Unit Ten: Development and Underdevelopment

1. Unit Ten: Development and Underdevelopment Dr. Russell Williams

2. 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. Outline: • Introduction • Trade and Development Strategies: 1945-1982 • The Crisis in Development • Orthodox Liberal Development Strategies • Contemporary Alternatives?

3. 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”

4. “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

5. “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 (?)

6. 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 (!)

7. “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

8. “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!

9. “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 . . . .

10. “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

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

12. 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

13. 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

14. 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 . . . .

15. A “liberal” development strategy - Results? Short term = pretty bad for most countries . . . . • Mexico: 1981 per capita income $3,500 1988 per capita income $3,028 1999 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?

16. 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

17. 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”

18. 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.