Challenges Facing Developing Countries

Challenges Facing Developing Countries Janita Aalto Principles of Microeconomics ECO 204 Instructor Kathryn Armstrong March 28, 2011 Challenges Facing Developing Countries Developing countries, also known as third and fourth world countries; face economic challenges that first world countries do not face, on a large scale. Poverty, low literacy rates, poor investments in both human capital and domestic capital, poor nutrition and devastation to populations due to the HIVAIDS pandemic contribute to developing countries moving towards development.

The primary focus of this paper is to explore the impact the HIV/AIDS pandemic has had on Sub-Sahara African economies and to explore the challenges facing developing countries to stimulate domestic savings. The impact on the economies of some of the African countries is still not completely known. If we look at economic impacts, first we must look at the human cost HIV/AIDS is having on Africa’s economic development and ability to cope with the pandemic.

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According to an online journal, there are four variables that outline the effects on Africa’s future development: “Economic research helps to estimate the effects of HIV/AIDS on the African economy and the cost effectiveness of prevention and treatment programmes; Economic theory predicts that HIV/AIDS reduces labour supply and productivity, reduces exports, and increase imports; The pandemic has already reduced average national economic growth rates by 2-4% a year across Africa; Prevention and treatment programmes and economic measures such as targeted training in skills needed in key industries will limit the economic effects of HIV/AIDS”, (BMJ. 2002, p. 232). In examining the economic effects of HIV/AIDS, it is hard to look past the fact that over 17 million African people have lost their lives to HIV/AIDS and has 70% of all HIV/AIDS related cases in the world. These are staggering statistics. As outlined in the above journal article, the mortality rates have caused a reduced labor supply, reduced labor productivity and reduced exports and increased exports. The population of people hardest hit by the HIV/AIDS pandemic are the prime-aged adults. HIV/AIDS robs industries of both skilled workers and a generation of workers in their prime working years.

The associated illnesses and sickness as a result of HIV/AIDS can lead to high absenteeism which impacts labor productivity. The effects of a reduced labor supply and reduced labor productivity, “reduces exports, while imports of expensive healthcare goods may increase. The decline in export earnings will be severe if strategic sectors of the economy are affected. The balance of payments (between export earnings and import expenditure) will come under pressure at the same time that government budgets come under pressure. This could cause defaults on debt repayments and require economic assistance from the international community”, (BMJ. 2002, p. 233).

In a 1992 macroeconomics a study on the impact of HIV/AIDS in Africa, it was concluded that “reduced availability of skilled labour would reduce growth rates by about 50% and investment by 75%, that imports of food and other basic products would increase, and that exports of manufactured and other products would decline”. It was also estimated that by 2010, “South African’s GDP per capita would be some 8% low and consumption per capita would be about 12% lower than would have been the case without the HIV/AIDS pandemic”, (BMJ. 2002, p. 234). The pandemic will have lasting effects on the economic development on the Sub-Sahara African countries without international assistance. “An important step in limiting the economic effects of the pandemic is to develop comprehensive policies tailored to the needs of the economies of individual countries.

These policies will inevitably include the introduction of treatment and prevention programmes but may also include economic measures, such as targeted training of skills needed in key industries”, (BMJ. 2002, p. 234). One way to help stabilize the economy may be to push expensive antiretroviral drugs at “highly productive groups of socioeconomic groups in specific industries on the basis of their contribution to economic output rather than their healthcare needs”, (BMJ. 2002, p. 235). This would most likely be a controversial plan, but the strategy would help the people in those groups and buy time for skills training and development of a new work force to replace those that will either lose their health or their lives.

It would also boost the economy if industry production levels can be maintained and exports of goods can remain at a profitable pace. The pandemic is having a major effect on life expectancy, which has been dropping. “ In Zimbabwe, for example, life expectancy is 40 instead of 69. In seven countries in Sub-Saharan Africa, life expectancies are below 40 years of age”, (CHG, 2009, p. 3). Not only does this impact the work force, but impacts the children, many of whom lose not only one, but both parents, and other family members that might be able to take them in. Instead these children now become a government responsibility, as they are put into orphanages, group homes, etc. It is estimated that there are 15 million orphaned children across Africa.

Standards of living are decreasing, and countries that were once starting to make progress both socioeconomically and economically are headed backwards instead of forward. Poverty is increasing as the family breadwinners are dying or becoming incapacitated by their illnesses. If there are savings, those savings are dwindling as people use their savings just to survive. With mainly young adults dying off, the tax base is shrinking which reduces a countries ability to invest in human capital, such as education and health services, which puts pressure on government finances and reduces economic growth. Investment in education is not a priority with the belief that children will contract HIV/AIDS in adulthood. The poor education of children translates into low adult productivity a generation later. This raises important social and fiscal implications for economic policy. The first is the threat of worsening inequality. If the children left orphaned are not given the care and education enjoyed by those whose parents remain uninfected there will be increasing inequality amount the next generation of adults and the families they form”, (CHG, 2009, p. 6). Investing in human capital is one of the keys to bringing economic growth to developing countries. According to an online website, human capital is defined as “the set of skills which an employee acquires on the job, through training and experiences”, (InvestorWords. com).

An investment in human capital also includes; development of and access to, health and nutrition programs. “Recent studies suggest that 40 percent of the population of the developing nations has an annual income insufficient to provide adequate nutrition”, (Case, Fair & Oster, 2009, p. 427). Low nutrition affects health and poor health affects productivity. Low productivity levels then affect the ability to provide for one’s family, let alone provide any surplus that can be sold and the money put into savings. There are two explanations as to why capital is in such short supply in developing countries. The first is the vicious-cycle-of-poverty hypothesis.

According to our text, “the vicious-cycle-of-poverty hypothesis suggests that a poor nation must consume most of its income just to maintain its already low standard of living. Consuming most of national income implies limited savings, and this implies low levels of investment”, (Case, Fair & Oster, 2009, p. 428). Investment is needed for capital stock to grow and for income levels to rise. Without it, “poverty becomes self-perpetuating”, (Case, Fair & Oster, 2009, p. 428), and the cycle is complete. The second explanation is that there is a lack of financial incentives for citizens to save and invest, as well as a lack of financial institutions. It is common for the wealthier citizens to invest their monies in Europe or the United States instead of in their own countries.

The term for this is capital flight, which “refers to the fact that both human capital and financial capital leave developing countries in search of higher expected rates of return elsewhere or returns with less risk”, (Case, Fair & Oster, 2009, p. 428). According to an online article, “Africa is estimated to lose hundreds of billions of dollars in domestic revenues annually through capital flight”, (Africa Renewal, 2008, p. 12). In order to reverse this trend, it is imperative that the government remove the barriers that turn away wealthy citizens from investing in their own countries. Without domestic savings, investment isn’t possible. Without investment, growth isn’t possible and this cycle continues much like the vicious-cycle-of-poverty hypothesis.

What decisions do leaders of a developing country make in order to stimulate domestic savings and in turn, capital? If I were the President of a developing country, I would invest in human capital and banking reform. In investing in human capital, I would target health and nutrition programs for kids and young adults, the next generation of workers. With life expectancy rates falling, efforts must be made to reverse that trend. A much larger investment in education would be made; incentives for college kids that go to school abroad to return to their home country and work in their field for a required number of years. I would emphasize training and skill development for replacement workers in the industries hit hardest by HIV/AIDS.

In investing in banking reform, I would offer incentives to people who put their money in banks and other financial institutions. Some of the reasons African people in particular do not put money in savings accounts are; “physical distance from banking institutions, high minimum deposit and balance requirements…and the considerable documentation needed to open an account”, (Africa Renewal, 2008, p. 7). There are also a limited number of banks available and with over 60 percent of African people living in rural areas, they just don’t have physical access to banks, unless they travel a long distance. In order to convince people to put their savings in banks, interest paid on savings would need to be high and interest rates on loans low.

Somehow, people must be encouraged to place their money into savings so money will be available for future investments. “The UNCDF noted in its 2004 report that in Rwanda about half a million savings passbook accounts, with an average account size of $57, pulled almost $40 mn into circulation in 2001. “ Although this may not appear significant”, argued the UNCDF, “proper circulation of these funds into credit products could have a significant multiplier effect in the Rwandan economy”, (Africa Renewal, 2008, p. 7). Poverty, low literacy rates, poor investments in both human capital and domestic capital, poor nutrition and devastation to populations due to the HIVAIDS pandemic contribute to developing countries moving towards development.

For these countries to become economically viable, the governments must encourage citizens to invest in their own countries and not rely on international assistance. It’s time for both the citizens and the governments to step up and help themselves. References: Case, K. E. , Fair, R. C. and Oster, S. E. (2009) Principles of Microeconomics (9th ed. ) Upper Saddle River, New Jersey:  Pearson Prentice Hall. Dovi, E. (2008) Boosting domestic savings in Africa: From Africa Renewal, Vol. 22#3 (October 2008), page 12, Retrieved on March, 26, 2011, from http://www. un. org/ecosocdev/geninfo/afrec/vol22no3/223-boosting-domestic-savi ngs. tml Economic Commission for Africa, CHG: Commission on HIV/AIDS and Governance in Africa: Africa: The Socio-Economic Impact of HIV/AIDS, Index No. CHGA-B-11-003, Retrieved on March 27, 2011, from http://www. uneca. org/chga/doc/SOCIO_ECO_IMPACT. pdf InvestorWords, Retrieved on March, 20, 2011, from http://www. investorwords. com Copyright©2011 by WebFinance, Inc. ALL RIGHTS RESERVED. PubMed Central: The impact of HIV and AIDS on Africa’s economic development Simon Dixon, Scott McDonald, and Jennifer Roberts BMJ, 2002 January 26; 324(7331):232-235 PMCID:PMC1122139 ; Retrieved on March 25, 2011, from http://www. ncbi. nlm. nih. gov/pmc/articles/PMC1122139

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