now "highly indebted," others not) for which
sufficiently detailed data were available. The figures suggest that the biggest source of capital, by
far, in these economies during the seventies and eighties was household saving. This was
equivalent, on average, to 13 percent of GDP in the countries in the sample. Businesses saved 9

28

percent of GDP. The domestic supply of capitalthe sum of household saving and business
savingwas 22 percent of GDP, while the inflow of foreign capital was only 2 percent of GDP.
After the debt myth comes the myth of the missing (especially African) entrepreneur. The idea
that the Third World lacks the spirit of enterprise is laughable. Peasant farmers who switch to
another crop in response to a change in their government's marketing arrangements are
entrepreneurs. So are the unregistered taxi and minibus operators who keep most Third World
cities moving. So are street vendors, perambulating water vendors, money changers, and
informal credit brokers. So are the growers of illegal crops such as coca, who in many countries
are denied the opportunity of making a decent living by legal means. So are the smugglers of just
about anything that do such a roaring trade across Africa's borders, profiting from the massive
price distortions that government policies create.
Entrepreneurship admittedly is partly a matter of skillsin choice of technique, in management,
in finance, in the ability to read the label on a bag of fertilizer. Skills have to be learned, and in
many developing countries they are in short supply. But this supply is not fixed. The success of
the green revolution in India and elsewhere shows that farmers are willing to learn new skills
when they can see an advantage in doing so. (The green revolution involved the introduction of
high-yielding crop varieties that required different methods and more sophisticated inputs such
as fertilizer and an assured water supply.)
To see what entrepreneurship in the Third World can achieve, consider the flowering of the
garment export business in Bangladesh, one of the poorest countries in the world. This started
with a collaboration between Noorul Quader, a bureaucrat-turned-entrepreneur, and the Daewoo
Company of South Korea. Quader's new company, Desh, agreed to buy sewing machines from
Daewoo and send workers to be trained in South Korea. Once Desh's factory started up, Daewoo
would advise on production and handle the marketing in return for royalties of 8 percent of sales.
Daewoo did not lend to Desh or take any stake in the business. But it showed Desh how to
design a bonded warehouse system, which the government agreed to authorize. This was crucial.
In effect, it made garment exporting a special economic zonean island of free trade within a
highly protected economy.

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At the end of 1979, Desh's 130 trainees returned from South Korea with three Daewoo engineers
to install the machines. Garment production began in April 1980 with 450 machines and 500
workers. In 1980 the company produced 43,000 shirts with a value of $56,000. By 1987 sales
had risen to 2.3 million shirts and a value of $5.3 milliona growth rate of 92 percent a year.
Desh did so well that it canceled its collaboration agreement with Daewoo in June 1981, just
eighteen months after the startup. It began to do its own marketing and bought its raw materials
from other suppliers. It achieved most of its success on its own. Also, the company has suffered
heavy defections of its Daewoo-trained staff. Of the initial batch of 130 who visited South Korea
in 1980, 115 had left the company by 1987to start their own garment-exporting businesses.
From nothing in 1979, Bangladesh had seven hundred garment-export factories by 1985. They
belonged to Desh, to Desh's graduates, or to others following their example.
There is no lack of entrepreneurship in the Third World. To release this huge potential,
governments first need to do much less. Above all, they must stop trying to micromanage the
process of industrialization, whether through trade policy, industrial licensing, or direct control
of state-owned enterprises. But they also need to do more. They must strive to keep public
borrowing and inflation in check, while investing adequately in physical and nonphysical
infrastructure.
In the early nineties, spurred by the collapse of the socialist model in Eastern Europe, a growing
number of developing countries are trying to reorder their economic priorities in this way. If they
persevere, the coming decades will be a time of unprecedented advance in the developing world.

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Multinational Corporations in the Third World:

Predators or Allies in Economic Development
Multinational corporations (MNCs) engage in very useful and morally defensible activities in
Third World countries for which they frequently have received little credit. Significant among
these activities are their extension of opportunities for earning higher incomes as well as the
consumption of improved quality goods and services to people in poorer regions of the world.
Instead, these firms have been misrepresented by ugly or fearful images by Marxists and
dependency theory advocates. Because many of these firms originate in the industrialized
countries, including the U.S., the U.K., Canada, Germany, France, and Italy, they have been
viewed as instruments for the imposition of Western cultural values on Third World countries,
rather than allies in their economic development. Thus, some proponents of these views urge the
expulsion of these firms, while others less hostile have argued for their close supervision or
regulation by Third World governments.
Incidents such as the improper use in the Third World of baby milk formula manufactured by
Nestle, the gas leak from a Union Carbide plant in Bhopal, India, and the alleged involvement of
foreign firms in the overthrow of President Allende of Chile have been used to perpetuate the
ugly image of MNCs. The fact that some MNCs command assets worth more than the national
income of their host countries also reinforces their fearful image. And indeed, there is evidence
that some MNCs have paid bribes to government officials in order to get around obstacles
erected against profitable operations of their enterprises.
Several governments, especially in Latin America and Africa, have been receptive to the
negative images and have adopted hostile policies towards MNCs. However, a careful
examination of the nature of MNCs and their operations in the Third World reveals a positive
image of them, especially as the allies in the development process of these countries. For the
greater well-being of the majority of the worlds poor who live in the Third World, it is
important that the positive contributions of these firms to their economies become more widely
known. Even as MNCs may be motivated primarily by profits to invest in the Third World, the

31

morality of their activities in improving the material lives of many in these countries should not
be obscured through misperceptions.
The first point to recognize about MNCs is that, besides operating under more than one
sovereign jurisdiction, they are in nature very similar to local or non-multinational firms
producing in more than one state or plant. We may call such multi-plant firms uninational
corporations (UNCs). Thus, a UNC with branch plants in Alaska as well as some other parts of
the U. S. would have been known as an MNC had Alaska continued to be a non-U.S. territory.
Indeed, the experience of European countries soon to become more unified economically or the
former Soviet Union now breaking up into several sovereign or quasi-sovereign states should
impress us of the fact that the United States or Canada easily could have been several
independent countries, and some present UNCs would have been MNCs.
Like UNCs, MNCs are owned by shareholders who expect annual returns or dividends in
compensation for funds they make available for the firms production and sales activities. It is to
enable MNCs to pay such dividends that their managers seek out the most efficient workers for
the wages they pay, buy materials at the cheapest costs possible, seek to produce in countries
levying the lowest profit taxes, and sell in markets where they can earn the highest revenues after
costs. (This is no different from anyone seeking employment at the highest wage for the least
amount of tedium, the most congenial work environment and location, and the highest
employment benefits.) Perhaps the main difference between uni national and multinational
corporations is that the latter have been more successful than the former, and as a result have
expanded their activities to many more regions and sovereign states.
Many do recognize UNCs or local firms as helpful agents in the development of the communities
in which they operate. Primary in this recognition is the employment they create and the (higher)
incomes earned because of their having established in the region. These firms also rent buildings
and land, or sometimes buy them, thus generating higher incomes for their owners. For example,
in the absence of the present Japanese owners having bid for the Rockefeller Center in New
York, the price its American owners would have gotten for it would have been lower. The same
applies to the income prospects of owners of the Seattle Mariners should the sale of this club to
the Japanese buyers go through. It is precisely in similar ways that MNCs enrich labor and other

32

resource owners in the Third World. In their absence, the people would have had fewer or much
lower paying jobs, and the demand for land and other local resources would have been lower.
Without the operators of such hotels as the Holiday Inn, the Sheraton, the Hyatt, Four Seasons,
and the Hilton having leased or bought beach-front properties in several of the popular tourist
resorts in the Third World, their owners (individuals or government) might have received much
less for their sale. Such purchases also release the capital of resource owners for investment in
other enterprises.
Some of those who recognize little positive contributions from MNCs to the economics
development of the Third World countries might, however, acknowledge that these firms pay
higher wages to local employees than they typically would receive elsewhere, and higher rents
for land and buildings. But they often argue that the wages in Third World countries are lower
than those paid by MNCs in the more developed countries, and the working conditions are not of
the same standard. However, the comparison misses several key points. For example, the skill or
educational levels of workers in the Third World and those of the more developed countries are
not the same. The amount of machinery and equipment handled by workers in the two locations
are also different. In short, the amount of output generated by a worker in the Third World is
typically smaller than that produced in the more developed world. Indeed, if MNCs could hire
enough of higher skilled workers in the more developed countries at the wages workers are paid
in the Third World, they would gladly do so. They would thus earn higher profits while selling
their goods and services at lower prices. But the fact is that the voluntary exchange system in
which MNCs operate would not permit them. Besides those working for charity, few others
would for long accept wages they consider to be less than their contribution to an enterprise.
The same explanation applies to wages paid by MNCs in the Third World. Unless workers find it
most profitable to work for MNCs at the wages they offer, they would choose employment
elsewhere. Similarly, unless MNCs can make as much profit as they can at home, as well as
compensation for the additional risks taken to invest in the Third World, including the risk of
asset confiscation by a hostile future government, they would not venture into those parts of the
world. Thus, there have to be net benefits for both parties in a transaction (here workers and
multinational corporations) for the transaction to take place, and on a continuous basis.

33

It may also be worthwhile to point out that research has not confirmed the frequent assertion that
foreign firms, including MNCs, make excessive or higher profits per dollar invested than their
local counterparts. On the contrary, private local firms on average earn higher rates of profits
before taxes than foreign firms (as revealed by research in India, Brazil, Columbia, Guatemala,
Ghana, and Kenya). And the simple explanation is that many Third World governments tax the
profits of their local firms at a higher rate than they do those of foreign firms. Thus, the after-tax
rates of profit are similar for foreign and private local firms in the Third World. Furthermore,
new wealth created by any firm has to cover the wages, interest, equipment, and the rental costs
of land and buildings incurred in production before profits are paid. And much of such payments
stay within the host Third World economy.
It may also be worthwhile to point out that research has not confirmed the frequent assertion that
foreign firms, including MNCs, make excessive or higher profits per dollar invested than their
local counterparts. On the contrary, private local firms on average earn higher rates of profits
before taxes than foreign firms (as revealed by research in India, Brazil, Columbia, Guatemala,
Ghana, and Kenya). And the simple explanation is that many Third World governments tax the
profits of their local firms than they do those of foreign firms. Thus, the after-tax rates of profit
are similar for foreign and private local firms in the Third World. Furthermore, new wealth
created by any firm has to cover the wages, interest, equipment, and the rental costs of land and
buildings incurred in production before profits are paid. And much of such payments stay within
the host Third World economy.
If we withhold our paternalistic instincts towards poorer people in the Third World, we would
also respect their judgment to purchase products manufactured there by MNCs rather than accuse
the firms of selling inappropriate products to them. Being poor does not make ones choice of
products less defensible or moral than the choices of the rich. And without sufficient demand for
the products, MNCs would not make profits from selling them in the Third World. In a free
trading regime, the same products might have been imported had they not been produced by
MNCs. There is thus no valid reason why Third World governments should require that MNCs
manufacture and sell only second- or third-rate quality products in those countries, as some
analysts from the more developed countries have suggested. Is there anything legitimate that
Third World governments can do about the activities of multinational corporations in their

34

countries? Yes; but nothing more than they legitimately and reasonably would do about local
firms, bearing in mind that excessive taxation of profits or environmental regulations reduce total
investments by both types of firms. Perhaps, MNCs may be able to offer bigger bribes than local
firms to escape restrictions imposed on them by Third World governments. If so, such
restrictions mainly work against the development of local firms. The solution ought to be a
loosening of restrictions on businesses so they may create more wealth and in the process
facilitate the development of local enterprise and lessen the incidence of corruption in
government.
Adam Smith, who was also a moral philosopher, long observed that an individual by directing .
. . industry in such a manner as its produce may be of the greatest value, . . . intends only his own
gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which
was no part of it. By pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it.
These observations apply with equal force to the investment activities of multinational
corporations in Third World countries. And it is no accident that people in those Third World
countries whose governments have been more open to the presence of multinational corporations
have experienced significant improvements in their standard of living (e.g., Bermuda, the
Bahamas, Hong Kong, South Korea, Singapore, and Taiwan) while many in countries hostile to
these firms continue to be mired in poverty. It may not be the intent of Third World
governments, but perpetuating poverty in the name of protecting their people from alleged
exploitation by MNCs has little moral justification.

Thinking about the world economy

The idea that Third World competition threatens living standards in advanced countries seems
straightforward. Suppose that somebody has learned to do something that used to be my
exclusive specialty. Maybe he or she isn't quite as good at it as I am but is willing to work for a
fraction of my wage. Isn't it obvious that I am either going to have to accept a lower standard of

35

living or be out of a job? That, in essence, is the view of those who fear that Western wage rates
must fall as the Third World develops.
But this story is completely misleading. When world productivity rises (as it does when Third
World countries converge on First World productivity), average world living standards must
rise: after all, the extra output must go somewhere. This by itself presumes that higher Third
World productivity will be reflected in higher Third World wages, not lower First World
incomes.
Another way to look at it is to notice that in a national economy, producers and consumers are
the same people; foreign competitors who cut prices may lower the wage I receive, but they also
raise the purchasing power of whatever I earn. There is no reason to expect the adverse effect to
predominate.
The world economy is a system -- a complex web of feedback relationships -- not a simple chain
of one-way effects. In this global economic system, wages, prices, trade, and investment flows
are outcomes, not givens. Intuitively plausible scenarios based on day-to-day business
experience can be deeply misleading about what happens to this system when underlying
parameters change, whether the parameters are government policies like tariffs and taxes or more
mysterious factors like the productivity of Chinese labor.
As anyone knows who has studied a complex system, be it global weather, Los Angeles traffic
patterns, or the flow of materials through a manufacturing process, it is necessary to build a
model to understand how the system works. The usual procedure is to start with a very simplified
model and then make it increasingly realistic; in the process, one comes to a more sophisticated
understanding of the actual system.
In this article, I will follow that procedure to think about the impact of emerging economies on
wages and jobs in the advanced world. I will start with an oversimplified and unrealistic picture
of the world economy and then gradually add realistic complications. At each stage, I will also
bring in some data. By the end, I hope to have made clear that the seemingly sophisticated view
that the Third World is causing First World problems is questionable on conceptual grounds and
wholly implausible in terms of the data.

36

Model 1: A One-Good, One-Input World

Imagine a world without the complexities of the global economy. In this world, one all-purpose
good is produced -- let's call it chips -- using one input, labor. All countries produce chips, but
labor is more productive in some countries than in others. In imagining such a world, we ignore
two crucial facts about the actual global economy: it produces hundreds of thousands of distinct
goods and services, and it does so using many inputs, including physical capital and the "human
capital" that result from education.
What would determine wages and standards of living in such a simplified world? In the absence
of capital or differentiation between skilled and unskilled labor, workers would receive what they
produce. That is, the annual real wage in terms of chips in each country would equal the number
of chips each worker produced in a year -- his or her productivity. And since chips are the only
good consumed as well as the only good produced, the consumer price index would contain
nothing but chips. Each country's real wage rate in terms of its CPI would also equal the
productivity of labor in each country.
What about relative wages? The possibility of arbitrage, of shipping goods to wherever they
command the highest price, would keep chip prices the same in all countries. Thus the wage rate
of workers who produce 10,000 chips annually would be ten times that of workers who produce
1,000, even if those workers are in different countries. The ratio of any two nations' wage rates,
then, would equal the ratio of their workers' productivity.
What would happen if countries that previously had low productivity and thus low wages were to
experience a large increase in their productivity? These emerging economies would see their
wage rates in terms of chips rise -- end of story. There would be no impact, positive or negative,
on real wage rates in other, initially higher-wage countries. In each country, the real wage rate
equals domestic productivity in terms of chips; that remains true, regardless of what happens
elsewhere.

What's wrong with this model? It's ridiculously oversimplified, but in what ways might the
simplification mislead us? One immediate problem with the model is that it leaves no room for

37

international trade: if everyone is producing chips, there is no reason to import or export them.
This issue does not seem to bother such competitiveness theorists as Lester Thurow. The central
proposition of Thurow's Head to Head is that because the advanced nations produce the same
things, the benign niche competition of the past has given way to win those head-to-head
competitions. But if the advanced nations are producing the same things, why do they sell so
much to one another?
While the fact that countries do trade with one another means that our simplified model cannot
be literally true, this model does raise the question of how extensive the trade actually is between
advanced nations and the Third World. It turns out to be surprisingly small despite the emphasis
on Third World trade in such documents as the Delors white paper. In 1990, advanced industrial
nations spent only 1.2% of their combined GDPs on imports of manufactured goods from newly
industrializing economies. A model in which advanced countries have no reason to trade with
low-wage countries is obviously not completely accurate, but it is more than 98% right all the
same.

Another problem with the model is that without capital, there can be no international investment.
We'll come back to that point when we put capital into the model. It's worth noting, however,
that in the U.S. economy, more than 70% of national income accrues to labor and less than 30%
to capital; this proportion has been very stable for the past two decades. Labor is clearly not the
only input in the production of goods, but the assertion that the average real wage rate moves
almost one for one with output per worker, that what is good for the United States is good for
U.S. workers and vice versa, seems approximately correct.
One last assertion that may bother some readers is that wages automatically rise with
productivity. Is this realistic? Yes. Economic history offers no example of a country that
experienced long-term productivity growth without a roughly equal rise in real wages. In the
1950s, when European productivity was typically less than half of U.S. productivity, so were
European wages; today average compensation measured in dollars is about the same. As Japan
climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of
the U.S. level. South Korea's wages have also risen dramatically over time. Indeed, many Korean
economists worry that wages may have risen too much. Korean labor now seems too expensive

38

to compete in low-technology goods with newcomers like China and Indonesia and too
expensive to compensate for low productivity and product quality in such industries as autos.
The idea that somehow the old rules no longer apply, that new entrants on the world economic
stage will always pay low wages even as their productivity rises to advanced-country levels, has
no basis in actual experience. (Some economic writers try to refute this proposition by pointing
to particular industries in which relative wages don't match relative productivity. For example,
shirtmakers in Bangladesh, who are almost half as productive as shirtmakers in the United States,
receive far less than half the U.S. wage rate. But as we'll see when we turn to a multigood model,
that is exactly what standard economic theory predicts.)
Our one-good, one-input model may seem silly, but it forces us to notice two crucial points.
First, an increase in Third World labor productivity means an increase in world output, and an
increase in world output must show up as an increase in somebody's income. And it does: it
shows up in higher wages for Third World workers. Second, whatever we may eventually
conclude about the impact of higher Third World productivity on First World economies, it won't
necessarily be adverse. The simplest model suggests that there is no impact at all.

Model 2: Many Goods, One Input

In the real world, of course, countries specialize in the production of a limited range of goods;
international trade is both the cause and the result of that specialization. In particular, the trade in
manufactured goods between the First and Third worlds is largely an exchange of sophisticated
high-technology products like aircraft and microprocessors for labor-intensive goods like
clothing. In a world in which countries produce different goods, productivity gains in one part of
the world may either help or hurt the rest of the world.
This is by no means a new subject. Between the end of World War II and the Korean War, many
nations experienced a series of balance-of-payments difficulties, which led to the perception of a
global "dollar shortage." At the time, many Europeans believed that their real problem was the
overwhelming competitiveness of the highly productive U.S. economy. But was the U.S.

39

economy really damaging the rest of the world? More generally, does productivity growth in one
country raise or lower real incomes in other countries? An extensive body of theoretical and
empirical work concluded that the impact of productivity growth abroad on domestic welfare can
be either positive or negative, depending on the bias of that productivity growth -- that is,
depending on the sectors in which such growth occurs.
Sir W. Arthur Lewis, who won the 1979 Nobel Prize in economics for his work on economic
development, has offered a clever illustration of how the effect of productivity growth in
developing countries on the real wages in advanced nations can work either way. In Lewis's
model, the world is divided into two regions, call them North and South. This global economy
produces not one but three types of goods: high-tech, medium-tech, and low-tech. As in our first
model, however, labor is still the only input into production. Northern labor is more productive
than Southern labor in all three types of goods, but that productivity advantage is huge in hightech, moderate in medium-tech, and small in low-tech.
What will be the pattern of wages and production in such a world? A likely outcome is that hightech goods will be produced only in the North, low-tech goods only in the South, and both
regions will produce at least some medium-tech goods. (If world demand for high-tech products
is very high, the North may produce only those goods; if demand for low-tech products is high,
the South may also specialize. But there will be a wide range of cases in which both regions
produce medium-tech goods.)
Competition will ensure that the ratio of the wage rate in the North to that in the South will equal
the ratio of Northern to Southern productivity in the sector in which workers in the two regions
face each other head-to-head: medium-tech. In this case, Northern workers will not be
competitive in low-tech goods in spite of their higher productivity because their wage rates are
too high. Conversely, low Southern wage rates are not enough to compensate for low
productivity in high-tech.
A numerical example may be helpful here. Suppose that Northern labor is ten times as
productive as Southern labor in high-tech, five times as productive in medium-tech, but only
twice as productive in low-tech. If both countries produce medium-tech goods, the Northern

40

wage must be five times higher than the Southern. Given this wage ratio, labor costs in the South
for low-tech goods will be only two-fifths of labor costs in the North for this sector, even though
Northern labor is more productive. In high-tech goods, by contrast, labor costs will be twice as
high in the South.
Notice that in this example, Southern low-tech workers receive only one-fifth the Northern wage,
even though they are half as productive as Northern workers in the same industry. Many people,
including those who call themselves experts on international trade, believe that kind of gap
shows that conventional economic models don't apply. In fact, it's exactly what conventional
analysis predicts: if low-wage countries didn't have lower unit labor costs than high-wage
countries in their export industries, they couldn't export.
Now suppose that there is an increase in Southern productivity. What effect will it have? It
depends on which sector experiences the productivity gain. If the productivity increase occurs in
low-tech output, a sector that does not compete with Northern labor, there is no reason to expect
the ratio of Northern to Southern wages to change. Southern labor will produce low-tech goods
more cheaply, and the fall in the price of those goods will raise real wages in the North. But if
Southern productivity rises in the competitive medium-tech sector, relative Southern wages will
rise. Since productivity has not risen in low-tech production, low-tech prices will rise and reduce
real wages in the North.
What happens if Southern productivity rises at equal rates in low- and medium-tech? The relative
wage rate will rise but will be offset by the productivity increase. The prices of low-tech goods in
terms of Northern labor will not change, and thus the real wages of Northern workers will not
change either. In other words, an across-the-board productivity increase in the South in this
multigood model has the same effect on Northern living standards as productivity growth had in
the one-good model: none at all.
It seems, then, that the effect of Third World growth on the First World, which was negligible in
our simplest model, becomes unpredictable once we make the model more realistic. There are,
however, two points worth noting.

41

First, the way in which growth in the Third World can hurt the First World is very different from
the way it is described in the Schwab letter or the Delores White Paper. Third World growth does
not hurt the First World because wages in the Third World stay low but because they rise and
therefore push up the prices of exports to advanced countries. That is, the United States may be
threatened when South Korea gets better at producing automobiles, not because the United States
loses the automobile market but because higher South Korean wages mean that U.S. consumers
pay more for the pajamas and toys that they were already buying from South Korea.

Second, this potential adverse effect should show up in a readily measured economic statistic:
the terms of trade, or the ratio of export to import prices. For example, if U.S. companies are
forced to sell goods more cheaply on world markets because of foreign competition or are forced
to pay more for imports because of competition for raw materials or a devalued dollar, real
income in the United States will fall. Because exports and imports are about 10% of GNP, each
10% decline in the U.S. terms of trade reduces U.S. real income by about 1%. The potential
damage to advanced economies from Third World growth rests on the possibility of a decline in
advanced-country terms of trade. But that hasn't happened. Between 1982 and 1992, the terms of
trade of the developed market economies actually improved by 12%, largely as a result of falling
real oil prices.
In sum, a multigood model offers more possibilities than the simple one-good model with which
we began, but it leads to the same conclusion: productivity growth in the Third World leads to
higher wages in the Third World.

Model 3: Capital and International Investment

Let's move a step closer to reality and add another input to our model. What changes if we now
imagine a world in which production requires both capital and labor? From a global point of
view, there is one big difference between labor and capital: the degree of international mobility.
Although large-scale international migration was a major force in the world economy before
1920, since then all advanced countries have erected high legal barriers to economically

42

motivated immigration. There is a limited flow of very highly skilled people from South to North
-- the notorious "brain drain" -- and a somewhat larger flow of illegal migration. But most labor
does not move internationally.
In contrast, international investment is a highly visible and growing influence on the world
economy. During the late 1970s, many banks in advanced countries lent large sums of money to
Third World countries. This flow dried up in the 1980s, the decade of the debt crisis, but
considerable capital flows resumed with the emerging-markets boom that began after 1990.

Many of the fears about Third World growth seem to focus on capital flows rather than trade.
Schwab's fear that there will be a "massive redeployment of production assets" presumably refers
to investment in the Third World. The famous estimate by the Economic Policy Institute that
NAFTA would cost 500,000 U.S. jobs was based on a completely hypothetical scenario about
diversion of U.S. investment. Even Labor Secretary Robert Reich, at the March 1994 job summit
in Detroit, attributed the employment problems of Western economies to the mobility of capital.
In effect, he seemed to be asserting that First World capital now creates only Third World jobs.
Are those fears justified?
The short answer is yes in principle but no in practice. As a matter of standard textbook theory,
international flows of capital from North to South could lower Northern wages. The actual flows
that have taken place since 1990, however, are far too small to have the devastating impacts that
many people envision.
To understand how international investment flows could pose problems for advanced-country
labor, we must first realize that the productivity of labor depends in part on how much capital it
has to work with. As an empirical matter, the share of labor in domestic output is very stable. But
if labor has less capital at its disposal, productivity and thus real wage rates will fall.

Suppose, then, that Third World nations become more attractive than First World nations for
First World investors. This might be because a change in political conditions makes such
investments seem safer or because technology transfer raises the potential productivity of Third
World workers (once they are equipped with adequate capital). Does this hurt First World

43

workers? Capital exported to the Third World is capital not invested at home, so such NorthSouth investment means that Northern productivity and wages will fall. Northern investors
presumably earn a higher return on these investments than they could have earned at home, but
that may offer little comfort to workers.
Before we jump to the conclusion that the development of the Third World has come at First
World expense, however, we must ask not merely whether economic damage arises in principle
but how large it is in practice.
How much capital has been exported from advanced countries to developing countries? During
the 1980s, there was essentially no net North South investment -- indeed, interest payments and
debt repayments were consistently larger than the new investment. All the action, then, has taken
place since 1990. In 1993, the peak year of emerging-markets investment so far, capital flows
from all advanced nations to all newly industrializing countries totaled about $ 100 billion.

That may sound very high, but compared with the First World economy, it isn't. Last year, the
combined GNPs of North America, Western Europe, and Japan totaled more than $ 18 trillion.
Their combined investment was more than $ 3.5 trillion; their combined capital stocks were
about $ 60 trillion. The record capital flows of 1993 diverted only about 3% of First World
investment away from domestic use and reduced the growth in the capital stock by less than
0.2%. The entire emerging-market investment boom since 1990 has reduced the advanced
world's capital stock by only about .5% from what it would otherwise have been.

How much pressure has this placed on wages in advanced countries? A reduction of the capital
stock by 1% reduces productivity by less than 1%, since capital is only one input; standard
estimates put the number at about 0.3%. A back-of-the-envelope calculation therefore suggests
that capital flows to the Third World since 1990 (and bear in mind that there was essentially no
capital flow during the 1980s) have reduced real wages in the advanced world by about 0.15% -hardly the devastation that Schwab, Delores, or the Economic Policy Institute presume.

There is another way to make the same point. Anything that draws capital away from business
investment in the advanced countries tends to reduce First World wages. But investment in the

44

Third World has become considerable only in the last few years. Meanwhile, there has been a
massive diversion of savings into a purely domestic sink: the budget deficits run up by the
United States and other countries. Since 1980, the United States alone has run up more than $ 3
trillion in federal debt, more than ten times the amount invested in emerging economies by all
advanced countries combined. The export of capital to the Third World attracts a lot of attention
because it is exotic, but the amounts are minor compared with domestic budget deficits.

At this point, some readers may object that one cannot compare the two numbers. Savings
absorbed by the federal budget deficit simply disappear; savings invested abroad create factories
that make products that then compete with ours. It seems plausible that overseas investment is
more damaging than budget deficits. But that intuition is wrong: investing in Third World
countries raises their productivity, and we've seen in the first two models that higher Third
World

productivity

per

se

is

unlikely

to

lower

First

World

living

standards.

The conventional wisdom among many policymakers and pundits is that we live in a world of
incredibly mobile capital and that such mobility changes everything. But capital isn't all that
mobile, and the capital movements we have seen so far change very little, at least for advanced
countries.

Model 4: The Distribution of Income

We seem to have concluded that growth in the Third World has almost no adverse effects on the
First World. But there is still one more issue to address: the effects of Third World growth on the
distribution of income between skilled and unskilled labor within the advanced world.

For our final model, let's add one more complication. Suppose that there are two kinds of labor,
skilled and unskilled. And suppose that the ratio of unskilled to skilled workers is much higher in
the South than in the North. In such a situation, one would expect the ratio of skilled to unskilled
wages to be lower in the North than in the South. As a result, one would expect the North to
export skill intensive goods and services - that is, employ a high ratio of skilled to unskilled labor

45

in their production, while the South exports goods whose production is intensive in unskilled
labor.

What is the effect of this trade on wages in the North? When two countries exchange skillintensive goods for labor-intensive goods, they indirectly trade skilled for unskilled labor; the
goods that the North ships to the South "embody" more skilled labor than the goods the North
receives in return. It is as if some of the North's skilled workers migrated to the South. Similarly,
the North's imports of labor-intensive products are like an indirect form of low-skill immigration.
Trade with the South in effect makes Northern skilled labor scarcer, raising the wage it can
command, while it makes unskilled labor effectively more abundant, reducing its wage.

Increased trade with the Third World, then, while it may have little effect on the overall level of
First World wages, should in principle lead to greater inequality in those wages, with a higher
premium for skill. Equally, there should be a tendency toward "factor price equalization," with
wages of low skilled workers in the North declining toward Southern levels.
What makes this conclusion worrisome is that income inequality has been rapidly increasing in
the United States and to a lesser extent in other advanced nations. Even if Third World exports
have not hurt the average level of wages in the First World, might they not be responsible for the
steep declines since the 1970s in real wages of unskilled workers in the United States and the
rising unemployment rates of European workers?
At this point, the preponderance of the evidence seems to be that factor price equalization has not
been a major element in the growing wage inequality in the United States, although the evidence
is more indirect and less secure than the evidence we brought to our earlier models. In essence,
trade with the Third World is just not that large. Since trade with low-wage countries is only a
little more than 1% of GDP, the net flows of labor embodied in that trade are fairly small
compared with the overall size of the labor force.

46

More careful research may lead to larger estimates of the effect of North-South trade on the
distribution of wages, or future growth in that trade may have larger effects than we have seen so
far. At this point, however, the available evidence does not support the view that trade with the
Third World is an important part of the wage inequality story.
Moreover, even to the extent that North-South trade may explain some of the growing inequality
of earnings, it has nothing to do with the disappointing performance of average wages. Before
1973, average compensation in the United States rose at an annual rate of more than 2%; since
then it has risen at a rate of only 0.3%. This decline is at the heart of our economic malaise, and
Third World exports have nothing to do with it.

The Real Threat

The view that competition from the Third World is a major problem for advanced countries is
questionable in theory and flatly rejected by the data. Why does this matter? Isn't this merely
academic quibbling? One answer is that those who talk about the dangers of competition with the
Third World certainly think that it matters; the European Commission presumably did not add its
comments about low-wage competition to its white paper simply to fill space. If policymakers
and intellectuals think it is important to emphasize the adverse effects of low-wage competition,
then it is at least equally important for economists and business leaders to tell them they are
wrong.

Ideas matter. According to recent newspaper reports, the United States and France have agreed to
place demands for international standards on wages and working conditions on the agenda at the
next GATT negotiations. U.S. officials will doubtless claim they have the interests of Third
World workers at heart. Developing countries are already warning, however, that such standards
are simply an effort to deny them access to world markets by preventing them from making use
of the only competitive advantage they have: abundant labor. The developing countries are right
this is protectionism in the guise of humanitarian concern.

47

Most worrisome of all is the prospect that disguised protectionism will eventually give way to
cruder, more open trade barriers. For example, Robert Kuttner has long argued that all world
trade should be run along the lines of the Multi-Fiber Agreement, which fixes market shares for
textile and apparel. In effect, he wants the cartelization off all world markets. Proposals like that
are still outside the range of serious policy discussion, but when respectable voices lend credence
to the wholly implausible idea that the Third World is responsible for the First World's problems,
they prepare the way for that kind of heavy-handed interference in world trade.

We are not talking about narrow economic issues. If the West throws up barriers to imports out
of a misguided belief that they will protect Western living standards, the effect could be to
destroy the most promising aspect of today's world economy: the beginning of widespread
economic development, of hopes for a decent living standard for hundreds of millions, even
billions, of human beings, Economic growth in the Third World is an opportunity, not a threat; it
is our fear of Third World success, not that success itself, that is the real danger to the world
economy.

The End of the Third World

When the billion plus people of China start importing the underwear that they are now exporting
then the low income category will be rapidly emptied, and in time the lower and upper middle
income categories. The Third World will end.
This is perhaps a pessimistic view of the future. Just as the low wage, labor intensive industries
became one engine of rapid development several decades ago, and Internet outsourcing has
recently become another engine, new engines of growth may develop. But even with the engines
we have now the Third World's days are numbered.

48

Conclusion
The future is, as always, uncertain. Nevertheless, a good deal of optimism is justified. The huge
and growing gap between rich and poor nations is likely to be temporary. It seems to be
shrinking now and we can hope that will continue.
There will need to be considerable adjustment in the First World. The increased prices for oil
which are a result of increased demand from China, India, and the Third World, illustrate the
basic point that we will have to share access to the world's resources. The First World will have
to meet the challenge of reinventing the technology of a rich society so that we can provide a
comfortable life style with fewer resources and less harm to the environment.
Furthermore, many First World industries will move to the Third World. Industrial production of
consumer goods will be concentrated in the Third World. The First World will pay for them with
capital goods which will enable the Third World to rapidly increase its productivity and achieve
First World status. In the process many First World workers will lose their jobs. The pain of
readjustment in the First World will be real, but relatively minor compared to terrible suffering
the Third World currently experiences.
Will First World countries become Third World countries? The history of many decades
suggests this is very unlikely. The richer First World countries with broad based industrial
economies tend to grow at about two percent a year. There are recessions where income per
person declines a percentage point or two. Growth can slow for a decade as it has in Japan, or
even stall altogether for about a decade as it did in Finland and Sweden. But as most broad based
industrial economies are several times as rich as the richest Third World country and really
serious economic decline, which is common in Third World natural resource exporters, is
unknown in broad based rich industrial countries there is little reason to fear First World nations
becoming Third World Nations. Of course oil rich nations and even a natural resource producer
like Argentina move up and down between high and middle income depending on the prices of
their exports. But the broad based industrial nations are unlikely to suffer any serious decline.
Once a First World nation always a First World nation.

49

Bibliography

The First World Will Soon Be the Only World, By Richard Bruce BA, MA, and PhC in
Economics

Third World, By Gerard Chaliand

Crook, Clive. "The Third World." The Economist, September 23, 1989

http://en.wikipedia.org/wiki/Least_Developed_Country

http://en.wikipedia.org/wiki/Developing_country#cite_note-WB-13

http://www.nationsonline.org/oneworld/third_world.htm#Poverty

Why Third World countries are poor ; Version 1.4, February 2010

World Development Report 1989, By the World Bank

http://www.acton.org/pub/religion-liberty/volume-2-number-5/multinationalcorporations-third-world-predators-o
(Multinational Corporations in the Third World, by James C. W. Ahiakpor)

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