Theories of Economic Development

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Theories of Economic Development

• The Liberal Paradigm

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Todays 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 indicators
• 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
•  

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Review The rise of a casino economy

• 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

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Retreat of the Welfare State Inequality in rich
countries
Per cent of Disposable income held by the wealthiest (top 30) ..and the poorest (bottom 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
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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

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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

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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

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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

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and the growth of unregulated global finance

• 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.

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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

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So.. If the U.S. pursued economic nationalism
after hegemony, how did we get a neo-liberal
global economy?

• U.S. hegemony supported embedded liberalism
• 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 didnt the world devolve into the
  fragmentation of the 1930s?

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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
  because
• 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

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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
  subsidies

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Interpretations
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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

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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 countries
• WTO rules supersede domestic laws

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The Economic Nationalist Critique

• Organizations undermine state sovereignty and
  make private actors more powerful than states

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A Liberal rebuttal Global Growth without a
hegemon and with neo-liberalism
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Is the world developing or underdeveloped.emergi
ng markets or just poor countries?
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Who is North and Who is South?

• North Worlds Rich
• South Worlds 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 not.

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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.

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Health and income have improved

• World Health Chart.lnk

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Health and well-being

• GapminderFlash_MDG4_07jan09.exe

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..\gapminder_world_chart_2006.pdf
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The Bad News From Local to Global Inequality

• The Pre-modern world inequality within societies
• Today inequality between societies
• What determines whether you will be rich or poor?
• Where is the class struggle now?

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The Bad A growing gap
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Income distribution

• movie.swf

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Who consumes the most?
Global Consumption, 2004(in billion US dollars)
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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

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Liberal Economic Development Modernization

• 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.

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Stage 1 Traditional society

• Why no growth?

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Stage 2 Preconditions for Growth

• Population growth will outpace economic growth in
  traditional society
• Stimulus needed to mobilize capital and resources
• Revolution and institutional restructuring
• Technological innovation
• Favorable international environment
• External Injection of capital

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Stage 3 The Takeoff

• Productive investment must rise to 10 per cent of
  national income
• Needed rapid accumulation of capital and
  productive investment
• Taxes
• Finance
• Stock
  market
• Trade
• 
  Foreign investment
• aid

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4. The Drive to Maturity

• Employment growth
• Growth in national income
• Rise of consumer demands
• Strong domestic markets

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5. High Mass Consumption Society
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The Importance of Capital Accumulation

• Capital accumulation is the name of the game
• So how does it happen?

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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

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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
  advantage
• Export-led growth is the way to develop

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Trade and the product cycle

• Corporations maximize their own growth and the
  growth of the countries in which they operate
• Three stages of corporate expansion and growth

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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

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The maturing phase of the product cycle 

• 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

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The Standardized Phase

• Production fully routine
• Comparative advantage shifts to the developing
  country
• Export platforms develop

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So.is there a symbiotic relationship between the
MNC product cycle and global economic development?
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Now.there are many sources of innovation..
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Research and Development
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High Tech Exports
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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 cant find funding
• Create wrong incentives
• Stimulate pressure for trade protection

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So why do many countries stagnate and show little
or no economic growth?

• External connections like trade and investment
  are important, but thats not all..
• There are internal requirements for developmet as
  well.
• Traditional culture must give way to modern
  culture.

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Tradition and Modernity
Tradition Example Modernity example
collective unit of social organization Religion, ethnic group, tribe Individual as the unit of social organization U.S. Bill of Rights,
Personal ties govern social organization and behavior family, tribe Pragmatic and functional ties govern behavior. markets, professions, associations
essentialist identity ethnic identity, religious identity, Multideminsional Individual identity
Identity derived from mystical principles ethnic clensing, Free choice of identity See above
Ascriptive hierarchies, Kingdoms, families Functional hierarchies Parliaments,
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Democracy and Markets

• Democracy and markets encourage each other
  political and economic freedom are two sides of
  the same coin

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Summary of Liberal Theories of Development
Stimulants Hindrances Internal External
Stimulants Hindrances Human Capital Entrepreneurial Spirit Efficient Government Savings Research and Development Investments Modern Society Opportunities to Catch Up Foreign Investments Trade Aid
Stimulants Hindrances Political Instability Corruption Traditional Society Trade Barriers in the North Absence of project finance Absence of Balance of Payments finance
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Conclusion

• 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!