Seminar Questions(1)

7/31/2019 Seminar Questions(1)

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Seminar - week 4

1. Reflections on the Documentary Film: The end of poverty, directed by

Philippe Diaz, 2010

2. What is meant by inequality traps? (see World Development Report, 2006.

Equity and growth)

3. Does it make sense for any country to have a majority of its export income

derived from one or two exports, that is, to be a mono-exporter? Why or whynot? Do developed countries have a limited array of exports? Why do most less-

developed countries have such a limited array of exports?

4. Why and how were dualist structures fostered in the colonial regions, andhow did they create barriers to further economic development?

5. How did institutions introduced under colonial rule act as a brake on economicdevelopment in the colonized areas and create long lasting effects? Why did the

colonizers require de-industrialization in their colonies? Who benefited and who

lost?

6. What is meant by adversepath dependence? What role did colonialism play in

creating adverse path dependence?

Week 5-7 Seminar

Chapter 4

1. What are the basic arguments of Adam Smith?

- His most enduring metaphor is the invisible hand which is the forces of

supply and demand in a competitive economy.

- The individualistic desires of consumers (for goods and services) combined

with producers self-interest to maximize profit tend towards levels of

production and prices (the equilibrium) where the supply curve crosses the

demand curve at which both consumers and producers gain from exchange.

- He stressed the importance of division of labour and the law of accumulation.


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- Division of labour accelerated after the industrial revolution. It increased the

productivity of labour, decreased costs, increased the profit making opportunity

for capitalist firms.

- The law of accumulation explains the desire of capitalists to amass ever morephysical capital, and embodying the latest technologies.

- According to Smith the source of expanding economic wealth depends on

accumulation of physical capital, technological progress, and specialization of

labour, and free trade.

2. a. Discuss the problem of diminishing returns in Ricardo. How does the

theory of comparative advantage provide an answer to the problem of

diminishing returns?

- The law of diminishing returns states that with population growth a

progressively lower productive land is brought into use. Because it is difficult to

produce an additional unit of food from the less productive land the price of

food will rise. Those with fertile land will benefit from the food price increase.

High food price means higher wages for employees and lower profit for

capitalists.

- If one factor of production is increased while the others remain constant, the

marginal benefits will decline and, after a certain point, overall production will

also decline. While initially there may be an increase in production as more of

the variable factor is used, eventually it will suffer diminishing returns as more

and more of the variable factor is applied to the same level of fixed factors,

increasing the costs in order to get the same output.

- Comparative advantage provides an answer to the problem of diminishing

returns in that countries specialize in the production of commodities with lower

cost and export it to a country where the production of that commodity

requires high cost. For example, by importing grains food prices goes down,

wages are kept low, higher profit for capitalist and as a result greater

possibility for continued capital accumulation, more production and hence higher

income level for the economy as a whole.

- Free trade would help to escape the dilemma posed by diminishing return


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b. Discuss briefly the critique of the Ricardian trade theory based on the

experience of East Asian countries.

c. exam question explain why in Ricardos theory it was the productivity of

labour in the agriculture sector which was the principal basis for sustaininggrowth rather than that of labour productivity in the industrial sector.

- Page 115 for Ricardo it was an increase in the productivity of labour in

agriculture rather than in industry, which was the principal basis for sustaining

economic growth, since only then would food, the indispensable and predominant

component of the consumption of workers in industry, be produced at a lower

cost, thus permitting lower wages, ever-higher profits, more capital

accumulation and more growth of industry.

3. Discuss the Harrod-Domar model, its major result, and its policy implications.

The Harrod-Domar model developed in the 1930s suggests the Economy's rate

of Growth depends on:

- the level of saving and the savings ratio

- the productivity of investment i.e. economy's capital-output ratio

- A knife edge equilibrium where the economy goes further away from the

equilibrium either growing too quickly igniting inflation or growing too slowlyleading to unused capacity and unemployment. A knife edge equilibrium occurs

when the economy is not growing at precisely the rate required by the currentrate of saving.

Further Analysis of the Model- Economic growth depends on the amount of labour and capital i.e. NY = f(K,L)

- Developing countries have an abundant supply of labour. So it is a lack of

physical capital that holds back economic growth hence economic development.

- More physical capital generates economic growth. (use Production PossibilityBoundaries to illustrate)- Net investment (i.e. investment over and above that needed to replace wornout capital (deprecation) leads to more producer goods (capital appreciation)

which generates higher output and income. Higher income allows higher levels ofsaving.

Implications of Harrod-Domar Model

Economic growth requires policies that encourage saving and/or generatetechnological advances, which lower capital-output ratio.

Criticisms of the Model


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- It is difficult to stimulate the desired level of domestic savings. Rigidity of

savings as a constant value is responsible for the instability of the growth model

.

- Meeting a savings gap by borrowing from overseas causes debt repayment

problems later.

- Diminishing marginal returns to capital equipment exist so each successive unit

of investment is less productive and the capital to output ratio rises.

- The amount of investment is just one factor affecting development eg supply

side approach (free up markets); human resource development (education and

training)

- Economic growth is a necessary but not sufficient condition for development

- Sector structure of the economy is important (i.e. agriculture vs. industry vs.services)

- Policy implication of this model: government action especially to alter fixed

rate of savings

4. a. Discuss the neoclassical growth model of Solow and its major result

regarding the steady state per capita income (the derivation of the formula is

not required)

- It predicts that for any given rate of savings and investment there will be a

constant steady-state level of real per capita income achieved. A higher level of

savings and investment does not lead to a higher rate of growth of income that

can persist over time. Regardless of the rate of saving and investment, there is

a celling on the level of per capita income for that level of s and i, and as the

economy approaches that level of income, the rate of growth of per capita

income decreases eventually reaching zero as the steady- state income level is

attained. The steady state is the point where physical capita per effective unit

of labor is constant or constant growth path.

b. Discuss the policy implications of the Solow growth model for

developing countries.


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- Poor countries are not growing because they are not saving and investing a

significantly higher proportion of their income. With the same rate of

population growth poor countries can increase their standard of living by

increasing their capital labour ration through higher rate of capital

accumulation.

- Poorer nations will grow faster than richer nations

c. exam question discuss and evaluate the statement that there is no

population problem in developing countries but rather a development problem

d. Discuss the critiques of the model.

1.no consideration of the institutional structure which converts savings intoinvestment

Assumption of a direct, automatic and smooth link b/t increased savings,increased investment and income growth.

2. growth is conceived of as a mechanical simple process of increasing per

capita income with no consideration of processes of structural, institutional,

economic, political and social transformation.

3. Convergence is not taking place among less developed and developed nations

Chapter 5

1. Summarize the various forms of positive external effects and virtuous

hidden effects which Rosenstein-Rodan utilized to argue that development could

be achieved quicker than one might expect. Briefly explain the ideas of virtuous

circles. Can you give two different examples of virtuous circles that might

affect a less-developed economy? Can you speculate on what a vicious circlemight be?

- The big push theory centred on taking advantage of the increasing returns

that could be realized from large-scale planned industrialization projects that

encompassed several major sectors of the economy simultaneously.

- Virtuous hidden effects cannot be fully realized in a purely market frame of

reference because the private investors are motivated by profit and not by the

spin-off industries created in other in other sectors. As a result it is the


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government that should invest in a number of branches of industry

simultaneously to create one huge, interlocked undertaking.

- Positive external effects are defined in terms of technology and labour force

training that would have spread effects to other sectors throughout theeconomy. For Rosenstein appropriate labour training has equal or greater

importance than capital accumulation.

- Virtuous circles in the theory of the big push states that concurrent industrial

investments could launch a chain reaction of virtuous circles and complementary

investments that would then ripple in many directions through the economic

system

- An example of virtuous circles: large scale investment in steel-making could

lead to research in metallurgy. Railway equipment manufacturer can benefit

from the findings and produce at lower costs. The lower cost can transform into

lower transportation cost to farmers

2. Discuss Nurkses export pessimism

- Nurkses theory breaks away for the orthodox theory of trade which assumed

less developed country should continue exporting tropical products and rawmaterials which they have comparative advantage. Nurkses had two reasons for

rejecting export led growth

- demand for tropical products and raw materials will be limited in the future

leading to less income

- the value of import and export does not balance in less developed countries

because as income increases so does wants to spend on imported luxury

products. This would drawn down the potential savings needed on domesticcapital formation and compete for foreign exchange that can be used to buy

machinery and so on.

- His solution is balanced growth through large scale increases in supply

sweeping across a large number of industrial sectors at the same time be met

by a large scale increase in demand created by same expansion.


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- He advocated for forced savings by increasing tax on high income recipients

and Infant industry protection. Massive injection of new technology and

machines production are key to development.

- Though his theory is similar to the big push he did not advocate planning andthe dominance of the public sector. Nurkse felt that dynamic fiscal policies

could have a very positive effect on the prospect for development without

large-scale government involvement in production decisions or large-scale

planning projects.

3. Why and how did Hirschman argue that by putting things the wrong wayaround, by actually creating disequilibrium, economic development could bepromoted? Why might unbalanced growth be easier, and less costly, for a poor

economy to follow than a balanced growth strategy?

- The idea of Hirschman doing things the wrong way around suggests on how

development planner can utilize market disequilibrium, profit and losses.

Investments should not be spread evenly but initially concentrate on industries

with high backward and forward linkages. Investment on selected industries

would create an overcapacity, while supplies bottlenecks would simultaneously

increase production difficulties elsewhere in the economic structure. These

bottlenecks would create pressures for new investments to resolve the supply

inadequacies.

- Unbalanced growth is less costly for a poor economy in that it doesnt

necessitate investing on all sectors at the same time. Path of unbalanced

growth is described by three phases:

Complementarity: It is a situation where increased production of onething builds up the pressure for increasing the available supply of secondcommodity. When the second product is a privately produced goods and

services, this pressure will lead to imports or higher production

domestically of the second product as it will be in the interests of the

producers of second commodity to do so. But when it is not privatelyproduced, the pressure does not transmute itself into pecuniary self-

interest and will take form of the political pressures for the provision of

second commodity. This in case for such public services such as law andorder, education, water, electricity etc. Complementarity then manifests

itself in the form of complaints about shortages, bottlenecks andobstacles to development. Action in this case does not take place through
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the operation of the profit motive, but through group pressure on public

authorities and agencies.

Induced investment: Because of complementarity investment in oneindustry or sectors induces investment in other industry or sectors. Thisconcept of induced investment is much like multiplier because eachinvestment leads to a series of another set of subsequent events and

there is an element of convergence as the 'output' of external economiesdiminishes at each step. Growth sequences tent to move towards

convergence or divergence and the policy is usually concerned with

preventing to rapid of convergence and the promotion of the possibilitiesof divergence.

External economies: New projects often appropriate external economiescreated by preceding ventures and create external economies that maybe utilized by subsequent ones. Sometimes the project undertaken

creates external economies and therefore there private profit falls short

of their social desire. The reverse is also possible. Some ventures have alarger input of external economies than the output. Therefore Hirshman

says, "the projects that falls into this category must be net beneficiaries

of external economies".

4. What did Lewis mean when he wrote that there was a surplus of labour in

agriculture? What role does it play in his model of development?- export optimist tropical products and raw materials from developing nations

are not subject to failing price internationally. Demand in the developed world

for these products will increase.

- change the structure of the economy from high concentration on agriculture

to industries and shifting labour force from agriculture to manufacturing. He

assumed that agriculture output level is maintained and the low wage paid to the

immigrating labour at subsistence level. This has double advantage for the

industries: can have comparative advantage or developed nations because wage

is kept at lower level, and as the industry grows to a higher level over time more

farmers can be employed at the industry.

5. Discuss Rostows stages model and its critique.

- Based on the economic history of Britain he suggested all nations pass through

five phases: traditional society, the pre-conditions for take-off, the take off,

the drive o maturity, and the age of mass consumption.
http://en.wikipedia.org/wiki/Convergencehttp://en.wikipedia.org/wiki/Divergencehttp://en.wikipedia.org/wiki/Profit_%28economics%29http://en.wikipedia.org/wiki/Profit_%28economics%29http://en.wikipedia.org/wiki/Divergencehttp://en.wikipedia.org/wiki/Convergence


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Traditional society: a pre Newtonian similar to that of medieval Europe where

society is pre scientific. It is predominately agricultural where landlords play a

dominant political and economical role. There is no systematic mechanism which

led to the introduction of scientific knowledge into the production process on a

continual basis. Production is for self consumption and not for trade. Trade was

done using the barter system.

The pre-conditions for the take off: distraction of traditional society by

outside force probably colonialism leads to the emergence of new types of

entrepreneurs and managers appear in the private and public sectors.

Development of financial sector increases investment especially on

infrastructure building. The use of new and sophisticated methods of

production becomes available to the modern businesses that are emerging.

The take-off: takes place under the following three simultaneous conditions

- A rise in the rate of production investment from national income to 10 percent

- Development of one or more large manufacturing sectors with a high rate of

growth

- The emergence of a political, social and institutional framework that make use

of the expansion

During the take-off stage growth becomes self sustaining, investment and

saving increases

Maturity: high growth enables significant increase in per capita income.

Economy becomes diversified and technology sophisticated. There is less

reliance on import.

High mass consumption: service sector becomes increasingly dominant and little

concern for the need to further build production. Society is devoted to the

pleasures of consumer choices.

Critique of Rostow

His sketch of traditional society fits pre 16 th century Europe and doesnt

necessarily apply to the context of Third World nations. He didnt have the

grasp of the economic history of less- developed regions.


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On the destruction of traditional society both the colonizer and colonized are

not swept forward through this stage. He failed to entertain the fact that

colonized nations normally are set to the path of stagnation as a result of the

destruction.

He does not explain the movement from one stage to the next. He doesnt consider the impact of population growth and migration. No analysis of how the pre conditions for take-off emerge. The concept doesnt accord with the history of most of the nations which

have moved to self-sustained growth.

6. What ideas did the developmentalist economists (Rosenstein-Rodan, Nurkse,

Hirschman, Lewis, Rostow) tend to share?

- They are optimistic about the hidden reserves in the less developed countries

which if tapped could promote economic development. They also believed

industrialization as the route to development. Affluent

Chapter 6

1. What are the main arguments of the Structuralists? Why do they disagree

with the orthodox/optimistic trade theory? What are the policy implications?- The main arguments of the structuralists is that they dont believe that

relatively minor changes in economic conditions would be sufficient to create

the big-push or the take-off into sustained growth that economic

development is a linear, universal process

- Limited changes within the context of the existing structures and institutions

might result in a strengthening of backward socio-economic structures

consolidating adverse path dependence.

- Their disagreement with orthodox/ optimistic theories

the process of development has geographically and historically uniquefeatures varying from one place to another

cautions the possibility of adverse path dependence emphasize the unequal relations of power between South and North

and/or Capital and Labor

underline the importance of socioeconomic and political structures andinstitutions in the development process


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2. Discuss the Prebisch-Singer Hypothesis on why terms of trade is declining?

How does this argument apply to manufactured goods?

- The Terms of trade refer to the relative price of exports / imports. A decline

in the terms of trade means the price of exports falls relative to imports. Adecline in the terms of trade will mean a country will see the price of coffee

beans falls relative to manufactured goods. This means it has to export

relatively more coffee beans to get the same quantity of manufactured goods. Aprolonged fall in the terms of trade could be seen as a problem because it can

lead to declining living standards and lower GDP.

- Why terms of trade decline? The relations between the center and the

periphery are antagonistic and detrimental rather than complimentary and

harmonous. These diffrences are based on existing economy, productivity, andlabour market of the two catagories. The advanced center countires are

dominated by oligopolistic industries with a substantial degree of control overthe prices of products. Unions and widely accepted conventions dictate theworker to be rewarded with higher incomes. n the periphery on the other handagricultural products and raw matericals face domestic and internationalcompetition which makes setting price by individual producers. Lack of unions

make it difficult to raise wages with productivity.

The center nations are able to buy the peripherys cheaper imported primaryproducts with their own higher-profit manufacturing exports while theperiphery find that new technology only forces the prices of their exports down

on the world market, thus requiring more to be exported just to be able to

purchase the same quantity of manufactured goods fromt he center.

How does this argument apply to manufactured goods? With the goal of

import substitution a country first begins to manufacture the simple consumer

non-durable goods then moves to the production of durable goods such as

electronics then moves to heavy industry prouction of cars and machinaries.

Exam question: the theory of comparative advantage may provide a one-off

boost to world production such that all countries gain, but over time, primary

product exporters will not benefit from staying with that static comparative

advantage. Critically discuss the above statement with referance to Prebish

hyphotesis.
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P. 179 primary product exporters will not benefit from international trade

because they dont enjoy the same technological advancement the center does

thus they have to export more to be able to import necessary machinary.

Besides the tendency for the ever-changing impact of technology to result indeclining terms of trade for the primary product, given the existing domestic

and international structures of production and trade, Prebisch and Singer

identified two additional forces at work in the world economy that tend to move

in the same direction and which reinforced the Prebisch- Singer effect.

First, differences in the income elasticities of manufactured versus primary

commodities, especially agricultural goods, work over time to the detriment of

the periphery.8 In essence, as world income grows, the demand formanufactured goods, which have an income elasticity > 1, rises faster than the

demand for agricultural products, with an income elasticity that is positive, but

< 1 (this is the essence of Engels Law), thus contributing to the secular, or long-

term, deterioration of the terms of trade for the periphery. The differences in

income elasticities for the exports of the center and periphery simply

reinforces the need for peripheral industrialization, as suggested by the P-S

hypothesis, along with the need for international commodity agreements to

stabilize primary product prices, and regional integration to expand existingmarkets and increase competitive pressures on firms.

The second contributing factor to declining terms of trade for many peripheral

countries, and certainly those in Latin America, was the lower level of the

import coefficient in the United States than in Great Britain, already

mentioned. As the United States replaced Great Britain as the worlds major

economic power, it became more difficult for some countries to expand

traditional exports to be able to earn the foreign exchange required topurchase the desired manufactured imports, again supporting the argument for

expanded industrialization in the periphery.

3. What are the problems faced by primary product exporters? Are thereprimary products that countries might export which would, perhaps, not besubject to the same difficulties? In general, what makes one export a goodexport and another less desirable?


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4. Distinguish between backwash effects and spread effects in Myrdal. How do

these two ideas of Myrdal relate to the concept of cumulative causation?

The concept of cumulative causation sought to account for dynamic economic

effects which progressively moved a society away from equilibrium. Myrdalassumed that there were notable inequalities between the regions of poor

nations that is, there was dualism, as discussed earlier. What happens when a

less-developed nation receives a stimulus to growth? If, as is likely, this

stimulus is experienced in the more prosperous region of the economy, then that

region will surge even further ahead, leaving the more economically deprived

regions of the economy lagging behind. This cumulative causation will occur for

many reasons, only a few of which can be summarized here, but all of the

reasons lead to a movement in society away from equalization among regions and

sectors and toward increasing inequality.

The cumulative movements which tend to economically weaken a region were

termed backwash effects. First, more ambitious and better-trained workers

will migrate from the poorer regions to the growing regions. This will leave

behind a bifurcated population of the young and the old in the poorer areas, a

population largely composed of dependants and low-productivity workers

compared to those who leave. At the same time, in backward rural areas, thereis likely to be a higher rate of fertility, leading to a more rapid rate of

population growth that puts increasing demand on a smaller number of the least

productive workers, pushing down income per person in these poorer rural

regions. Thus movements in any one direction tend to be cumulative,

exacerbating poverty and sustaining low levels of development where they exist

and favoring and expanding upon economic development and progress where they

already exist.

Secondarybackwash effect also might be anticipated. If the economic stimulus

took the form of the expansion of industry in the economically more advanced

region of a country, the output of the new firms might well compete with the

peasant and artisan production methods prevalent in the poorest region. Artisan

production might then be undercut by the economies of scale realized by

manufacturers in the more advanced region of the country


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The spread effects, or positive externalities, of such a new growth stimulus

might induce other, linked domestic manufacturing needed to support an

expanded export sector, la Nurkses balanced growth or Hirschmans

linkage models considered in the previous chapter. One might think that such

effects would be a plus for development. Myrdal, however, cautioned that

proper analysis demanded an understanding of both the positive impact of

spread effects and the negative impact of backwash effects.

5. Discuss the role of technology and ceremonialism in Ayres.

Ceremonialism refers to the opposite of technological dynamism and it imposes a

curb on human creativity. In its essence, it is any past-binding behavior that

tends to thwart the forward progress that technology imparts. There are five

ways in which ceremonialism intrudes on any society, according to Ayres:

(1) The nature of social stratification or class structures;

(2) Via social mores or conventions of what is acceptable behavior;

(3) Ideology which justifies the existing social stratification and mores and

which further attempts to emphasize the negative consequences of changing

either the social strata or the mores;

(4) A social system of indoctrination which emotionally conditions individuals to

accept the dominant ideology, mores, and class and social stratification; and

(5) Social patterns of ceremonial behavior designed to reinforce the first four

factors.

For Ayres technological development and economic growth are simultaneous. In

Ayress view, the way to diminish the negative effects of ceremonialism on

technological progress was via expanded education, which he defined as the

diffusion of knowledge and skills. Of course, organized educational institutions

can be hostile to educating and be a determined element in societys efforts

to inculcate and perpetuate the prevailing ceremonial structures. Indeed, this is

often the case with educational institutions in poorer nations, even through the

university level. Still, Ayres felt strongly that expanded educational


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opportunities for larger numbers, or what we will later call human capital

accumulation, were the surest means for any society to promote economic and

social progress:

6. What are the main arguments of the Marxist Dependency Analysis?What is their policy implication? Contrast the Marxist (Baran, Frank,

Wallerstein etc.) vs. non-Marxist dependency school.

Dependency analysis built on the ideas of the structuralists, specifically

Prebischs distinction between the center and the periphery. The center was

viewed as causeand the periphery as effect. According to dependency writers,

the less-developed nations had to be understood as part of a global process.

Their fate was merely to provide the inputs to the advanced nations or toreceive their cast-off, low-wage manufacturing processes under trading

conditions which were likely to worsen.

Dependency theory found the causes for the lack of development to be

externalto the socio-economic formations of the less-developed nations. Thus,

alleged internal backward or dysfunctional institutions of the less-developed

nations were not treated seriously by dependency writers as a subject of

analysis, or were seen as extensions of external domination. Instead, the

negative influence of transnational corporations, multilateral institutions like

the World Bank and the International Monetary Fund, and the extensive

influence of foreign governments in the internal affairs of less-developed

nations were highlighted.

7. Contrast the institutionalist approach to development with the Marxist

dependency approach? Are there strong similarities, as well as differences?

8. What similarities are there between the classical Marxist view of Bill

Warren and the views of the developmentalist economists? What

differences are there?

Week 7 Seminar

Chapter 7


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1. Discuss the main arguments of the neoliberal economists on the issue of

the state in the process of development based on the ideas of

-Bauer -Lal -Krueger

For Bauer, then, it was not government intervention, a driving vision of the

future, a desire for development, infrastructure creation, a big push of

industrialization, or anything other than the pursuit of individual gain by

individual members of society, mediated by the market, that resulted in

economic growth and development. Bauers view, then, is little more than a

restatement of Adam Smiths praise of the invisible hand as a coordinating

mechanism and of how the decisions of individuals to accumulate capital in the

pursuit of profit lead to social progress.

For example, he denied that there was any evidence of vicious circles of poverty

in less-developed nations or cumulative causation, as Gunnar Myrdal had

called these mechanisms which exacerbate poverty where it already exists. At

the same time, in observing key export crops such as rubber, cotton, and cocoa,

he maintained that the benefits of expanded production of these crops spread

down to even the very small farmers; there were no enclaves in the export-

oriented economy that did not gain from export expansion. Thus, Bauer

returned to the Smithian idea that the market harmonizes the interests of

all participants: everyone gains. Even major investments in infrastructure by

government, he claimed, were not necessary to start off, accelerate, or push

the process of development forward, a view distinctly contrary to what other

development economists had claimed, as we read in Chapter 5.

Nations are not poor because they are poor, that is, because of vicious

circles; rather they are poor because of too much government interference.

Bauer and others have constructed their criticism of the state on three pillars:

1 The public sector has become over-extended in the economy.

2 The public sector has over-emphasized capital formation and mega-investment

projects.

3 The public sector has caused the proliferation of economically distorting

controls in the economy that create incentives for inefficient production and

ineffective economic structures.


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Deepak Lal

Lal attempted to dismiss virtually the entire body of thinking, analysis, and

research conducted by the developmentalist and the heterodox thinkers

discussed in the previous two chapters. Utilizing a polemical style, Lalmaintained that heretofore development economics has been subject to what he

termed a dirigiste dogma, that is, a preference for state-led development

strategies. He suggested that development economists had embraced

instinctively the notion that the price and market system should besupplanted

(and not just supplemented) by various forms of direct government control to

promote economic development

Lal further attacks development economics for its emphasis on macroeconomicconsiderations, such as growth, industrialization, investment, and employment,

rather than on micro-efficiency. This, of course, is a valid observation. But the

corrective is not to be found in the direction which Lal advocates: emphasizing

micro-efficiency, while assuming that the big picture macro-issues will

somehow take care of themselves as a result of the focus on the microeconomic

matters.

A third component of Lals critique of development economics concerned the

abandonment of the theory of comparative advantage, as a result of export

pessimism (declining terms of trade). He maintains that the East Asian

miracle economies have employed a policy of virtual free trade (Lal 1985:

478), by which he seems to mean that the Asian economies tampered just

enough with market outcomes, and that a little fudging against the doctrine of

laissez-faireis permissible if one ends up promoting exports.

Krueger

Krueger has concentrated on the economic waste and social distrust and

instability which occur when the state has the capacity to redistribute income

to selected elements of society. For example, import licenses create monopolies

and permit the earning of economic profits for those who receive the licenses.

If the price of the license is less than the economic advantage of owning such a

license, the fortunate importer is in a position to receive revenues that have not

been earned. Such revenues are windfalls which constitute unearned

sources of income, or rents. Krueger has argued that the large state sector in


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many less-developed nations creates widespread opportunities for such rents,

and under such conditions one should expect a pathological result: the rent-

seeking society.

In Kruegers interpretation, the state is a ready source of rents via subsidies,tax exemptions, tariffs, and a wide range of government policies. Once such

rents have been captured by certain interests, those groups have a vested

interest in keeping such policies in place. The implication seems to be that state

activities drain the economy of its dynamism. Wrongheaded policies are

maintained, because groups with an interest in the rents to be derived from

such policies exert pressure on the state to maintain those policies. As a

consequence, consumers end up paying unnecessarily high prices, production

costs are too high, and tax revenues are squandered, as state functionaries fail

to pursue the general welfare in deference to vested interests.

2. Discuss market failures and their implications. How do they provide a

critique of the neoliberal view of the role of the state?

3. Using the categories of predatory, intermediate, and developmental

states (of P. Evans), review the critique of state policies offered by theneoliberals. How do these categories help you better understand the role of

the state and the dangers of generalizing too broadly on the weakness of

state intervention from specific instances?

Evans maintains that it is possible to identify three archetypes of the state: (1)

the predatory state; (2) the intermediate state; and (3) the developmental

state (Evans 1995). In his conceptualization, states can vary, depending on the

historical evolution of specific societies. States are the result of complexhistorical forces and relationships, but they are also actors or agents

potentially capable of shaping and influencing the ongoing process of historical

evolution.

The predatory state: is one where the appropriation of unearned income via

rent-seeking has become endemic and structural. Everything is for sale: the

courts, the legislature, the military, the taxing authority, etc. Government

employees use their authority to maximize, in the shortest possible time, theiraccumulation of wealth. Political offices are held not for the reason of providing


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service to a nation, but for the purpose of individual gain in a society which may

offer few alternative avenues to wealth accumulation. With corruption endemic,

rational individuals may prepare for their own economic demise by

establishing secret bank accounts in Switzerland or other havens for flight

capital.

In the non-coherent state, we find a vitriolic mixture of traditionalism and

arbitrariness characteristic of pre-capitalist societies. There is a scarcity of

trained bureaucrats, and an absence of both a meritocracy and rule-governed

behavior throughout the state apparatus. The state operates according to the

whims of a strong president or leader who functions in the patrimonial

tradition of an absolutist ruler. Around the president is clustered the

presidential clique of perhaps fifty people who control the state apparatus

and use it for their own ends, as a result of their personal and perhaps familial

ties to the leader. Beyond the inner circle lies the presidential

brotherhood, the second circle of power, where state managers seek to both

plunder society and continue to pledge their allegiance to the inner circle of

power. An example of such type of state is Nigeria.

The intermediate state:Many states are fragmented intermediatestates whereinconsistencies reign, yet (unlike the non-cohesive states) they are able tomount and sustain a development project. Such states do, at times and within

specific sectors, exhibit the loathsome features of the predatory archetype.

But they also exhibit a complex range of attributes which cannot be explained

within the neoliberal paradigm which accepts the non-cohesive state as an

inevitability. The fragmented intermediate state exhibitspockets of

efficiency, where state managers demonstrate both their professionalism and

competence in designing, promoting, and completing imaginative and important

projects, either jointly with the private sector, or on their own through state-

owned enterprises (SOEs).

Such societies do not suffer from too many bureaucrats, but too few, according

to Evans. For Evans, invoking the concepts of Max Weber, a fully formed and

fully functioning bureaucracy entails merit-based recruitment, long-term career

rewards for state managers, social status for government employees, and a

coherent institutional structure which can form a constructive counterpart to

private-sector institutions. Intermediate states demonstrate some of these


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Weberian attributes, some of the time, in some sectors of society. But

pervasive imbalance is endemic. Example India and Brazil

The developmental state:The key characteristic of the developmental state isembedded autonomy. An embedded state possesses a variety ofinstitutionalized channels where the state apparatus and the private sector

continually interact in a constructive manner via a joint project of fostering

economic development. The developmental state is clearly endogenous; it is

broadly embedded in civil society via a dense web of networks. Some parts of

the state apparatus may be tightly linked to specific sectors. These broad and

dense institutionalized channels of communication and interaction provide the

links whereby the state is continually in the process of constructive negotiation

and renegotiation of policies and goals intended to move a society toward a

higher and higher level of economic and social development

4. Krueger has maintained that the solution to rent-seeking on the part of

state functionaries is the shrinkage of the state. Peter Evans perspective

is quite different. Compare their contrasting approaches to rent-seeking.

Where do they agree, and when and why do they disagree?

Professor Krueger, a popular advocate of neoliberal, has argued that the large

state sector in many less-developed nations creates widespread opportunities

for such rents, and under such conditions one should expect a pathological

result: the rent-seeking society. She has concentrated on the economic waste

and social distrust and instability which occur when the state has the capacity

to redistribute income to selected elements of society. For example, import

licenses create monopolies and permit the earning of economic profits for those

who receive the licenses. If the price of the license is less than the economic

advantage of owning such a license, the fortunate importer is in a position toreceive revenues that have not been earned. Such revenues are windfalls

which constitute unearned sources of income, or rents. Krueger

Rent seekers can take advantage of the state by way of manipulating

government policies and subsidies, tax exemptions, and tariffs to their own

advantages. Such groups pressure the state to keep certain policies so that

they continue to benefit from them.


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This type of state (it democratic or authoritarian) continues to drain the

economy through corruption and inefficiency and is referred by Krueger as

Functional state.

The solution for the functional state suggested by Krueger is to shrink thestate to a minimum by taking the following measures:

selling off government-owned firms via privatization programs the elimination of tariffs removal of import licenses end to special subsidies Elimination of any policy that might create gains for special interests.

Peter Evans agrees with Krueger on eliminating the rent seeking corrupt andinefficient behavior. However, the solution he provides for the functional state

is quite different from Kruegers suggestions.

According to Evans instead of shrinking and minimizing the state it should focus

on developing the channels where by the state and the private sector interact in

a constructive manner through joint venture fostering economic development.

This is what Evans refers as embodied autonomy.

Embeddedness alone is nonetheless enough. In order to guard against the riskof capture, the state apparatus must have integrity, loyalty, and cohesiveness.

In short, the state must also exhibit the characteristics of autonomy.

Autonomy implies that the state can stand alone, above the fray and beyond the

controlling reach of vested interests which would seek to capture the power of

the state and turn that power to their very specific, short-term advantage.

An autonomous state has to be able to draw on its own vision of economic

transformation, and this vision has to be the result of a highly competent groupof state managers who have achieved their power via proven performance and

professional competence which undergird the merit-based hierarchy of state

employees.

A state can only over come rent seeker groups by combining both embodidness

and autonomy. Pure autonomy alone doesnt have the effective means of

constructively interacting with the private sector. The pure concept of

embeddedness logically leads to the capture of state policymaking by thesectors which the government seeks to guide and promote.


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A state should be able to focus on developing three key variables: power,

purpose, and capacity.

Unlike Krueger instead of eliminating stimulus policies such as subsidies, and tax

exemptions the state should establish performance standards so that onlythose meeting the standard benefit from the stimulus policy.

5. a)Discuss the major arguments of the endogenous growth model.

b) Compare the neoclassical growth model with endogenous growth

model.

c) How would endogenous growth model explain the sustained or

increasing income gap between developed and developing economies?

d) Compare the policy implications of the endogenous growth model

with the Solow growth model for developing countries.

6. What does it mean to say technological change is endogenous to an

economy? How is this different from viewing technological change as

exogenous?

7. Based on the Table below discuss the empirical findings in World Bank

(1995) and Rodrik (1994). What role does inequality play in Rodriks model?

Why?

Week 8-9 seminar

Chapter 9 & 10

1. Explain the economic rationale for imposing an infant industry tariff toprotect new producers from import competition. Why are these called

`infant industry tariffs and not just tariffs?

2. What is meant by transitional inefficiencies?3. Is it possible for a state (or para-state) firm which creates positive

externalities to private sector enterprises to have an accounting loss, but

still be socially profitable'? Explain.4. What is easy ISI?


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5. is the importance of gradually removing the infant industry tariffs forthe eventual success of easy ISI?

6. What is easy export substitution? What exactly is being substituted forwhat? Explain the importance of the easy export substitution stage of

industrial transformation. Why is it that this stage is able to absorb

more labour than the difficult ISI stage? What other benefits are there

to easy export substitution compared to premature difficult ISI as a

stage of industrialization to follow after easy ISI?

7. What is meant by a strategy switch? Why are strategy switchesimportant components of good policy making?

8. Define difficult ISI. In what sense do we say that the Latin Americancountries entered this stage `prematurely while the East Asianeconomies entered this stage `maturely? What potential problems are

there for countries which follow easy ISI with difficult ISI, thus

skipping the export substitution stage of transformation?

9. Discuss the following argument: If transitional inefficiencies areovercome and domestic ISI producers approach the level of international

competitiveness, there is a dynamic welfare gain to society from

promoting ISI with protectionist measures that is greater than the free

trade welfare benefit. If this argument is correct, what does it implyfor the theory that free trade is beneficial for all countries? Explain by

considering the possible advantages of a successful ISI policy that

involves also strategy switching.

10. a) Explain why a country that is currently a primary commodity exporter

and that has a relatively large land area and abundant natural resources might

be more likely to remain a primary product exporter compared to another

country, which is also now a primary product exporter, but which lacks abundantland and other natural resources.

b) Do abundant resources necessarily act as a brake on the evolution of

the economic structure (this is the resource curseissue)?

c) Under what conditions might natural resources and abundant land be a

blessing for future growth possibilities? Might there be a difference in terms

of the `resource curse' effect between countries which have abundant but


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equitablyowned natural resources and those with abundant but unequallyowned

resources where control is concentrated in the hands of a small elite?

11. a) Discuss the industrial policy instruments used by East Asian countries

to create dynamic comparative advantage regarding the stimulus policies andthe performance standards.

b) in particular how were the East Asian economies able to avoid

unproductive rent-seeking by industrialists interested in earning above-normal

profits, who might have wanted to extend infant industry protection via the

payment of bribes to government officials, while the Latin American economies

seemed unable to avoid such costs? What role do `contests' play in reducing

unproductive rents?

Week 10 Seminar

1. a. What is the role of the exchange rate in the initial phases of structural

adjustment programs? What is the effect of exchange rate on international

competitiveness?

b. What are the potential problems associated with the depreciation of the localcurrency?

c. What could be the alternative policy tools to enhance international

competitiveness?

2. What are the main features of the structural adjustment programs (in the

developing countries)? Discuss the stabilization and structural change stages

separately.

3. What are the sources of problems/crisis within the structural adjustment

experience of the many developing countries, who have implemented orthodox

structural adjustment programs? Discuss in terms of the effects of economic

policies on investment, growth, employment/unemployment, income distribution,

and stability of the economy.

4. Review the debate about debt audit and default.


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5. Review the debate about the differences between the Washington vs. Post-

Washington Consensus.

Week 11 Seminar

Based on World Bank, Engendering Development, 2001, pp.1-14. aatay, 2001

1. a. Discuss the effects of domestic and international financial

liberalization on the economy in terms of financial fragility and risk factors. In

particular discuss the mechanisms, which generate the cycles of boom and bust

after international financial liberalization.

b. Discuss the main common points among developing countries, which have

experienced a currency (financial) crisis.

2. Discuss and contrast various explanations of the Asian Crisis in 1997-98

based on Arestis and Glickman (2002)

3. Discuss the mechanisms through which a financial/currency crisis can affect

income distribution between wage and profit income. What have been the

empirical trends in labor share after currency crisis? (See Onaran, 2009 forhints and data). Below are some further data on the wage share (adjusted, -note

that these series are different from the unadjusted wage share in Onaran

(2009) and they are also converted to an index value), growth, and

unemployment in the developing countries.

Seminar Questions(1)

Documents

Transcript of Seminar Questions(1)