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    Developing Countries
    Developing Countries
    Developing Countries
    Ebook449 pages6 hours

    Developing Countries

    By Alan S. Gutterman

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    There is no universally accepted definition of a "developing country"; however, it is acknowledged that almost two-thirds of the countries in the world are significantly challenged in their ability to provide a basic standard of living for their citizens and participate competitively in the global economy.  Many of the developing countries are highly industrialized and have become significant players in world trade (e.g., Brazil, Russia, India and China, which are referred to generally as the BRIC emerging markets).  On the other hand, the so-called "less developed countries", or "LDCs", are truly poor and lag significantly behind most of the other countries in the world.  There is also substantial diversity among the developed countries including very different levels and processes of development.  The circumstances in those countries are always rapidly changing and the goal of this book is to provide readers with an introduction to the prospects and challenges of conducting business in developing countries, and the important role of the state with respect to development in those countries, and then continue on with a series of chapters dealing with entrepreneurship, leadership and management in developing countries and operational issues and activities in those countries including organizational culture, strategic planning, product development, finance, human resources management and internationalization.

    LanguageEnglish
    PublisherSustainable Entrepreneurship Project
    Release dateMay 5, 2019
    ISBN9781386520733
    Developing Countries
    Author

    Alan S. Gutterman

    This book was written by Alan S. Gutterman, whose prolific output of practical guidance for legal and financial professionals, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace.  His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business.  Alan has also authored or edited over 80 books on sustainable entrepreneurship, leadership and management, business transactions, international business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Oxford, Quorum, ABA Press, Aspen, Euromoney, Business Expert Press, Harvard Business Publishing and BNA.  Alan has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions and strategic business alliances, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.  He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital and law and economic development,  He has also launched and oversees projects relating to sustainable entrepreneurship and ageism.  He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge.  For more information about Alan and his activities, please contact him directly at alangutterman@gmail.com, follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.

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      Developing Countries - Alan S. Gutterman

      1

      Developing Countries: Prospects and Challenges

      §1:1 INTRODUCTION

      While, as discussed elsewhere in this chapter, there is no universally accepted definition of a developing country it is acknowledged that almost two-thirds of the countries in the world are significantly challenged in their ability to provide a basic standard of living for their citizens and participate competitively in the global economy.  It is common to distinguish between developed, or advanced, countries and developing countries by arranging all of the countries by their real income, from highest to lowest, and then drawing a dividing line that places those countries above the line into the advanced category and those below the line into the developing category.  When this method is used the group referred to as developed typically includes the United States and Canada in North America, the countries in Western Europe and Australia, Japan, Israel and New Zealand.  Developing countries can generally be found in Africa, Asia, Latin America and the Middle East; however, there are clear differences among countries that remain classified as developing. For example, many of the developing countries are highly industrialized and have become significant players in world trade (e.g., Brazil, Russia, India and China, which are referred to generally as the BRIC emerging markets).  On the other hand, the so-called less developed countries, or LDCs, are truly poor and lag significantly behind most of the other countries in the world.  From a size perspective the developing world includes China and India at one end to small and sparsely populated countries such as Samoa and St. Lucia at the other perspective.  Relatively wealthy and prosperous countries such as Taiwan also share developing status in many measurements with extremely poor countries such as Haiti.

      Austin prepared a summary comparison of developing and developed countries based on a list of key environmental factors—natural resources, labor, capital and infrastructure—and made the following general observations of conditions as of the last 1980s[1]: importance of natural resources (high in developing countries and low in developed countries); availability of natural resources (underdeveloped in developing countries and high in developed countries); availability of skilled human capital (scarce in developed countries and high in developed countries); percentage of workforce classified as unskilled, based on percentage of workforce working in agricultural sector (high in developing countries and very low in developed countries); per capita income levels (much higher in developed countries)[2]; savings rates as a percentage of GDP (lowest among low-income countries and highest among middle-income countries); income skewedness (medium among low-income countries, high among middle-income countries and low among high-income countries); financial institutions (weak among low-income countries and strong among high-income countries); capital flight (high among low-income countries and low among high-income countries which actually attract capital inflows); trade deficits (medium among low-income countries, high among middle-income countries and low among high-income countries); commodity export line (narrow among developing countries and broad among developed countries); physical infrastructure (weak among developing countries and strong among developed countries); information availability (low among developing countries and high among developed countries); technological levels (low among developing countries and high among developed countries); industry structures (dualistic among developing countries and unitary among developed countries) and technology flows (developing countries are recipients and developed countries are suppliers).

      A list of common characteristics of developing countries should not lead to neglect of the substantial diversity among those countries.  One finds very different levels and processes of development among developing countries and circumstances in those countries are always rapidly changing.  While all of the countries included in the developing category have per capita income levels substantially lower than in the US, Japan and other industrialized countries there are vast and important gaps in income levels between upper middle-income and low-income countries and income levels in developing countries must be carefully adjusted to take into account different local costs of basic living items such as food and shelter.  The size of the national economies among developing countries also differ substantially and size impacts issues such as the ability to achieve economies of scale, vulnerability to economic shocks and the need for firms to rely on export-based strategies due to limited local demand.  Finally, developing countries can be distinguished by other factors such as literacy, health, demographic profile, access to natural resources and level of industrialization.

      §1:2 Developmental economics

      While the study of development is multi-disciplinary it is fair to say that a good deal of the initial interest and research in the area comes from the field of developmental economics that emerged after World War II as a number of new independent countries were created with the erosion of colonialism.  Most of these new countries were quite poor and started their lives far behind the industrialized countries and the interest of developmental economists lied in studying the differences between the rich and poor, differences among the poorer countries and, most importantly, the path that those countries who were coming late to the party should follow in order to catch up with those that had gone before them.  Initially the focus was on increasing per capita real income in the poorest countries; however, as time went by it became clear that development was more than just increasing income and included elements that touched all aspects of the human conditions in those countries such as health, literacy and educational opportunities, physical infrastructure and a political and social environment that provided residents with choices and opportunities to improve their standard of living.[3]

      §1:3 Role of developing countries in the global economy

      While economic conditions in many developing countries are quite difficult, as a group developing countries play a number of significant roles in the global economy and in the worldwide markets in which all countries are active.  For example, a large majority of the world’s potential consumers live in developing countries and their share promises to continue to increase based on projected population growth around the world.  Obviously, since income levels in developing countries are much lower than in the industrialized world the effective consumer demand in developing countries as well as their share of the global economic pie is proportionally lower; however, growth rates in developing countries have been exceeding those of developed countries and rising incomes in developing countries have made them prime targets for exports from the US, Western Europe and Japan.  Moreover, it is inevitable that developing countries actively participate in global trading markets as buyers given that they lack local sources for key items such as food, machinery, manufactured goods, fuels, chemicals and other raw materials.  Developing countries are also important suppliers to countries in the industrialized world and countries like the US have long relied on developing countries for imports of fuel, agricultural products and raw materials.  In recent years, imports from developing, albeit large and rapidly industrialized countries in Asia, have had a significant impact on US and European domestic markets as firms from developing countries have risen to become global challengers and competitors in sophisticated, technology-based manufacturing industries such as automobiles.  Finally, developing countries have been a significant factor in global capital markets for decades—first as capital users and beneficiaries of large amounts of bank lending, official assistance from international aid organizations such as the World Bank and direct private investment, and then as investors in their own rights (e.g., the large amount of US government debt instruments held by the Chinese and direct investments by foreign firms in the US to establish and grow local manufacturing and sales activities).[4]

      In addition to their roles as buyers, suppliers, competitors and capital users, developing countries are linked to other countries, and thus into the global economy, in several other ways.  For example, many developing countries have special economic links to one or more industrialized countries due to geographic proximity (e.g., Mexico and the US) or mutual interest in products such as oil or other relatively rare natural resources.  In fact, economic linkages have become increasingly important in both the developed and developing worlds over the last few decades as regional trading blocs have emerged and expanded.  Linkages among countries based on political, cultural and religious considerations are also common and countries located in close physical proximity inevitably experience movement of workers across borders that can have both positive and negative effects.[5]  Finally, developing countries participate in global discussions on key issues through their membership in multilateral organizations and agreement such as the United Nations and the World Trade Organization.

      §1:4 Critical issues confronting developing countries

      Economists, most from the US and other Western countries, have offered a number of explanations for why developing countries are poor, including lack of infrastructure, lack of skills, cultural practices, insufficient trade with the West and lack of incentives.  Each of these topics is discussed in a little more detail below:

      Lack of infrastructure: Many developing countries have been unable to accumulate the capital necessary for investing in improvements in their infrastructure which will, in turn increase the productivity of both labor and capital inputs and maintain the health of the people by providing clean water and suitable housing.  When infrastructure investments are made they tend to occur in urban areas; however, if creation of a highway system to move people and goods from rural areas to the cities is ignored this leads to economic and social problems.

      Lack of skills: When developing countries remain dependent on agriculture and industries that do not require skill labor they fails to develop the pool of skilled workers necessary to transition to a modern industrialized economy.  To the extent that a developing country has skilled workers they tend to live and work in concentrated, urban areas, which makes it difficult to transfer those skills to workers living in rural areas without access to the cities due to the infrastructure problems referred to above.

      Cultural practices:  The impact of societal culture on business and economic activities has been studied; however, it should be noted that some economists have criticized people living in developing countries as lazy and lacking motivation and have also expressed concerns that certain culturally-based labor practices, such as extended vacations in many European countries, have impeded development.

      Insufficient trade with the West:  Many economists have criticized developing countries for what they perceive as a failure by those countries to take proper advantage of trade opportunities with the developed countries in the West.  These economists are among those who strongly advocate export-oriented industrial policies that they believe will lead first to higher wages in the export sectors and eventually to a trade surplus that can be used to sustain the engine of growth through the development of infrastructure and investment in new industrial sectors.  Free trade strategies have another benefit to developing countries: they allow those countries to gain access to foreign capital without the dependence that occurs when capital comes in the form of aid.

      Lack of incentives: The failure of developing countries to create, or permit, extensive private ownership of property and other resources necessary for entrepreneurial activities reduces the incentives of workers to seek higher income levels.  Those people who are employed generally have little incentive to work any harder than the minimum since their pay is not tied to the quality and productivity of their work.

      Economists have identified several trade characteristics of developing countries.  For example, developing countries tend to be highly dependent on the developed, or advanced, countries in terms of the volume of exports and access to new technologies.  Trade among developing countries is relatively small and developing countries lack the capital and technology to develop and produce high-end manufactured products that can be sold to developed countries and must rely on exports of primary products such as agricultural goods, raw materials and fuels.  In those cases where developing countries are able to export manufactured goods, those goods, such as textiles, tend to be labor intensive with a low absolute value.  Another crucial trade issue in many developing countries is over-reliance on a single major export product.[6]

      §1:5 Economic prospects for developing countries

      In early 2012 the UN continued to express concerns about the slow recovery from the global financial crisis and the possibility that the global economy could suffer another major downturn.[7]  If such a downturn were to occur, the impact on income growth in developing countries, which had rebounded strongly from the global recession, would be substantial.  Evidence of potential problems already surfaced in the fall of 2011 when financial turmoil in both the US and Europe triggered sudden withdrawals of capital in several major developing countries and pressures on the currencies of those countries.  Given the problems in the developed countries, it is not surprising to hear that the UN projected that the developing countries and economies in transition would continue to stoke the engine of the world economy in 2012 and 2013 and the UN predictions for growth in those countries have been set at 5.6% in 2012 and 5.9% in 2013 in its baseline outlook.  While these numbers are indeed impressive in comparison to most developed countries, they are well below the 7.5% growth actually achieved in 2010 and led by the larger emerging economies in Asia and Latin America (i.e., Brazil, China and India).  The UN noted that a slowdown was already occurring among developing countries and economies in transition from the second quarter of 2011 as the pace of the annual growth rate in those countries dropped to 5.9% due to in part, . . . macroeconomic policy tightening in attempts to curb emerging asset price bubbles and accelerating inflation, which in turn were fanned by high capital inflows and rising global commodity prices.[8]  Another complicating factor was, of course, the weaker external demand from developed countries due to the economic problems—slow growth and high unemployment—in those countries.[9]

      The UN predicted that growth performance among the least developed countries, or LDCs, would continue to be distinguishable from the rest of the world.  LDCs performed relatively well during the turbulence of 2010 and 2011 with growth rates of 5.6% and 4.9%, respectively, in those years and the UN forecasted that GDP growth for those countries in 2012 would actually increase slightly to 5.9%.  The UN explained that [d]espite the high vulnerability of most LDCs to commodity price shocks, they tend to be less exposed to financial shocks, and mild growth in official development assistance (ODA) has provided them with a cushion against the global slowdown.  However, while growth is expected to occur among the LDCs on a per capita income basis the projected increase of between 2% and 2.5% in 2011-2012 is well below the annual average of 5% experienced in 2004-2007 and there remains substantial variation in performance among countries in this category.  For example, the UN noted that Bangladesh and several of the LDCs in East Africa are showing strong growth, while adverse weather conditions and/or fragile political and security situations continue to plague economies in the Horn of Africa and in parts of South and Western Asia.[10]

      The UN noted that while employment recovery has been much stronger in developing countries than in developed countries, developing countries still have large numbers of workers that are underemployed, poorly paid, have vulnerable job conditions or lack access to any form of social security[11] and must cope with high unemployment rates in urban areas and among younger workers who make up a large proportion of the work force in developing countries.  Inflation is also a great problem for developing countries than for developed countries and the UN noted that governments in developing countries have attempted to combat inflation rates that exceeded policy target by using a variety of measures such as tightening monetary policy, increasing subsidies on food and oil and providing incentives to domestic production. The UN also pointed out that going forward developing countries must be prepared to cope with several significant trends in the global economic environment such as increased volatility in private capital flows—private capital flows to developing countries remain well below levels enjoyed prior to the commencement of the current global economic crisis[12]; continued volatility in international prices of oil and other primary commodities; and moderating growth in the level of world trade.[13]  These challenged are significant for developing countries that need to increase investment in order to sustain higher growth rates and accelerate reduction of poverty and creation of sustainable production activities.  In fact, development has become a social and political imperative in many countries, particularly in the Arab world, where frustration are rising about the lack of a meaningful future.

      While the UN outlook above focused primarily on LDCs, another ongoing and interesting development is the extraordinarily rapid progress that firms from emerging companies have made in challenging traditional industry leaders from the West.  An article that appeared in The Economist in January 2011 cited the findings of the latest annual report published by the Boston Consulting Group (BCG) on the rising stars of the developing world that the number and size of cross-border acquisitions by firms in emerging economies had surged in 2010.[14]  The BCG report also included an analysis of 100 leading firms from emerging economies, over 70 of which came from one of the BRICs[15], and noted that the revenues for the group had grown at an average annual rate of 18% over the last decade (three times faster than non-financial firms in the Standard & Poors 500) while also achieving profit margins of 18% (6% high than non-financial firms in the Standard & Poors 500).  BCG attributed the success of these firms to several factors including their ability to resolve three trade-offs that are usually associated with corporate growth: of volume against margin; rapid expansion against low leverage (debt); and growth against dividends.[16] However, while recognizing the impressive performance described by the BCG report, The Economist sounded a cautionary note and detailed the following challenges that the firms it referred to as the tiger cubs will need to overcome in the years ahead to really catch up with their entrenched rivals from the US, Europe and other parts of the developed world:

      The recent growth in China and other emerging markets—as well as much of the continuing growth that is projected for the future—is tied to heavy investment on infrastructure that inures to the benefit of low-cost construction and heavy-equipment companies in those countries.  Obviously, roads and bridges are being built at record pace in China, India and other emerging markets and Chinese firms are even winning large contracts in the US; however, if capital for these projects becomes scarce or too expensive the gold rush may come tumbling down.

      Firms based in emerging markets tend to rely on the conglomerate model as their preferred form of organizational structure and while this has been successful up until now many question whether the model is sustainable from an efficiency perspective.  If Chinese and Indian firms wish to continue using this model they will likely need to borrow and implement new technology and management techniques that have been deployed by old multinationals in the West such as General Electric.  A related challenge for these growing challengers will be coping with more and more operations taking place far away from their headquarters office.

      It remains to be seen whether firms from emerging markets, which have often relied on the acquisition of established brands from the developed world (e.g., Lenovo/IBM PCs), can build their own global brands that will be accepted and valued by consumers in the US and Europe.  Simply put, firms based in Brazil, China or India probably have their work cut out for them in exporting products that are favorites in their local markets to Western countries and their success in doing so will determine just how well they will do in terms of revenue growth and associated profit margins.

      There are certain industries and market sectors where firms from emerging markets have been content to follow a rapid revenue growth strategy while sacrificing margins in order to achieve market share.  For example, low-margin generic drugs are common offerings of pharmaceutical firms from the developing world and the same holds true with respect to consumer goods in many instances as firms from emerging markets lead with low-cost products.  The result so far is that established global brands continue to dominate in niche markets with higher profit margins.

      As they push to build a larger presence in Western markets firms in emerging markets must also cover their rear guard and fend off the advances of global multinationals from the West into emerging markets.  For example, the Economist noted that the Times of India had reported that IBM has become the second largest private-sector employer in India.

      One particularly interesting aspect of the report was the decision of these challengers from developing countries to rely on strategic alliances with other emerging-market firms rather than multinational companies headquartered in the West.  As noted in the article, these partnerships allow the participants to share knowledge, penetrate new markets and spread the risk of especially hair-curling investments.  The financial rewards can be huge since partnering in emerging markets today means tapping into the dynamic growth of countries such as Brazil, China and India.  Assuming that the alliances are effective, more and more firms will soon be able to negotiate and collaborate with large Western countries from what the article described as a position of strength.

      Others have studied the use and impact of strategic alliances in developing markets including alliances between local partners.  An article on The Changing Face of Strategic Alliances in Latin America written in 2002 and appearing in Strategy + Business noted many of the large multinational companies in Latin America grew through cross-border alliances and acquisitions with local firms to increase market share, gain access to synergistic assets and other resources and create a portfolio of products and markets that will be perceived as having value to foreign investors who might then be willing to provide new capital.  Alliance activities among emerging markets firms also allows them to build a company that is seen a regional leader and thus achieve greater leverage when dealing with larger multinationals from the industrialized world.  Finally, companies in emerging countries that are involved in alliances with partners in several other countries are perceived as less risky by investors who are otherwise concerned about having all of their "eggs’ in a single country basket that could be tipped over without warning by currency issues or political instability.[17]

      §1:6 Theories of economic development

      Martinez commented that [e]conomic development occurs with the reduction and elimination of poverty, inequality and unemployment within a growing economy.[18]  He went on to discuss the role of economic development theories and models and argued that such theories and models sought to explain and predict how economies develop (or fail to develop) over time; how barriers to growth can be identified and overcome; and the appropriate role of government—the state—in launching and sustaining economic growth through the use of appropriate development policies.  It is important to remember that theories of economic development are no more than generalizations and the applicability of a particular theory to a given country depends on factors unique to that country including the country’s economic conditions, societal culture and historical development. 

      The sections that follow briefly describe some of the most-commonly identified and discussed theories of economic development.  There are four approaches among these theories: linear-stages-of-growth models, which were popular in the 1950s and 1960s and based on the assumption that developing countries could learn from the path taken by developing countries as they transitions from poor agrarian societies to modern, wealthy industrial powers; structural-change models, which were popular in the 1970s and emphasized the transformation within developing countries from economies reliant on traditional agricultural activities to modern, urbanized and industrially diverse manufacturing and service economies; international dependence models, which were also popular in the 1970s and focused on the disadvantages of developing countries with respect to international power relationships; and market fundamentalism, which preached an expanded role for free markets rather than reliance on ineffective governmental planning and intervention.  There is certainly no agreement that one theory is better than another and, at best, the preferred approach is to pick and choose from the various theories to gain insight into the broad topic of economic development.  For example, while Rostow’s model is useful in establish a model of the path that a developing country might take toward economic growth the Harrod-Domar models teaches the importance of savings as an accelerator down a path of economic development.

      §1:7 —Rostow’s Linear Stages model

      Rostow’s linear stages model assumes that all countries go through a linear progression of development that includes several different stages.  It is assumed that advanced countries have moved well beyond the take off stage while developing countries are still grappling with the challenges of the traditional or pre-conditions stages yet are eager to modernize and join developing countries at much higher levels of economic growth.  Mobilization of investment, both domestic and foreign, is key to progress and Rostow’s model does not dismiss the possibility that some degree of governmental invention may be needed even though such actions are an anathema to free trade advocates.

      The first stage is referred to as traditional society and is characterized by subsistence economy activity (i.e., in general, output is consumed by producers rather than traded; however, some level of trade does occur through bartering).  At this stage agriculture is the most important industry and whatever production occurs is highly labor-intensive given that there are limitations on the amount of available capital and the use of technology.  In fact, some traditional societies rely on pre-scientific understanding of gadgets and believe that procurement of goods is based more on spiritual conditions than on deliberative productive activities of human beings.

      The second stage is referred to as the transitional stage during which surpluses for trading begin to emerge along with a growing and maturing transportation infrastructure.  Savings and investment grow during this stage, supported by the establishment of banks and currency, and prospective entrepreneurs begin to emerge as the society readies itself for take off during the next stage.  While it may take anywhere from ten to 50 years for take off to begin countries begin to invest in secular education and routine manufacturing activities.

      The third stage is referred to as the take off stage and features increased reliance on industrial activities and a migration of workers from agricultural activities to manufacturing.  In general, growth activities are concentration in just a few regions around the country and manufacturing focuses on one or two industrial areas.  As industrial activities increase new political and social institutions also emerge to support the transition and norms of economic growth replace the traditions of the past and become well established.

      The fourth stage is referred to as the drive to ‘maturity’ and features more diverse growth based more and more on technological innovation.  Those sectors of the economy that were most important during the take off stage begin to mature and level off in terms of growth and no sectors take their place as the most dynamic engines of economic development.  Diversity is thought to be the key to increasing levels of employment across the entire economy and also reducing poverty and raising standards of living.

      The fifth, and final, stage is referred to as age of high mass consumption and is the stage occupied by many developed countries in the West which features consumer focus on durable goods and an inability to recall the challenges of mere subsidence that confronted the citizenry during the previous stages.  Countries in this stage can devote time, energy and resources to decisions regarding military and security, equality and welfare and the level of emphasis on developing even greater luxuries for members of their upper class.  Characteristics of this stage of development can be seen among several of the developing countries today where incomes have grown to the point where a middle class has arisen and opportunities have opened for retail businesses and the accumulation of private capital that can be used to form new local businesses and pursue outbound foreign investment opportunities.

      In order for countries to succeed and progress in the Rostow model there must be a substantial investment in capital equipment during the transitional stage, which means that the conditions must be right for encouraging the necessary levels of savings and capital formation.  These conditions for development often raise concerns since development can staff during the take off stage unless and until the domestic savings rate reaches the minimum level necessary to support investment.  It has been estimated, for example, that the savings rates as a percentage of GDP should be at least 15% to 20% by the take off stage and if this level has not been reached countries must reach out to the international community for loans and other aid in order to plug the so-called savings gap.

      A variety of limitations have been found in Rostow’s model.  For example, the certain determinants of a country’s stage of development are seen in broader terms, such as the quality and quantiy of resources, access to technologies and legal and political infrastructures.  It has also been argued that while Rostow’s model does an adequate job of explaining the development experience in Western economies it has not been terribly helpful in explaining the progress and challenges in other countries with different cultures and traditions.  In fact, Rostow’s model has been particularly criticized for what is seen as a strong bias toward the Western model of modernization, including free markets rather than controlled markets.  The utility and universality of a linear model of progress has also been questioned, since countries such as Russia often make false starts along the way.  Finally, the Rostow model has been dismissed as applying only to countries with a large population (Japan), a large land mass (Argentina) or the good fortune to have access to natural resources valued in the global marketplace (coal in Northern European countries).

      §1:8 —Harrod-Domar model

      The Harrod-Domar model, developed in the 1930s, is prescriptive and argues that in order for countries to develop that must generate funds through increasing their level of savings and savings ratio and then allow those funds to be borrowed by entrepreneurs for investment to enhance productivity and overall economic growth.  The fundamental premise of this model is that more investment, in the form of additions to the capital stock, leads to more growth and the model also suggests that there is no particular reason that growth should be balanced.  When it first emerged the Harrod-Domar model was primarily intended as a theory for explaining and analyzing business cycles; however, it was later adapted to serve as an alternative model for explaining economic development.  The key concepts of the model are as follows: economic growth is a function of the amount of labor and capital; since developing countries have an abundance of labor they need to overcome a relative lack of physical capital in order to pursue and achieve economic growth; as more physical capital becomes available through savings the country is then in a position to engage in the productive activities necessary for economic growth; and as productivity increases net investment also goes up leading to more producer goods, capital appreciation, higher output and income and , hopefully, higher levels of savings that can be committed to even more entrepreneurial activities.

      It is clear that the necessary and appropriate policies for achieving economic growth in the manner predicted by the Harrod-Domar model must include encouragement of domestic savings and technological advances that can lower the capital-output ratio and many of the neoclassical models of growth described elsewhere in this chapter focus on

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