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Globalization and Underdevelopment

Globalization and Underdevelopment. Or, If globalization is so great, why are there so many poor people?. Statistics. Infant mortality: 4 of 1,000 in the richest fifth of countries; 200 of 1,000 in the poorest fifth Childhood diseases: 2 million die of dehydration from diarrhea

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Globalization and Underdevelopment

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  1. Globalization and Underdevelopment Or, If globalization is so great, why are there so many poor people?

  2. Statistics • Infant mortality: • 4 of 1,000 in the richest fifth of countries; • 200 of 1,000 in the poorest fifth • Childhood diseases: • 2 million die of dehydration from diarrhea • 2 million die of pertussis, polio, diptheria, tetanus, measles. Vaccination costs $15. • 3 million die of bacterial pneumonia. The antibiotic treatment costs $.25 Easterly 2001

  3. Statistics • Nutrition • Calorie intake 1/3 lower in the poorest fifth of countries than in the richest • Child labor • 42% aged 10-14 in the poorest countries • 2% in the richest fifth • Women’s rights • None of the poorest fifth has equal rights for women Easterly 2001

  4. Case study: Ghana • Auspicious start • At independence in 1957, Gold Coast exported 2/3 of the world’s cocoa • Best educational system in Africa • Under British rule, Nkrumah built roads, clinics, schools • Leading economists were optimistic

  5. Case study: Ghana • World Bank project: Akosombo Dam • Electricity • Aluminum smelter owned by multinational Kaiser Aluminum • Artificial Lake Volta for water transportation • Fishery • Irrigation • But Ghana was poorer in the 1980s than in 1957, and is not much better off today

  6. What went wrong? • 5 military coups • Famine in the 1970s • Drought • By 1983 • Per capita GDP was 2/3 of the 1971 level • Calorie intake was 2/3 of recommended level

  7. Financing gap approach • Evsey Domar (1946) • Roy Harrod (1939) • Sir Arthur Lewis (1954) • W. W. Rostow (1960) The Stages of Economic Growth: A Non-Communist Manifesto Growth is proportional to net investment Problem: the evidence

  8. Solow’s paradox (1956, 1957) • Investment cannot lead to long-run growth • Diminishing returns • Technological innovation  growth • But, how do we explain variation across countries? • Does technology vary? Why?

  9. Other explanations? • Human capital • Complementarities • Incentives & institutions • Saving & investing • Maximizing profits (not rents) • Competition • Resource allocation • Missing markets

  10. Globalization • Trade • Technology • Capital flows • Capital controls • Interdependence • Communications

  11. Joseph E. Stiglitz • Nobel Prize in Economics • Major contributions in the economics of information—transaction costs, principal-agent models, incentives • Expertise in public economics & development • Council of Economic Advisers, 1993-97 • Chief Economist, World Bank, 1997-2000

  12. Globalization & Discontent Major claims: • IMF, World Bank & WTO are managed in the interest of the richest countries • Current trade regime is unfair • Abolishing capital controls exposes poor countries to too much risk of crises • IMF programs hurt the poor and do not promote growth

  13. Indictment of the IMF • Poor economic analysis • “Market fundamentalism” • Little local knowledge • Lack of transparency • Excessive attention to inflation • Overextension beyond core competencies

  14. Critique of conditionality • Little evidence that it works: • Influencing policy • Increasing growth • Political backlash

  15. Recommendations • Adjustment should be gradual • Wider role for state involvement in the economy • Regulation • Deficit spending • Industrial policy • Reform of IFIs and WTO in the interests of the poor • Abolish conditional lending

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