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POLITICAL ECONOMY OF DEVELOPMENT

Group Report #1 (Aquino, Cuerdo, Reyes) Prof. Amado Mendoza, Jr.

POLSC 188 WFW February 13, 2013

INTRODUCTION

Bretton Woods system and its institutions have been credited with contributing to almost unprecedented global econogrowth and change over the past five decades.

A large percentage of people living in the South have received little benefit from global economic growth. Economic development problems of less developed countries are often accompanied by social problems. Despite the prevalence of socioeconomic problems in the South, there are major differences in economic developm

among less developed countries. The rate of development differs in the various regions of these less developed countrie

Despite the regional differences among less developed countries, the South in general lacks power and wealth vis--vis North.

HISTORY

Neoclassical Theories Firm-household cash flow

Harrod-Domar model (1939, 1946)

-Per capita growth depends on savings, productivity, depreciation, and population growth

Grand Theories Big Push theory by Rosenstein-Rodan (1943)

A wave of industrial investments can launch a chain reaction of virtuous circles Refinement of Big Push theory by Hirschman (1958)

Invest only in certain industries, purposely creating disequilibrium, due to the fact that resources are limited

Stages of growth theory by Rostow (1960)Traditional pre-scientific and agricultural

Pre-Take-Off gathering of forces that will bring society to take-off

Take-Off rise in investment rate, development of manufacturing sector and expansion of the economy

Maturity significant increase in per capita income and existence of technologically sophisticated economy

Mass Consumption production is largely for consumption

Critiques of stages of growth theoryFocused on UK history

Assumed all countries are alike

Ignored effects of colonialism

Not supported by empirical evidence

Latin American Theories Comparative advantage (1880s-1930s)

Developing states should focus on agriculture

Raul Prebisch (1949) deteriorating terms of trade (center and periphery)

unequal structure of global economy

Solution: Import-Substitution Industrialization (ISI)

Weakness of Import-Substitution IndustrializationWithdrawal from agriculture led to food shortage

Shortage of capital increased reliance on foreign investment

The industries that resulted were not globally competitive

Income inequality worsened

Dependency theoryFernando Cardosomutual interests of social classes across center-periphery system

associated-dependent development

Andre Gunder Frank no development possible for the periphery

exit from system through revolution necessary

Critiques of dependency theoryMarxists focused on relations in international markets

neglected class analysis

Non-Marxists vague and inconsistent

not falsifiable

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The Developmental State South Korea and Taiwan

Changed composition of production

1950s: pursued ISI policies but did not escape ISI weaknesses

1960s: encouraged growth of manufactured exports

Selective protectionism Fiscal incentives to certain industries Devalued currencies

Promoted savings and investment

Growth of financial institutionsInflux offoreign capital and aid

Investment in education and research

Political culture

IPE Perspectives and the East Asian experienceOrthodox liberalism

Modern mercantilism (Realist)

Political culture

Historical structuralism

Asian financial crisisLiberalized capital accounts

Speculative attack on Thai baht

Spread to other East Asian and Southeast Asian economies Neoliberalism

1930s to 1950sKeynesianism and ISI model are threats to freedom

Socialism state central planning > abolishment of capitalist market economy and private economy

> establishment ofstate control over the economy

1960s to 1990sEconomics: Challenge to Keynesianism from Chicago School

Monetarism

Rational expectations hypothesis

Public choice theory

Politics: 1973 oil embargo by Organization of Petroleum Exporting Countries (OPEC)

Chiles neoliberal economic reforms1982 Latin American debt crisis

Expanded role of the International Monetary Fund (IMF) and World BankStructural adjustment

Ronald Reagan and Margaret Thatcher programs

Collapse of USSRTransitional economies

1997 East Asian financial crisis

Deregulation, Privatization and LiberalizationIPE PERSPECTIVES ON INTERNATIONAL DEVELOPMENT

Realist perspective Liberal perspective Critical perspective

Dependency theorist perspective World-systems theorist perspective Gramscian theorist perspective Some historical structuralist perspectives

OFFICIAL DEVELOPMENT ASSISTANCE

grants, loans, or technical assistance that donors provide to recipients on concessional rather than commercial terms

LESS DEVELOPED COUNTRIES DEVELOPMENT STRATEGIES (SUMMARY)

Import-Substitution Industrialization ProtectionismProtection of local industries

State-promoted industrialization

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Emphasizing industrial development and de-emphasizing agriculture

Socialist Development StrategiesState central planning

Abolishment of capitalist market economy and private economy

Establishment of state control over the economy

Export-Led Growthpolicies encouraging the growth of manufactured exports East Asian developmental state model Asian Financial CrisisExport growth slowed, earnings declined, and surplus capacity developed in many industries

After problems emerged in Thailands real estate and financial sector, a full-blown financial crisis began in1997 when the country allowed its currency to float, some other Asian economies followed the Thai example,

and their currencies depreciated sharply.

Orthodox Liberal Model/Neoliberalism market rational/market ideological approach Washington consensusdescription of the policies that the international institutions based in Washington,

the IMF and the World Bank, and the US Treasury Department had come to favor for

the reconstruction of economies in the developing world

It favored the following:Fiscal discipline (cutting public spending)

Tax reform (cutting personal and corporate taxes)

Financial liberalization (the deregulation of financial markets and capital controls)

Floating and competitive exchange ratesTrade liberalization (free trade)

Openness to foreign direct investment

Privatization

Structural Adjustment and the Theoretical PerspectivesBased on the belief that the debt crisis and other problems were due to structural inefficiencies in the

economies of many developing countries, compounded by bad or misguided government policies, the IMF

and the World Bank sought to build conditionalities into the provision of any future loan. The purpose of

these conditions was to bring about a market-orientated structural adjustment of economic policy in line

with the principles of neoliberalism.

Major Conditionalities

Recipients should control inflation. Recipients should decrease government spending. Recipients should balance their budgets. Recipients should privatize state-owned enterprises. Recipients should deregulate financial and labor markets. Recipients should liberalize their trade and investment policies.

DISCUSSION QUESTIONS

1. What are structural adjustment loans, and how have they affected less developed countries?

2. How would you compare the effectiveness of import substitution and export-led growth strategies?

3. Why has the World Bank been so important in a development context, and do you think this importance will continue?

4. Why did the East Asian newly industrializing economies escape the worst effects of the 1980s foreign debt crisis, but not fare

so well in the 1990s financial crisis?

5. What do you think is the best approach to development, and why?

REFERENCES

Backhouse, R. E. (2005). The rise of free market economics: economists and the role of the state since 1970. In Medema, S. G

Boettke, P. (Eds.), The role of government in the history of economic thought, pp. 355392. Durham: Duke University Press.

Balaam, D. and Veseth, M. (2007). Introduction to International Political Economy. Upper Saddle River, NJ: Pearson/Prentice Hall.

Cohn, T. (2008). Global political economy: theory and practice. New York: Longman.

Cypher, J. M. and Dietz, J. L. (2009). The process of economic development, 3rd ed. London and New York: Routledge.

Gilpin, R. (2001). Global political economy. Princeton: Princeton University Press.

Love, J. L. (2008). Economic ideas and ideologies in Latin America since 1930. In Bethell, L. (Ed.), The Cambridge history of

America. Cambridge Histories Online: Cambridge University Press.

Ray, D. (1998). Development economics. Princeton, New Jersey: Princeton University Press.