Many Multi-National Companies (MNC’s) invest in developing countries to take advantage of the cheap land and labour. This investment might be argued as a positive impact on the country but the MNC’s pay very low wages and the majority of the profits leave the developing countries. The low wages received by the labour force are just about adequate for the people to survive. Little money is invested or saved so MNC’s investing in LEDC’s gives little increase in resources or development as many MNC’s were only concerned with maximising their profits and have little concern for the countries development.
Political factors can also play a major role in the development of a country as was the case for North East Brazil. During the 1960’s,70’s and 80’s the Brazilian military government was responsible for Brazil being billions of dollars into debt as they invested in many Billion dollar projects such as the HEP dams. This irrational act of spending by the Brazilian government meant that they were taking out loans to pay back the interest on their debts, as you can imagine the economy was very unstable. When Brazil realised the problem the government immediately and dramatically decreased government spending. The North East of Brazil is the most underdeveloped part of Brazil and has many characteristics of a third world county, compared to the rich South Eastern part of Brazil. As a result of the dramatic decrease in government spending the North East suffered even more. There was no money to invest in infrastructure, education or health so there was no possibility that investment would be attracted to the area and for many years this devastated the North East as unemployment soared and poverty drastically increased. This political act meant that until recently the North East had no opportunity to develop and no chance of competing globally. Similar problems have occurred in other third world countries and have also restricted the development of the countries. As shown on the diagram on page 1 if there is little investment, the economy will decline and will be less competitive in the global market.
Third world countries are often guilty of being over dependant on many primary industries. This makes the country very vulnerable to weather conditions for example drought, as a result revenue gained from primary industries often fluctuates and is unreliable. If countries are over dependant on some industries they are often vulnerable to changes in market conditions. This has been the case in North East Brazil, where the economy was over dependant on the sugar industry and could have created a lot more revenue if it had changed to producing similar products, which had the greatest demand. Many LEDC’s are dependant on primary industry. With the introduction of genetically modified crops and enormous pig farms in Europe and the USA, LEDC’s find it very difficult to compete in the global market as they cannot compete with products being mass produced by more advanced companies in developed countries.
Due to the lack of technology available in LEDC’s it is very hard for companies to compete on the global scale as previously mentioned. MEDC’s develop the best technology for instance genetically modified crops, with this technology, for example, a UK farming company, with better technology can produce more crops on the same area of land than an Bangladeshi farmer. This increase production by the UK farmer means their costs are lower more than the Bangladeshi farmer so demand for UK crops will increase and demand for Bangladesh crops will decrease as consumers will switch to the cheaper substitute. This will result in less Bangladesh crops being bought, therefore making the Bangladeshi farmers less competitive in the global economy.
UK crops Indian crops
Price Price
Quantity Quantity
It is not all ‘doom and gloom’ however for developing countries which are trying to compete globally. There are a number of policies, which can be used to promote development and to increase the countries competitiveness on a global scale.
Increasing agricultural productivity- This policy has often been overlooked in the past because of the income inelastic demand for food and the volatility of supply. However, increasing productivity in agriculture, as part of a development strategy, can stimulate demand for manufactured products like tractors. With this new technology farmers will be able to increase their yields as they become more productive and as their costs are reduced they will become more competitive. A firms costs will fall as they become more productive as they spread their overheads over a larger volume of output, resulting in reduced unit costs.
Export-orientated industrialisation- Involves an outward orientation of development, opening up the country to international trade by removing trade barriers. The thinking is that the increased competition from industrial countries will force the developing country’s firms to become more efficient. The NIC’s (Newly industrialised country) successfully followed this approach from the 1970’s. However they built up their countries behind tariff walls. Personally I think this policy may not have a significant impact on some developing economies as in many LEDC’s there is an unequal distribution of wealth. I feel that this policy will make firms in urban areas more efficient, which, if successful will increase revenue which may stay in the urban areas and may not reach the most deprived parts of the country, which are usually in rural areas. Another reason why I feel this policy may fail is that many firms in developing countries are foreign firms taking advantage from the cheap land and labour so the majority of the increased profits will be leaving the country.
Import-substituting industrialisation – refers to the strategy that NIC’s were pursuing in the 1950’s and 1960’s. This strategy involves protecting infant industries by means of tariffs until they have built up a comparative advantage. When firms have become established the countries imports are gradually replaced by domestically produced products and a more diversified industrial structure is built up. I feel that this policy is far more effective than the Export-orientated industrialisation as it encourages domestic firms to establish and they are protected until they can successfully compete on a global scale. I feel that this policy, if successful will create less unemployment as more domestic firms will develop which will demand labour. If domestic firms are competing successfully on a global scale and unemployment falls I feel that investment will significantly increase which will greatly benefit the economy.
Even though Multi-national companies often take advantage of the cheap resources in developing countries they can also bring a lot of benefits to the country. Foreign firms often bring in up-to-date technology and modern management techniques, which indigenous firms can copy. They also provide employment, train domestic workers, contribute to the countries output and exports and may improve the countries infrastructure. A risk involved however with attracting foreign firms is that they may out-compete domestic firms and they may go out of business.
Other problems with foreign firms moving into a county are that multinational firms are often capital intensive and as already mentioned pay low wages so there may not be a significant amount of jobs created and workers may be paid poorly. MNC’s often deplete natural resources and create pollution, for example the Aluminium factories in Brazil use the majority of the electricity produced by the Hydro Electric dams and have caused great pollution , which has affected local residents and wildlife. They may contribute to economic growth but not to sustainable economic development.
Developing the tourism market- Tourism is the fastest growing industry in the world. It also benefits from having high high-income elasticity of demand. However, tourism tends to create low income and low-skilled jobs. Tourism has been successful in underdeveloped areas for example Kenya and North East Brazil. As consumers are now looking for more exotic, less ‘built up’ tourist destinations demand for safari holidays, for example has significantly increased. Tourism can start off a positive multiplier effect as many indirect jobs are created by the holiday makers e.g. a firm will be needed to build fences for wild life sanctions. Tourism can create a lot of investment for developing areas and can boost development in the area. Tourism also successfully helps infrastructure to improve in the area which is likely to attract investment. One drawback of this policy is that only certain parts of a country attract tourists e.g. the coast, as a result a lot of the investment remains in the tourist areas and does not reach the most deprived parts of the country. Tourism produces negative externalities such as it can create pollution and can damage the environment.
Population control- A high birth rate, which is commonly the case in developing countries, results in a high dependency ratio (i.e. a high proportion of non-workers dependant on the labour force). Not only do the children have to be supported but, most commonly the mothers for the time they are raising their children on a full time basis. Policies to reduce birth rate such as better education on family planning, increased contraception availability etc. have not been entirely successful as they frequently come under opposition on the grounds of religion and culture. When countries experience economic development there is usually a time lag before population growth slows. In the short run population may accelerate as infant mortality falls due to improved health care. It takes some time for people to adjust the number of children they have to take into account that more of them will survive. I feel that reducing birth rates is essential if an economy is to significantly develop as the youth dependency ratio decreases. The main problem with reducing birth rates is that it usually occurs naturally but takes a significant amount of time as described in the demographic transition model as shown on the next page.
Borrowing from abroad – A developing country may borrow from industrial countries in order, for example, to spend on investment, both on capital goods and human capital. It may look to foreign banks because the supply of domestic funds is low due to low savings. If the money borrowed does result in the development of new industries and increases in productivity, sufficient income may be generated to repay the interest on the loans. However, there is a risk that some of the money borrowed may be used for non-productive purposes such as military programmes as was the case in Brazil, some projects may prove to be unprofitable and the interest rates rise. This policy can be a successful method of increasing development if the strategies are planned correctly. If money is spent unwisely as was the case in Brazil and Mexico problems can occur which will devastate the economies and will stunt development.
Applying for foreign aid – can assist development if it is used in high productive projects which take into account the resource endowment of the country. Untied aid is thought to be more beneficial than tied aid. The latter requires the recipient to buy goods and services from the donor country. The World bank and IMF (International Monetary Fund) provide loans to developing countries designed to improve their infrastructure, education and health services, restructure the economy and cope with aggregate supply and demand shocks. I feel that this policy can once again either greatly benefit a country if it is used wisely or it can create even more problems for the economy.
To conclude I feel that it is very difficult for developing countries to compete globally with developed countries as they are at a disadvantage in many respects. I feel that the best way to increase the competitiveness of developing countries is to increase the development in the countries and to increase investment and this often requires external assistance. I feel that developing countries can overcome the disadvantages they face by successfully planning and using some of the policies mentioned above. The third world should not be alienated but welcomed into the global market, and only then will they not feel so daunted by the prospect of competing with the superpowers of the industrial world.
