Unit Ten: Development and Underdevelopment

Dr. Russell Williams

Outline:1. Introduction

2. Trade and Development Strategies: 1945-1982

3. The Crisis in Development

4. Orthodox Liberal Development Strategies

5. Contemporary Alternatives?

Required Reading: Cohn, Ch. 10.

Class Discussion Reading: Robert Hunter Wade, “What Strategies are Viable for

Developing Countries Today? The World Trade Organization and the Shrinking of Development Space,” Review of International Political Economy, 10-4 (November 2003), pp. 621-644.

Shaun Breslin, “The ‘China model’ and the global crisis: from Friedrich List to a Chinese mode of Governance?” International Affairs, 87:6 (2011), Pp. 1323-1343.

1) Introduction:

What is “development”?

Traditional definitions focused on political and economic paths followed by the North

=“Modernization theory”

Contemporary focus is simply “economic growth” Social or ecological concerns?

Post war era assumed South would develop, however: Growing gap between rich and poor countries (?) Few countries have “joined the club”

“Development” involves two concerns:

1) Financial assistance and investment LDCs “capital poor” – “Heckscher-Ohlin Theory” Development supported by:

“Official Development Assistance (ODA)”: Money given at below market interest rate loans (concessional loans) or grants

Problems: Funds are limited and declining

Funds subject to conditions

World Bank Development Assistance: Money given as loans, but often at better interest rates then LDC’s could get on their own

Problem: WB has to borrow money; therefore its loans must be commercially viable

Private Lending and FDI Problems: Bad management = debt crisis

States must be attractive to investors

“Development” involves two concerns:

2) Domestic trade policies and the global trade regime What strategies promote development? What strategies are allowed under trade rules?

Under “embedded liberal” system, South pursued a variety of strategies Domestic autonomy meant many chose to respond to structural

challenges of resource dependency etc. through protectionism

Under “Orthodox” or “Neoliberal” era, South has less autonomy: More reliance on markets . . . .

Failure of alternatives (?) Role of financial problems (?)

2) Trade and Development Strategies: (1945 – 1982)

South ambivalent about GATT participation; skeptical of liberal analysis of free trade and comparative advantage Instead: “Import Substitution Industrialization (ISI)”

Derived from: Realist/Mercantilist analyses (List) “Structuralism,” Dependency theory and Marxism

“Structuralism”? Highlighted developmental “challenges” facing LDCs that invalidated

liberal analyses

1) Reliance on natural resource exports= price volatility (!)

“Structuralism”? (cont . . . )

2) “Mono-exporters”: Specialization on one primary export commodity E.g. Coffee = 80% of Burundi’s export earnings (1984)

Cocoa = 75% of Ghana’s export earnings (1984)Coffee and Cocoa = 69% of Brazil’s export earnings

(1950)

= potential “terms of trade shocks” (?)

3) Singer-Prebisch Theory: Resource exporters suffered from “declining terms of trade” E.g. As incomes increase:

Demand for natural resources does not increase . . . . People only need so much cocoa . . . .Demand for manufactured goods always increases

Inevitable relative economic decline = LDCs have a harder time paying for desired manufactured imports

“Structuralism”? (cont . . . )

4) Absence of domestic investment linkages and savings LDC would not develop away from natural resource industries

because of financial arrangements MNC profits exported Low domestic demand discourages local reinvestment

=Problem of subsistence agriculture Poorly organized financial services industries

Structuralism promoted internal development strategies Industrialization through tariffs on manufactured imports Direct state involvement in investment linkages

E.g. State enterprises National economic planning

=Four distinct types of structuralist economic interventions!

“Easy ISI”:

Replace easily produced imported consumer goods with local products - E.g. textiles, shoes, etc. Improves balance of trade Generates “human capital”

Transfer earnings from export sectors to industrial development

Tended to work fairly well, particularly in larger states E.g. Brazil

However, gains were short term, states thought development required progression to more capital intensive goods . . . .

“Secondary ISI”: (“Latin American Approach”) Replace complex manufactured products with local goods

E.g. Automobiles, appliances etc. Stimulate “backward linkages” – development of industries providing inputs Generates “human capital”

Requires large investment = debt financing Will require export earnings to finance debt

“ISI-Export Substitution”: (“Export Led Growth” – “East Asian Approach”) Convert “Easy ISI” producers into export industries Large role for the state:

Promote correct investments: Tax breaks and incentives for desired industries

Industrial planning – “Strategic Trade Theory”: Create desired comparative advantages

Support for free trade, but protectionism for “infant Industries” Liberalization is staged based on needs of export industries

Socialist strategies ? ? ? “Nationalization” and “expropriation” of infrastructure Disengagement form MNC and global trade More emphasis on “basic needs” development

3) The Crisis in Development:

After 1980 ISI seen as a failure – Problems include: Competitiveness of ISI economies - Absence of economies of

scale

Financial problems – External debts grew rapidly

“Balance of Payments” crises - Problem for “Secondary ISI” countries:

Current account: Machinery imports increase?Exports do not?

State “competence” (E.g. East Asian “developmental states” vs. ?)

Sources of “official development assistance” begin to decline and MNC FDI becomes more important

MNC’s not interested in ISI-led development

4) Orthodox/Neoliberal Dev’t Strategies:

Neoliberalism became dominant development strategy after 1980s:

Why? Failure of alternatives (?) Ideology – Neoliberal “hegemony”

Promoted by KIEO’s and northern states Interpretations of the “East Asian Model” emphasized its “liberal”

elements - KIEO’s argue that focus on increasing exports and internal markets is key to development

Neo Imperialism/Neo Colonialism – IMF “Structural Adjustment Policies” dictate state policy in many southern states

Power – the North E.g. the WTO single undertaking and development

A “liberal” development strategy: Remove trade and investment barriers Increase export earnings through logic of comparative advantage

E.g. focus on resource exports if that is what you are already competitive in . . .

Reduce budget deficits and cut social expenditures – show stable, sound economic management

Eliminate state economic subsidies and privatize state owned industries

Result: Increased access to MNC FDI = capital and technology necessary to becoming more efficient at what you already export and necessary to development of new industries

Liberal Economics: Small states have no choice . . . intervention are inherently inefficient over the long term . . . .

A “liberal” development strategy - Results?

Short term = pretty bad for most countries . . . . Mexico: 1981 per capita income $3,500

1988 per capita income $3,0281999 per capita income $3,600

Long term = most states have experienced good growth since 2000 Mexico = 3.0 % annual GDP growth since 1996

However, context of each state is different . . . . E.g. Many states under IMF SAP’s have not done very well – particularly

“low income” LDC’s . . . . E.g. Brazil, India and China . . . . All have done well, but . . . .

How orthodox have their strategies been? Role of large internal markets?

Challenges: Interpreting the success of this model is very ideologically driven Domestic politics . . . How do you “sell” decades of pain?

5) Contemporary Alternatives:

If Neoliberalism does not work for your society what are the alternatives?

Domestic Policies?

“Strategic Trade Theory”, ISI and infant industries . . . . Problem: Even if “comparative advantage” can be created in

theory, can it be done in practice? E.g. WTO trade rules E.g. MNCs and investment rules . . . .

Human capital development Education and social spending to create a skilled work force

attractive to investors

5) Contemporary Alternatives:

If Neoliberalism does not work for your society what are the alternatives?

Systemic Reform? IFI reform that might help poorest states . . . .

Reduced conditionality in development assistance – No more “one size fits all” More emphasis on internal economic integration

E.g. stop cutbacks that undermine capabilities of “developmental state” “Basic needs” development – Now promoted by WB

Support for infrastructure etc. that the market will not provide in poor states Problem: Runs counter to emphasis on economic growth as measure of

development Debt relief “Right to Development” = Special treatment in trade regime to allow

“free riding”

For Next Time:

Final Exam:

Saturday, April 12 – 3:00 to 5:00pm (SN2101)

Exam is cumulative – same format as midterm.

Eight short answe concepts and TWO essays.