7.3.5 Foreign Direct Investment
Too many sectors of Ethiopia’s economy are closed to foreign investment. Although international corporations do not normally operate in some of these sectors, the restrictions project a generally negative image to potential foreign investors in Ethiopia. In some of the closed sectors, in particular air transport, travel operations, and financial services, the financial and trading skills of foreign investors would likely be a positive influence on domestic investors and stimulate domestic investment activity. In addition, the Government should review and reduce or eliminate its current minimum investment requirements. Moreover, although the Ethiopia Investment Agency (EIA) has taken many positive steps toward encouraging private investment, it lacks resources in terms of the necessary scale and content of its investment promotion activities; its staffing, equipment, and information resources; and its access to and status with other government departments and agencies. To undertake effective promotional work, the EIA should be strengthened.
National policies on investment are critical for encouraging and facilitating foreign investment and maximizing the benefits from it. Ethiopia’s current regulatory regime, governing both foreign and domestic investment, has undergone significant changes as part of the reform process started in 1992–1993. The investment regime in Ethiopia is based on a series of investment proclamations issued between 1996 and 2003.In combination, these laws specify the economic sectors that are open both to domestic and foreign direct investment (FDI); the financial limits and requirements for FDI; the monitoring and reporting requirements; and the financial incentives that are available.
7.3.4 Competition Law and Policy
In recent years, Ethiopia has taken steps toward opening several sectors of the economy to competition and to encourage and facilitate new entrants into those sectors. The Ethiopian business community has responded very positively to these openings, as demonstrated by a number of new Ethiopian entrants into the banking, textiles and floriculture sectors, for example. The process of introducing free competition into the economy, however, is far from complete.
Despite new entry, important sectors are still overwhelmingly dominated by State-owned enterprises, and the retail sector and financial services are, for the most part, closed to competition from foreign firms. Government monopolies also continue to exist in energy and other sectors.
Even in those sectors where economic liberalization has taken place through reducing barriers to foreign competition and privatization of industry and services, expected economic benefits can be short-circuited by private cartels, barriers created by dominant firms and by public regulations. On April 17, 2003, to safeguard against private and public impediments to free competition taking place, and as part of the move to introduce free market forces into the Ethiopian economy, the Ethiopian Parliament passed the Trade Practices Proclamation No. 329/2003 (“TPP”). This legislation states that the government is committed to “[establishing] a system that is conducive for the promotion of a competitive environment, by regulating anti-competitive practices in order to maximize economic efficiency and social welfare.” It prohibits anticompetitive behavior and unfair or deceptive conduct by one competitor against another; authorizes regulation of prices for basic goods and services in times of shortage; and requires disclosure on labels of basic consumer information such as weights and measures. The law also provides for the creation of two implementing institutions, the Trade Practices Commission and the Trade Practices Secretariat.
Aspects of the law and institutions, however, make it difficult to use them as effective tools for enhancing consumer welfare. First, the law has disparate goals—prohibiting anticompetitive conduct, regulating unfair and deceptive conduct between individual competitors, prohibiting importation of goods at prices that are below wholesale in the country of production, regulating prices for basic goods and services, and regulating product labelling—that divert enforcement from the most harmful anticompetitive conduct and dilute limited enforcement resources. Second, the Trade Practices Commission that has responsibility for addressing abusive conduct by dominant players, many of whom are government-owned and controlled enterprises, is itself part of the government’s Ministry of Industry and Trade. Its members are high-level officials of other Government agencies such as the National Bank. Third, the Commission has no staff of its own and virtually no budget. The Trade Practices Secretariat does have a small staff of approximately five, but it has a clerical, non-investigative, and non-prosecutorial function. Fourth, legal and economic training in competition policy and law enforcement at the university level does not exist.
The TPP has five parts: (a) definitions, objectives, scope, and exceptions; (b) prohibited trade practices; (c) enforcement bodies and appellate rights; (d) labelling and pricing regulations; and (e) remedies for violation. Although the framework law contains the substantive prohibitions and remedies needed to preserve and enhance competition policy, it also gives a great deal of room for interpretation and leaves power to grant exemptions in the hands of a Commission composed of high government officials and the Minister of Trade and Industry. Therefore, to paraphrase what one prominent Ethiopian private businessman said, if the government has no will or desire for competition to drive a sector of the economy, it will not happen, no matter what budgetary or
human resources are given to the Commission.
7.3.3 Real Property Law
Real property law is crucial in a market economy; it provides the legal environment for a business to own, use, and sell land and buildings as well as to use them as collateral to obtain credit. Good property law is especially critical in transition-economy countries; a good law enables entrepreneurs to acquire land freely to produce goods and services in a secured ownership environment, which is a necessity in planning for the long term. A good property law must also be accompanied by an objective and standardized titling system.
Under Ethiopia’s Constitution, all land is owned by the State, a circumstance which is hardly conducive to a free market in land transactions. Furthermore, Ethiopia has never had a widespread system of land survey and titling. At the same time, however, the Constitution and other laws support extensive private use and quasi-ownership of land by Ethiopians and, in limited cases, by foreigners. This includes the right of private persons to own buildings and fixtures on the land, their right to lease land from the State on a long-term basis, farmers’ right to continue using rural land permanently for agriculture and in limited cases to lease it to investors or otherwise develop it commercially, and the State’s right and frequent practice to expropriate urban or rural private land use rights and sell those to private investors. Further, the city of Addis Ababa has a working cadastral titling system, and survey and titling projects have just begun with donor help that in several more years could cover much of the significant commercially desirable land in Ethiopia.
Through these limited rights, there is an active market in land transactions although that market is much more politically controlled and opaque, and the rights are less secure and predictable, than in market-economy countries or than should be the case for optimal economic development in Ethiopia.
The main features of Ethiopian land law and the governing federal laws are described below. It is important to note that although overall land policy is set at the federal level (in the laws cited below), administration of the law has been delegated almost entirely to innumerable local authorities which include municipalities (in urban areas) and regions, woredas, and kebeles (in rural areas). A kebele is a group of villages forming an administrative unit, and a woreda is a group of kebeles forming a larger administrative unit within a region .
Private Landholding Rights: the Federal Constitution (Proclamation
These competing concepts are in the Constitution itself, which states that ownership of land “as well as of all natural resources, is exclusively vested in the State and in the peoples of Ethiopia…and shall not be subject to sale or other means of exchange” (Article 41/3), but also states that “Every Ethiopian shall have the full right to the immovable property he builds and to the permanent improvements he brings about on the land by his labor or capital” (Article 40/7); that the “government shall ensure the right of private investors to the use of land [on] the basis of payment arrangements established by law” (Article 40/6); and that the “government may expropriate private property for public purposes subject to payment in advance of compensation .. .” (Article 40/8). Private land ownership was recognized in imperial times but was abolished during the Communist Derg period. The Constitution’s current prohibition of private ownership continues that latter state of affairs.
7.3.2 Contract Law
The law of contracts governs the commercial relationships between parties, typically buyers and sellers of goods, services, and rights. The development of an efficient market requires a clear and predictable law that adequately covers such basic issues as contract formation, obligations of the parties, and available remedies when one party is in breach, as well as more complex issues such as force majeure (natural disasters and other “Acts of God”) and assignment of rights to third parties. However, other components of the legal system are just critical. Contract law is of little practical use if the general legal, business, and government environments act to suppress the formation of efficient commercial agreements.
Ultimately, the law and legal support systems must be sufficient to allow parties to assess and allocate risk. Components of this support system include the legal community’s ability to understand and apply legal principles in the contract drafting and dispute-resolution phases; sufficient information that allows for an informed assessment of risks and obligations; the judiciary’s ability to resolve disputes; the existence of alternative dispute-resolution systems; civil society and the State’s roles in supporting and regulating the commercial sector; and the commercial sector’s willingness to seek legal advice.
Against a backdrop of State support for the needs of commerce, three distinct sectors are needed: a strong, responsible practicing bar; a commercial sector that is at least minimally knowledgeable in legal principles; and civil society support systems.
Though the written law on contracts (the Law of Obligations in the 1960 Civil Code) in Ethiopia is comprehensive and reasonably well thought out, most of the other components critical to an efficient culture of commercial contracts are either non-existent or seriously underdeveloped. Ethiopia’s traditional customary legal system is widely used by individuals and small commercial enterprises and is reported to be reasonably efficient. Individuals with commercial disputes often turn first to the customary system (usually the elders of a community or urban neighborhood), then to the courts only if the dispute cannot be resolved. Judges indicate that they review the findings of the elders as if they had come from a lower court. This state of affairs is not necessarily a barrier to the development of a domestic market system. It is, however, a system which will not be viable for business in the international market, and the dependence upon customary dispute resolution will need to be reduced by individuals wishing to enter the global marketplace.
CHAPTER SEVEN - LAW AND DEVELOPMENT IN ETHIOPIA
7.1 General Overview of Ethiopian Economic Development
Ethiopia is desperately poor. It contains one of the largest concentrations of poor people on the planet. Ethiopia ranks 170 out of 177 countries on the human development indicator and on present trends will fail to meet any of the MDGs by 2015, and this has implications for the extent to which the whole of Africa will meet them. GDP per capita has increased marginally from $102 to $113 between 2000 and 2004, but still remains at one of the lowest levels in the world. 31 million people live below the national poverty line (on less than half a dollar a day) and between 6 and 13 million people are at risk of starvation each year. Not only Ethiopia is poor but it is equally poor: 81% of the population of 77 million live below a poverty line of $2 a day. There has been little improvement in either income or consumption poverty in the last decade.
Livelihoods are predominantly based on agriculture, which accounts for 85% of employment, 45% of national income and over 90% of export earnings. But, Ethiopian agriculture remains low-input, low-value and subsistence-oriented, and subject to frequent climatic shocks. Labour productivity in agriculture is low and the country suffers increasingly from shocks of drought, which often lead to severe harvest failure and famine, and affect not only current but future levels of consumption. In the last major drought in 2002/03, over 13 million people in more than half of the districts of the country were affected.
The most pressing concern of rural communities is the continued pressure on limited land resources. High population growth, slow rural-urban transition and limited employment opportunities outside farming have combined to make a significant reduction in landholdings from 0.5 hectares per person in the 1960s to 0.11 in 1999. Intensive use of smaller plots of land is contributing to environmental degradation in turn feeding back into even lower levels of agricultural productivity, and effectively locking many into a poverty trap.
Patterns of social exclusion affecting particular social groups or segments of the population contribute to increasing vulnerability in Ethiopia. Women are especially disempowered. There have been gradual gains in gender equality in Ethiopia but there is also a deep conservatism that pervades gender roles, severely proscribing what women can and cannot do, especially in rural areas. The extent to which gender inequity in Ethiopia is deep-rooted is epitomised by the widespread acceptance, by women themselves, of violence against women.
Women’s poverty is characterized by their limited access to resources, services and employment, and inability to claim their rights: only 9% of women have access to agricultural extension services and 12% to agricultural credit; only 32% of permanent civil service posts are held by women, and only 10% of those are in professional cadres. The relatively high prevalence of harmful traditional practices, such as female genital mutilation, early marriage, and marriage by abduction significantly affects the vulnerability of women and girls, for example by increasing the risk of HIV infection, reducing their chances of finishing school, and violating their reproductive and sexual rights.
The overall health status of people in Ethiopia is extremely poor. Life expectancy is 54 years. Despite some improvements in recent years, the rates for maternal mortality, under-five mortality and infant mortality are high. High fertility is a major contributor to poverty. The main health problems are communicable diseases, due to poor personal hygiene, poor garbage and waste disposal practices, and lack of an adequate and safe water supply. The major causes of death are infectious diseases (TB, respiratory illnesses, malaria, gastrointestinal infections, meningitis, AIDS and leishmaniasis). Malaria is one of the country’s worst health problems. 68% of the population is at risk of infection and malaria accounts for 10-30% of the disease burden in all age groups. Ethiopia is one of the world’s 22 top countries for tuberculosis incidence.
In the past 40 years, the performance of the Ethiopian economy has been variable, with a very poor underlying trend of 0.2% annual growth in GDP per capita over the period 1961-2003. Due to the dependence of the economy on agriculture, growth has historically been affected by climatic variability, the terms of trade (eg the effects of volatility in international coffee prices), and conflict. Growth spurts have tended to be short-lived and associated with positive climatic shocks such as good rainfall. The main driver of growth in agriculture has been the expansion of land under cultivation rather than increased productivity, which is unsustainable in the medium to long term.
There is little in the way of export-led growth: Ethiopia is a landlocked country and trade (both internal and external) is constrained by the large distances and poor transport infrastructure. Growth rates increased in the 1990s, and since the war with Eritrea ended in 2000, the Ethiopian economy has performed relatively well, even despite the drought in 2002/03. Over the past five years the average growth rate has been 4-5% per annum, although this translates to only 2-2.5% growth in GDP per capita given rates of population increase, falling far short of what is needed to meet the $1 a day MDG.
THE LAW OF SUSTAINABLE DEVELOPMENT AND GOOD GOVERNANCE-law and development teaching materia CHAPTER SIX
THE LAW OF SUSTAINABLE DEVELOPMENT AND GOOD GOVERNANCE
Besides its legal aspect, sustainable development has clear philosophical, scientific, economic and political dimensions. However, like all the social institutions created by man so far, the institution of sustainable development too will acquire its specific form via the science of law and its application by court decisions. In other times, philosophy in particular paved the way for the work of lawyers. Today, unfortunately, lawyers have little to gain from the other sciences where sustainable development is concerned. The theory of sustainable development is new and still under development. In contrast, the social problems that must be solved by sustainable development cannot afford to wait. The purpose of this chapter is therefore , to enable law students to grasp the primary knowledge on the interrelation of law and sustainable development.
6.1 From Economic Development to Sustainable Development
The Rio Conference on the Environment (1992) will live on in mankind’s history as the occasion which put an end to obsession with economic development. That "development" was no more than misrepresented growth of wealth along with a corresponding frantic squandering of mankind’s natural reserves. The Rio Conference is memorable because it succeeded in offering mankind the new
vision of sustainable development: no longer quantitative but qualitative development, in other words, a balanced striving for all human values, whether material or intangible, in harmony with nature.
In reality, what happened was that misconceptions were abandoned and development resumed its true meaning and moral content, which does not consist in the consumption of material goods but in improving education and health, securing a good natural environment, establishing harmonious co-existence between people in a just and peaceful world, and encouraging the stable joint development of civilization and nature, in other words a development having all that "quality of life" which had ceased being accessible to most of mankind. "Quality of life" includes, in particular, employment, which in the developed countries, however, can only be achieved by appropriate restructuring of their sustainable economy and not by its expansion. Thus, after Rio insistence a unilateral economic growth is not just an outdated policy but one that is both illegal and unethical.
6.2. What is Sustainable Development Law?
What is sustainable development, and what, in particular, is ‘international law on sustainable development’ (or in short, ‘sustainable development law’)? Certain international processes have provided guidance, and commonly accepted elements of answers, to these questions. Sustainable development is most commonly defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” In short tautology, it means ‘development that is sustainable.’ Development can be defined as a collective process of change toward improvements in quality of life for human beings and their communities, and sustainability can be seen to refer to the need for development to be integrated, socially, economically and environmentally sound, oriented to the long-term, and hence, able to last. The concept of sustainable development, in international law, requires accommodation, reconciliation and integration between economic growth, social justice (including human rights) and environmental protection objectives, towards participatory improvement in collective quality of life for the benefit of both present and future generations. The term ‘sustainable development law’ describes an emerging corpus of international legal principles and instruments which address the intersections between international economic, environmental and social law (including human rights law), towards development that can last for the benefit of present and future generations.
DEVELOPMENT AND DEMOCRACY
5.1 Defining the Concept of Democracy
“Democracy means the organization of society for the benefit and at the expense of everybody indiscriminately and not for the benefit of a privileged class.”
George Bernard Shaw.
The concept of "democracy" is contestable. It is understood by many people to mean a form of government in which a significant portion of the governed society has a franchise to elect members of the governing body. Other observers would argue that a "true" democracy is a system of government that embraces a universal adult franchise. While we may not agree on one uniform definition ,there are certain universal attributes of a democratic society namely:
• Equality of all citizens before the law without regard for race, ethnicity, religion,region, gender, or any other social or biological differences;
• The supremacy of the rule of law;
• Full participation of people in how they are governed;
• The principle of separation of powers between the executive, legislature and judiciary;
• Freedom of expression, association, conscience and affiliated family of rights;
• Periodic elections as a means of choosing alternative ideas for public policy.
Any society that claims to be democratic must have all of these elements. Those that aspire to build a democratic society must have most of these elementary things in place or must be taking genuine steps towards their achievement. The popular understanding of the term "democracy" is that there are three basic forms: direct, representative and constitutional. . A brief outline of the historical development of each will provide a solid foundation of knowledge on which the concept of constitutional democracy can be further explored.
5.1.1. Direct democracy
This is a form of government in which the right to participate in making political decisions is exercised directly by all citizens, acting under procedures of majority rule. In large states, direct or participative democracy is not possible.
Debate continues as to the origins of democracy. However, the city-states of ancient Greece stand out as one of the earliest examples of codified and institutionalized democratic principles. The motivating force for the development of democratic political institutions in the Greek states was their desire to discover the best system of government that would maintain the liberty of the citizen. Their solution was a system in which the whole citizen body formed the legislature. All citizens had a voice and a presence in the formulation of the rules that governed their society. All citizens were eligible to hold executive and judicial offices, some were elected, while others were assigned by lot. In this early form of democracy, all officials were directly responsible to the popular assembly, which was qualified to act in executive, judicial and legislative matters.
It should be noted that Greek democracy, which may be epitomised as the expression of the interests of all citizens, rested on a society radically different from that which exists today. In the first place, the city-states were small enough to allow for direct participation in judicial and legislative affairs. Secondly, only male native-born Athenians were citizens and so were participants in this process. Slaves, women and foreigners, who together made up the majority of the population of any Greek city-state, were excluded. Thirdly, in ancient Greece, the notion that a citizen was in some way unique did not operate. Each citizen was part of a collective and public whole. Public life was significant and private life was not taken into account. Finally, the concept of citizenship carried with it military responsibility, either as a warrior or as a contributor of funds. This early version of democracy, now known and frequently referred as "classical democracy", was both flawed and vulnerable to manipulation.
CHAPTER FOUR - Human Rights and Development
Apart from it being fundamental human rights, development is itself a process in which all human rights are realized. This fact is released not only by human rights agencies, but also by traditional, bilateral and multilateral development agencies. Several bilateral aid agencies now see respect for human rights as an integral part of the development process. Besides the broader conception of the nature of development, several of the issues that are central to development are also issues of human rights. Such issues range from the broad macro-economic policy and regulatory framework to the micro project implementation. The rule of law, which depends among others on impartial and independent courts, seen by proponents of economic growth as a precondition for investment and a free market economy, is also a central human rights concern. Gender relations which are the subjects of development endeavors are also the subjects of women’s and therefore human rights. Participation, another key concept in development conceptions and practice, is not only a human right in itself but is also determined by people’s ability to make, express, decide on and enforce their choices. At the end of this chapter students will able to:
The right to development can be rooted in the provision of the Charter of the United Nation, The Universal Declaration on human Rights and the two International Human Right Covenants. One of the objectives of the charter is to “promote social progress and better standards of life in larger freedom” and “to achieve international cooperation in solving international problems of an economic, social, cultural or humanitarian character, and in promoting and encouraging respect for human rights and for fundamental freedoms for all without distinction at to race, sex, language or religion.” Through the Charter , member states undertook to promote higher standards of living , full employment and conditions of economic and social progress and development and universal respect for, and observance of , human right and fundamental freedoms for all without distinction at to race, sex, language or religion.
The UDHR contains a number of elements that became central to the international community’s understanding of the right to development. It attaches importance, for example, to the promotion of social progress and better standards of life and recognizes the right to non-discrimination, the right to participate in public affairs and the right to an adequate standard of living. It also contains everyone’s entitlement to social and international order in which the rights and freedoms set forth in the Declaration can be fully realized. An importanct step towards the recognition of the right to development was General Assembly resolution 1161(XII). In this resolution the General Assembly expressed the view “that a balanced and integrated economic and social development would contribute towards the promotion and maintains of peace and security, social progress and better standards of living, and the observance of and respect for human rights and fundamental freedoms”.
This theme was taken up at the International Conference on Human Rights held in Tehran from 22 April to 13 May, 1968. The Conference expressed its belief “that the enjoyment of economic and social rights in inherently linked with any meaningful and profound interconnection between the realization of human rights and economic development”. It recognized “the collective responsibility of the international community to ensure the attainment of minimum standard of living necessary for the enjoyment of human right and fundamental freedoms but all persons throughout the world”. In 1969 the General Assembly, in its resolution 2542(XXIV), adopted the declaration on Social progress and development, which states that “Social progress and Development shall aim at the continuous raising of the material and spiritual standards of living of all members of society with respect for and in compliance with human rights and fundamental freedoms.”
In its resolution 4(XXXIII) of 21 February, 1977, the Commission on Human rights decided to pay special attention to consideration of the obstacle impeding the full realization of economic, social and cultural rights, particularly in developing countries, and of national and international action to secure the enjoyment of those rights. Recognizing the right to development as a human right, the Commission recommended to the Economic and Social council that it invites the Secretary – General to undertake a study on “the international dimensions of the right to development as human right in relation with other human rights based on international cooperation, including the right to peace, taking into account the requirements of the new International Economic Order and fundamental human needs”.
The Declaration on the Right to Development, which stated unequivocally that the right to development is a human right, was adopted by the United Nations in 1986 by an overwhelming majority, with the United States casting the single dissenting vote. This Declaration came almost thirty-eight years after the adoption of the Universal Declaration of Human Rights, according to which human rights constituted both civil and political rights (Articles 1 to 21) and economic, social, and cultural rights (Articles 22 to 28). In fact, the Universal Declaration reflected the immediate post-war consensus about human rights based on what President Roosevelt described as four freedoms—including the freedom from want—which he wanted to be incorporated in an International Bill of Rights.
There was no ambiguity at that time about political and economic rights being interrelated and interdependent components of human rights, and no disagreement that “true individual freedom cannot exist without economic security and independence.” And the credit should rightfully go to Mrs. Eleanor Roosevelt, who was the head of the U.S. delegation during the drafting of the Universal Declaration, for having first identified and advocated for the right to development when she stated, “[W]e are writing a bill of rights for the world, and . . . one of the most important rights is the opportunity for development.” The consensus over the unity of civil and political rights and economic, social, and cultural rights was broken in the Fifties, with the spread of the Cold War. Two separate covenants, one covering civil and political rights and another covering economic, social, and cultural rights, were promulgated to give them the status of international treaties in the late Sixties, and both came into force in the late Seventies. It took many years of international deliberations and negotiation for the world community to get back to the original conception of integrated and indivisible human rights. The Declaration on the Right to Development was the result. However, the single dissenting vote by the United States set back the process by several years, during which the international community could have tried to translate such a right to development into a reality. Issues were raised about the foundational basis of this right, its legitimacy, justiciability, and coherence.
The world was still divided between those who denied that economic, social, and cultural rights could be regarded as human rights, and those who considered that economic, social, and cultural rights as not only fully justifiable human rights but as essential human rights. Claims and counterclaims continued to be made by both the groups in different forums. Finally, a new consensus emerged in Vienna at the Second UN World Conference on Human Rights in 1993. The Declaration adopted there reaffirmed “the right to development, as established in the Declaration on the Right to Development, as a universal and inalienable right .
FANA HAGOS BERHANE (LL. B) (LL.M)
Sponsored by the Justice and Legal System Research Institute
DETERMINANTS OF ECONOMIC DEVELOPMENT
Today, countries of the world are divided into rich (developed) countries and poor (developing) countries. There is a wide gap between the rich and the poor countries. The statement that “the rich nations get richer and the poor countries get poorer” has become popular in the literature about world poverty. But what are the explanations for the poor performance of the developing countries? There are two approaches to explain the determinants of economic development; the traditional approach and the institutional approach. Thus at the end of this chapter you will be able to familiarize yourself with.
§ Traditional approach to development and
§ Institutional approach to development.
3.1 The Traditional Approach (Economic Factors) to Development
The traditional approach to development assumes that economic development is determined by economic factors, like natural resources, capital, technology, etc. Let’s see each of the major economic factors
A) Natural Resources
The principal factors affecting the development of an economy are the natural resources or land. “Land” as used in economics includes natural resources such as fertility of land, its situation and composition, forest wealth, minerals, climate, water resources, sea resources, geographical proximity with rich countries etc. For growth, the existence of natural resources in abundance is essential. A country which is deficient in natural resources will not be in a position to develop rapidly. As pointed out by Lewis, “Other things being equal, men can make better use of rich resources than they can of poor.” In LDCs natural resources are unutilized, underutilized or mis-utilized. This is one of the reasons for their backwardness. The presence of natural resources is not sufficient for economic growth. What is required is their proper exploitation.
It is often said that economic growth is possible even when an economyc is deficient in natural resources. As pointed out by Lewis, “A country which is considered to be poor in resources today may be considered very rich in resources at some later time, not merely because unknown resources are discovered, but equally because new uses are discovered for the known resources.” Japan is one such country which is deficient in natural resources but it is one of the advanced countries of the world because it has been able to discover new uses for limited resources.
B) Capital Accumulation Capital means the stock of physical reproducible factors of production. When capital stock increases with the passage of time, it is called capital accumulation or capital formation. Capital formation is investment in capital goods that leads to increase in capital stock, national output and income. Capital formation is the key to economic development. On the one hand, it reflects effective demand and on the other hand, it creates productive efficiency for production. Capital formation possesses special importance to LDCs. The process of capital formation leads to the increase in national output in a number of ways. Capital formation is essential to meet the requirements of an increasing population in such economies. Investment in capital goods not only raises production but also employment opportunities. It is capital formation that leads to technological progress. Technological progress in turn leads to specialization and the economies of large scale production. The provision of social and economic over heads, like transport, power education, etc. in a country is possible through capital formation. It is also capital formation that leads to the exploitation of natural resources, industrialization and expansion of markets which are essential for economic progress.
Organization is an important part of the growth process. It relates to the optimum use of factor of production and economic activities. Organization is complement to capital and labor and helps in increasing their product activities. In modern economic growth, the entrepreneur has been performing the task of an organizer and undertaking risks and uncertainties.
The underdeveloped countries lack entrepreneurial activity. Such factors as the small size of the market, capital deficiency, absence of private property and contract, lack of skilled and trained labor, non-availability of adequate raw materials, and infrastructural facilities like transport, power, etc increase risk and uncertainties. That is why such countries lack entrepreneurs.
D) Technological Progress Technological changes are regarded as the most important factor in the process of economic growth. They are related to changes in the methods of production which are the result of some new techniques of research or innovation. Changes in Technology lead to increase in productivity of labor, capital and other factors of production.
E) Division of Labor and Scale of production Specialization and division of labor lead to increase in productivity. They lead to economies of large scale production which further help in industrial development. Adam Smith gave much importance to the division of labor in economic development. Division of labor leads to improvement in the productive capacities of labor. Every laborer becomes more efficient than before. S/he saves time. S/he is capable of inventing new machines and process in production. Ultimately production increases manifold. But division of labor depends upon the size of the market. The size of the market, in turn, depends upon economic progress, i.e. the extent to which the size of demand, the general level of production, the means of transport etc are developed. When the scale of production is large, there is greater specialization and division of labor. As a result, production increases and the rate of economic progress is accelerated. Underdeveloped countries are unable to take advantage of the economics of division of labor and large scale production due to the presence of market imperfections, which in turn keep the size of the market small.
FANA HAGOS BERHANE (LL. B) (LL.M)
Sponsored by the Justice and Legal System Research Institute
DIMENSIONS OF DEVELOPMENT OF DEVELOPING COUNTRIES
We have already seen the concept of development and its measurements. We will use these concepts and their measurements as guideline in understanding the depth and width of the problems of countries of the third world. This chapter gives a short account of the dimensions of the development problems of poor nations.
These countries have both similarities and difference in economic, geographical, historical, social, cultural and institutional factors. Here, it is attempted to shortly familiarize the student with the diversities and common features of developing countries. The chapter is divided into two parts. The discussion starts with the differences among developing countries and proceeds to their common characteristic features.
At the end of this chapter you will be able to
2.1. An Overview of the Diverse Structures of Developing Countries
This section portrays the structural diversity of developing nations. With this intention, we will do an examination of eight critical components. These are
1. The size of the country(geographic area, size of population, and income levels)
2. Its historical and economical background;
3. Its endowments of physical and human resources;
4. Its ethnic and religious composition;
5. The relative importance of its public and private sector
6. The nature of its industrial structure;
7. Its degree of dependence on external economic and political forces and
8. The distribution of power and the institutional and political structure within the nation.
Dear students, each of the above components are discussed in detail below. In doing this, we will focus on regional comparisons of the developing countries of Africa, Asia, and Latin America and their sub regions.
2.1.1. Size and Income Level
Evidently, economic potential of a country is significantly determined by its physique and population size, and its level of national per capita income. These are also major factors differentiating one developing country from another. In the world of developing countries, larger and populated nations such as Brazil, India, Nigeria and Ethiopia exist side-by side with small countries like Paraguay, Nepal and Djibouti respectively.
This size provides both advantages and disadvantages. Large size usually presents advantages of diverse resources endowment, large potential markets, and lesser dependence on foreign sources of materials and products. But it also creates problems of administrative control, national cohesion, and regional imbalances.
However, it is to be noted that there is no necessary relationship among a country’s size, its level of per capita income, and the degree of equality or inequality in the distribution of that income. For example, as compared to Ethiopia, the neighboring country, Kenya is smaller in geographic and population size. But Kenya has about 3 times the per capita income of Ethiopia at official exchange rate. But Kenya has also lesser per capita income than Brazil and some other lager developing countries.