Theories of Economic Development

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					Theories of Economic
  The Liberal Paradigm
                         Today’s Agenda
• Review: Neo-Liberalism, Casino Capitalism, demise of the welfare state,
  the Transformation of International Institutions
• Is the World Developing or Underdeveloped?
    – The good news: Growth and aggregate improvement in human welfare
    – The bad news: inequality and a growing gap between rich and poor
• Liberal views on development and explanations for the growing gap
•       A. Rostow and Stages
•       B. Liberalism and integration into the international economy:
             – Staples Theory (Trade)
             – Product cycle (MNC),
             – Institutions (Washington Consensus)
•       C. Internal Requirements for Development
             – Move from a traditionsl to a modern society
             – Democracy
•       D. Summary of the Liberal position
     Review: The rise of a “casino”
• End of hegemony removes international
  “safety net”
• Need to compete in the global economy for
  economic growth and to remove BoP deficits
• Requirement for competitiveness: End of the
  welfare state
• International institutions that promote and
  protect a neo-liberal international economy
           Retreat of the Welfare State:
            Inequality in rich countries
                   Per cent of Disposable   …..and the poorest
                   income held by the       (bottom 30%)
                   wealthiest (top 30%)

Denmark            48.3                     13.8
Finland            45.6                     17.0
Sweden             45.8                     15.8
Norway             46.1                     16.3
Netherlands        46.3                     15.8
Germany            48.9                     14.7
Canada             49.2                     14.3
Italy              53.2                     12.0
United States      52.5                     11.8
      New Role for the IMF: spread
   liberalism to developing countries
• Balance of payments lending in exchange for
  liberal reforms: structural adjustment
• Washington Consensus: stabilize, privatize,
  liberalize: put on the “golden straightjacket”
• No chance for the welfare state
• Contributes to freedom of finance capital to roam
  the earth
• Contributes to freedom of multinational
  corporations to roam the earth
New Role for the World Bank: focus on fostering
  neo-liberal policies as condition of lending
• Moved from the task of financing
  reconstruction projects for Europe after WWII
• To the task of financing development projects
  in poor countries
• Imposed the same conditions on lending as
  the IMF
             GATT becomes the WTO
• WTO is a binding treaty
• Becomes the LAW in its member states
• An arena for negotiating the conditions for trade liberalization
• Overseas implementation of multilateral free trade agreements and
  punishment for non-compliance
• Goodbye embedded liberalism: members not permitted to protect
  their populations

    –   Goodbye child labor protections
    –   Goodbye environmental protections
    –   Goodbye health and safety protections
    –   Hello Private actors: banks, multinational corporations

• Hello Private Actors: banks, multinational corporations
 This institutional framework permits
The rise of Multinational corporations
• Given these new “global guardians” of the
  market, private actors have new powers
• Corporations sit on advisory boards of WTO,
  IMF, and World Bank
• Global FDI grew from $50 billion to $2.5
  trillion in 30 years
…and the growth of unregulated global
• International movements of money – both
  volume and speed
• cross-border bank lending has grown about
  10% annually.
• daily foreign exchange trades now exceed by a
  wide margin the combined reserves of all
  central banks.
The result: Increasing privatization
• Some say international institutions governing
  the global economy have been weakened
• Only those who prefer embedded liberalism
  say that
• The institutions have simply changed (and
  strengthened) to govern an international neo-
  liberal economy
• Privatization is the goal of neo-liberalism
 So….. If the U.S. pursued economic nationalism after
   hegemony, how did we get a neo-liberal global
• U.S. hegemony supported embedded
• Without a hegemon and with IFIs and WTO
  transformed to protect neo-liberalism, Private
  forces are unleashed and unregulated
• Many governments were then free to pursue
  economic nationalism
• Why didn’t the world devolve into the
  fragmentation of the 1930s?
 Because of the U.S. market and the $
• First of all, freedom, not stability, is the goal
• The U.S. market still stimulates exports abroad
   – Americans consume wildly
   – Demand met by imports
• The U.S. is also a magnet for foreign capital
   – Strong dollar
   – Low inflation rate
• But Financial crisis suggests instability
  Maybe fragementation will yet occur. Without
embedded liberalism, economic nationalism can rear
    its head: indicators are PTAs and Subsidies
• What are PTAs?
  – Two or more parties with preferential access
  – Viviolates MFN obligation
  – End of 2004: 300 PTAs
  – 50% of global trade
• Rich countries give mammoth agricultural
    The WTO: A Distributive Justice Critique:
    neoliberalism creates growing inequality
• The rich get richer, the poor get poorer
• A “race to the bottom”
• “non-commercial values” cannot play a part in
  trade rules
• Property rights preferred to health and human
  lives: “right to profit” over “right to life”
   And Institutions of economic neo-
   liberalism undermine democracy
• Are these organizations a new source of global
  dominance, surveillance, and manipulation of
  the nation-state?
• Conditions of IMF and world bank loans not
  subject to domestic debate in borrowing
• WTO rules supersede domestic laws
 The Economic Nationalist Critique
• Organizations undermine state sovereignty
  and make private actors more powerful than
A Liberal rebuttal: Global Growth without a
     hegemon and with neo-liberalism
 Who is North and Who is South?
• North = World’s Rich
• South = World’s poor, or developing nations,
  or emerging markets (more complicated)
  – Used to be called the Third World
  – We can no longer lump together the countries of
    the “south”
  – Some are growing and “emerging” and some are
             The Good News
• 20th century economic output off the charts!
• South Korea and China doubled productive
  output in 10 years
• Humans are, on the whole more healthy now
  than 100 years ago.
Health and income have improved
• World Health Chart.lnk
       Health and well-being
 The Bad News: From Local to Global
• The Pre-modern world: inequality within
• Today: inequality between societies
• What determines whether you will be rich or
• Where is the “class struggle” now?
The Bad: A growing gap
            Income distribution
Who consumes the most?
  Global Consumption, 2004
  (in billion US dollars)
Liberal explanations for global growth
        with global inequality?
• Walt Rostow: the intellectual context
  – No previous conceptual apparatus
  – But experience with Marshall Plan
  – But there were historical patterns of development
  – Winning the cold war meant:
    Helping the “Third world” develop
    Within the liberal capitalist model
    Liberal Economic Development:
• From an agrarian to an industrial society
  through absorbtion of “western” liberal
  models, i.e.
  But this requires a “jump start” in the cold war
    environment: help from the rich liberal countries
  The Stages of growth are…….
     Stage 1: Traditional society
• Why no growth?
 Stage 2: Preconditions for Growth
• Population growth will outpace economic
  growth in traditional society
• Stimulus needed to mobilize capital and
  – Revolution and institutional restructuring
  – Technological innovation
  – Favorable international environment
  – External Injection of capital
        Stage 3: The Takeoff
•Productive investment must rise to 10 per cent
of national income
•Needed: rapid accumulation of capital and
productive investment
                         Stock market
                         Foreign investment
         4. The Drive to Maturity
•   Employment growth
•   Growth in national income
•   Rise of consumer demands
•   Strong domestic markets
5. High Mass Consumption Society
       The Importance of Capital
• Capital accumulation is the name of the game
• So how does it happen?
    Economic development and the
        International Economy
• International interdependence will lead to
  economic development of ALL countries in a
  liberal system
• Trade serves as an engine of growth
           The Staples Theory
• Staples are field crops or minerals
• Earnings finance industrial growth
• Canada and Australia developed this way
• This justifies the theory of comparative
• Export-led growth is the way to develop
    Trade and the product cycle
• Corporations maximize their own growth and
  the growth of the countries in which they
• Three stages of corporate expansion and
the introductory or innovative phase
• Located in advanced countries
• Comparative advantage in product
  development because of large home market
• And lots of resources
• Corporation enjoys monopolistic position
• Foreign demand grows
• Corporation exports
  The maturing phase of the product
• Technology diffuses
• Innovative firm loses competitive edge as
  technology becomes available
• Advantage shifts to foreign production to
  replace exports and hold market share
• Innovative firm establishes foreign branches
       The Standardized Phase
• Production fully routine
• Comparative advantage shifts to the
  developing country
• Export platforms develop
So….is there a symbiotic relationship between the MNC
  product cycle and global economic development?
Now….there are many sources of
Research and Development
High Tech Exports
 Role of International Institutions: Washington
  Consensus on conditions for loans and aid
• Internal liberalization of Markets
• Integration into the world Economy
• Reduction of extensive government programs
  because they…….
  – Tend of allocate funds to non-productive activities
  – Entrepreneurs can’t find funding
  – Create wrong incentives
  – Stimulate pressure for trade protection
  So why do many countries stagnate and
    show little or no economic growth?
• External connections like trade and
  investment are important, but that’s not all…..
• There are internal requirements for
  developmet as well….
• Traditional culture must give way to modern
      Tradition                       and            Modernity
Tradition             Example               Modernity             example
collective unit of    Religion, ethnic      Individual as the     U.S. Bill of Rights,
social organization   group, tribe          unit of social
Personal ties         family, tribe         Pragmatic and         markets,
govern social                               functional ties       professions,
organization and                            govern behavior.      associations
essentialist          ethnic identity,      Multideminsional
identity              religious identity,   Individual identity
Identity derived      ethnic clensing,      Free choice of        See above
from mystical                               identity
Ascriptive            Kingdoms, families    Functional            Parliaments,
hierarchies,                                hierarchies
       Democracy and Markets
• Democracy and markets encourage each
  other: political and economic freedom are
  two sides of the same coin
       Summary of Liberal Theories of
                             Internal            External

             •Human Capital              •Opportunities to Catch Up
             •Entrepreneurial Spirit     •Foreign Investments
Stimulants   •Efficient Government       •Trade
             •Savings                    •Aid
             •Research and Development
             = Modern Society
             •Political Instability      •Trade Barriers in the North
             •Corruption                 •Absence of project finance
             •Traditional Society        •Absence of Balance of
Hindrances                               Payments finance
• Smith, Friedman, Rostow…. “not to worry”
• People will act rationally
• Capital will be accumulated
• If markets are allowed to operate, they will
  take care of the rest
• Long live the invisible hand!

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