The New International Economic Order,1973-1982

1. The Oil Shock and Commodity Power Commodity Power Leads to Demands for The New International Economic Order (NIEO) Increase LDC Manufacturing to 25% of Total World Manufacturing by 2000 LDCs Manufactured about 9% in 1978 Specific Demands: Increase LDC Control of Natural Resources Cheaper and Easier Access to Northern Technology Increased Foreign Aid (.7% of North’s GNP) Eliminate LDC Debt Greater Influence over IMF and World Bank The New International Economic Order,1973-1982

2. The Shift to Market-Based Liberalism, 1982-2001 • “The Poor are Poor Because They Are Inefficient.” • Development Requires Societies to Allocate Their Resources to those Activities that Yield the Highest Possible Return. • Best Achieved By Allowing Markets to Make Decisions About Resource Allocation. • By Relying Upon the Government Rather than the Market to Allocate Resources under ISI, Developing Countries Realized a Smaller Return on their Resources Than They Would Have Realized Had Markets Played the Central Role.

3. Over-Taxed Productive Sector (Agriculture). Agricultural Production Fell as Consequence. Exports Fell Because Agriculture was Most Important Export. Food Imports Rose. Government Revenues Fell. Ghana and Cocoa as an Example. Over-Subsidized Un-Productive Sectors (Manufacturing). Manufacturing Was Too Capital Intensive. Factories Ran at 50% of Capacity. Goods Were Not Competitive in International Market. Ghana and Fruit Processing as an Example. Inefficient Resource Use Under ISI

4. Rent Seeking • Government Permits Required For All Imports. • Government Does Not Satisfy All Requests for Import Permits. • Import Permits Are Therefore Valuable: • People Holding Import Permits Can Buy Goods at Low World Prices, Sell Them at Home at Higher Domestic Prices, and Pocket the Difference. • The Price Difference is A “Rent”—An Above Market Return. • People Dedicate Their Lives to Capturing the Rents Created By This System. They Become “Rent Seekers.” • Consequences of This System • Bureaucratic Delay • Bribery and Corruption in Government Agencies: A Market for Permits • Misallocation of Productive Resources

5. Strong States • Import Substitution Required A Strong State • Strong States Are Risky • “Good” Dictators Use State Power For Public Good • Extract Resources From One Sector and Invest Them in Other Productive Sectors • “Bad” Dictators Use State Power For Their Own Gain • Extract Resources From One Sector and Spend Them on Palaces, Private Jets, Pink Champagne, and Perfume Baths (e.g., Mobutu in Zaire) • Temptation to Use State Power to Own Profit Appears Hard to Resist

6. Liberalism Ascendant • Since Late 1980s Developing Country Governments Have Embraced Liberal Development Strategies • Dismantle ISI at Home • Sell Government-Owned Industries • Stop Taxing Agriculture to Subsidize Manufacturing • Embrace Liberal International Trade • Reduce Tariffs and Liberalize Imports • Target Export Sectors for Development • Join “Free Trade Areas” • A 180 Degree Turn in Development Strategy

8. Why the 180? • ISI Running Out of Steam By Early 1970s. • Success of East Asian NICs Suggests the Viability of Alternative Strategy. • The Debt Crisis and Northern Control Over Financial Flows. • A Realist Perspective on the Last Fifty Years of North-South Relations.

9. Who Is Right? • Structuralists Have a Point • Life in Global Capitalist System is Difficult for Developing Countries • Vulnerable to Terms of Trade Shocks • LDC Industries Can’t Easily Compete Against Core Country Firms. • Structuralists Exaggerate Degree to Which Poverty is Caused by Capitalist System • Liberals Have a Point • Government Policy Did Make Things Worse Rather Than Better in Most Countries. • Liberals Exaggerate Degree to Which and the Speed at Which Markets Will Raise Incomes in Developing Countries.