International Trade and Economics of Less: International Economic Relations

International Economic Relations There is great disparity in levels of per capita income among nations in the world. Real per capita output is a measure of real output per person in a nation. It is calculated simply by dividing real GNP in a nation by the nation's population. Output per capita in the United States and other industrial nations generally ranges well over $10,000. However, in less developed countries (LDCs), real GNP per capita is generally much less than $1,000 per year. In fact, in some very poor nations in Africa and Asia, output per capita is less than $200 per year! The incredible poverty and disparity in levels of average well-being among nations, measured by output per capita, is a source of great concern to many caring people. The problem is all the more serious because about 75 percent of the world population lives in LDCs. Unfortunately, there is no simple solution to raising living standards in less developed countries. The problems of these nations must be looked at within the context of international trade and economic relations. Causes of Low Per Capita Output in Less Developed Countries The problems of each particular nation with low income per capita are unique. In general, in LDCs, large portions of the population are engaged in agricultural pursuits and use older methods of farming. Despite the high input of labor in agriculture, many of these nations barely manage to produce enough food to feed their populations. Life expectancy is low, living conditions are often miserable, and people have a standard of material well-being that barely allows them to survive. However, in most LDCs, population growth is much higher than it is in industrialized nations. A number of basic causes of relatively low per capita output can be identified: 1. Low rates of saving and capital accumulation. The key to economic growth is accumulation of capital such as roads, structures, bridges, equipment, and vehicles. To accumulate capital requires saving. Less developed countries are so poor that their saving is close to zero. To obtain capital these nations often must borrow from more industrialized nations. Per capita incomes are low in LDCs because workers have little capital equipment to work with. As a result, their productivity is low and therefore output per capita is low. This prevents them from saving, a vicious cycle that often requires assistance from other nations to break. Assistance can come from foreign governments or from direct investment of private corporations. For example, if a U.S. tire manufacturer provides funds to build its own plant in an African nation, capital will flow into that nation and contribute to higher incomes. 2. Poorly skilled and educated workers. Human capital is as important as physical capital for the productivity of workers. In less developed countries, workers are often illiterate and have little training. Low productivity is caused by a lack of human capital as well as physical capital. 3. Lagging technological know-how. Production methods in less developed nations are often old-fashioned. The use of dated technology is related to the problem of lack of capital and a poorly informed and trained work force. The problem is particularly acute in agriculture where the use of more modern cultivation methods can result in enormous gains in productivity that will free labor to be used in industrial activities and generate a surplus of food that could be exported. 4. High population growth and unemployment. Medical advances in many poor nations have reduced the death rate while the birth rate remains high. This contributes to population growth that often is as much as 10 times the rate in typical industrialized nations. The average age of the population tends to be low in poor nations, which contributes to a higher rate of natural unemployment. Much of the unemployment in less developed nations is disguised in the sense that many workers have marginal products close to zero. Customs and other traditions provide work with little social value to many people. For example, many government jobs could be dispensed with entirely and no one would be made worse off except the worker who loses a salary. Similarly, on many farms, four workers do the job of one worker. Spreading the work out over more workers than necessary disguises the fact that many workers have zero marginal products. 5. Political instability and government policies that discourage production. Many LDCs are in the throes of social upheaval. Political insurgence and guerrilla warfare are not uncommon in many nations of Africa, Asia, and Central and South America. Governments are sometimes corrupt, and international aid payments often enrich a few at the expense of many. Sometimes governments pursue policies that help in the short run at the expense of making long-run development slower. Price control policies may keep food prices and prices of other basic goods low, but they inevitably destroy incentives for farmers to produce and innovate. Governments of LDCs often support their own currencies with price controls that overvalue the currency relative to its equilibrium value on international markets. This decreases demand for the nation's exports and makes imports appear to be cheap. This too discourages local business-people and farmers from innovating to increase productivity. International Trade and Less Developed Countries Less developed nations are often dependent on trade with foreign nations to obtain capital and the technical know-how that is necessary for them to increase productivity and living standards. To pay for foreign capital in foreign currency is impossible unless the less developed nations export more. Increased exports of either agricultural or industrial products from these nations are likely to affect world prices and possibly make workers in industrialized nations worse off. Competition from less developed nations will increase if their economies begin to take off. At the same time, growing per capita incomes in these nations will provide broader markets for the products of the United States and other industrialized nations. There is great risk, however, that short-sighted protectionist policies in the advanced nations will prevent export growth in the poorer nations. The United States, the Soviet Union, and other advanced nations often make gifts of direct aid and technical assistance to less developed nations. There are, of course, often political overtones to such gifts with hints of quid pro quo. The politicizing of foreign aid is a fact of life. The World Bank, an international organization of over 140 nations, also provides loans at reduced interest rates to help developing nations acquire capital. Such gifts and loans on favorable terms can help these nations acquire the capital necessary to enable them to increase per capita output.