Theories of Economic Development

The Liberal Paradigm

Today’s Agenda• Review: Neo-Liberalism, Casino Capitalism, demise of the welfare state,

the Transformation of International Institutions• Is the World Developing or Underdeveloped?

– The good news: Growth and aggregate improvement in human welfare indicators

– The bad news: inequality and a growing gap between rich and poor• Liberal views on development and explanations for the growing gap• A. Rostow and Stages• B. Liberalism and integration into the international economy:

– Staples Theory (Trade) – Product cycle (MNC), – Institutions (Washington Consensus)

• C. Internal Requirements for Development– Move from a traditionsl to a modern society– Democracy

• D. Summary of the Liberal position•

Review: The rise of a “casino” economy

• End of hegemony removes international “safety net”

• Need to compete in the global economy for economic growth and to remove BoP deficits

• Requirement for competitiveness: End of the welfare state

• International institutions that promote and protect a neo-liberal international economy

Retreat of the Welfare State: Inequality in rich countries

Per cent of Disposable income held by the wealthiest (top 30%)

…..and the poorest(bottom 30%)

Denmark 48.3 13.8

Finland 45.6 17.0

Sweden 45.8 15.8

Norway 46.1 16.3

Netherlands 46.3 15.8

Germany 48.9 14.7

Canada 49.2 14.3

Italy 53.2 12.0

United States 52.5 11.8

New Role for the IMF: spread liberalism to developing countries

• Balance of payments lending in exchange for liberal reforms: structural adjustment

• Washington Consensus: stabilize, privatize, liberalize: put on the “golden straightjacket”

• No chance for the welfare state• Contributes to freedom of finance capital to

roam the earth• Contributes to freedom of multinational

corporations to roam the earth

New Role for the World Bank: focus on fostering neo-liberal policies as condition of lending

• Moved from the task of financing reconstruction projects for Europe after WWII

• To the task of financing development projects in poor countries

• Imposed the same conditions on lending as the IMF

GATT becomes the WTO• WTO is a binding treaty• Becomes the LAW in its member states• An arena for negotiating the conditions for trade liberalization• Overseas implementation of multilateral free trade agreements and

punishment for non-compliance• Goodbye embedded liberalism: members not permitted to protect

their populations

– Goodbye child labor protections– Goodbye environmental protections– Goodbye health and safety protections– Hello Private actors: banks, multinational corporations

• Hello Private Actors: banks, multinational corporations

This institutional framework permits The rise of Multinational corporations• Given these new “global guardians” of the

market, private actors have new powers• Corporations sit on advisory boards of WTO,

IMF, and World Bank• Global FDI grew from $50 billion to $2.5

trillion in 30 years

…and the growth of unregulated global finance

• International movements of money – both volume and speed

• cross-border bank lending has grown about 10% annually.

• daily foreign exchange trades now exceed by a wide margin the combined reserves of all central banks.

The result: Increasing privatization

• Some say international institutions governing the global economy have been weakened

• Only those who prefer embedded liberalism say that

• The institutions have simply changed (and strengthened) to govern an international neo-liberal economy

• Privatization is the goal of neo-liberalism

So….. If the U.S. pursued economic nationalism after hegemony, how did we get a neo-liberal global

economy?

• U.S. hegemony supported embedded liberalism

• Without a hegemon and with IFIs and WTO transformed to protect neo-liberalism, Private forces are unleashed and unregulated

• Many governments were then free to pursue economic nationalism

• Why didn’t the world devolve into the fragmentation of the 1930s?

Because of the U.S. market and the $

• First of all, freedom, not stability, is the goal• The U.S. market still stimulates exports abroad

because– Americans consume wildly– Demand met by imports

• The U.S. is also a magnet for foreign capital– Strong dollar– Low inflation rate

• But Financial crisis suggests instability

Maybe fragementation will yet occur. Without embedded liberalism, economic nationalism can rear

its head: indicators are PTAs and Subsidies

• What are PTAs?– Two or more parties with preferential access– Viviolates MFN obligation– End of 2004: 300 PTAs– 50% of global trade

• Rich countries give mammoth agricultural subsidies

INTERPRETATIONS

The WTO: A Distributive Justice Critique: neoliberalism creates growing inequality

• The rich get richer, the poor get poorer• A “race to the bottom”• “non-commercial values” cannot play a part in

trade rules• Property rights preferred to health and human

lives: “right to profit” over “right to life”

And Institutions of economic neo-liberalism undermine democracy

• Are these organizations a new source of global dominance, surveillance, and manipulation of the nation-state?

• Conditions of IMF and world bank loans not subject to domestic debate in borrowing countries

• WTO rules supersede domestic laws

The Economic Nationalist Critique

• Organizations undermine state sovereignty and make private actors more powerful than states

A Liberal rebuttal: Global Growth without a hegemon and with neo-liberalism

Who is North and Who is South?

• North = World’s Rich• South = World’s poor, or developing nations,

or emerging markets (more complicated)– Used to be called the Third World– We can no longer lump together the countries of

the “south”– Some are growing and “emerging” and some are

not.

The Good News

• 20th century economic output off the charts!• South Korea and China doubled productive

output in 10 years• Humans are, on the whole more healthy now

than 100 years ago.

Health and income have improved

• World Health Chart.lnk

Health and well-being

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..\gapminder_world_chart_2006.pdf

The Bad News: From Local to Global Inequality

• The Pre-modern world: inequality within societies

• Today: inequality between societies• What determines whether you will be rich or

poor?• Where is the “class struggle” now?

The Bad: A growing gap

Income distribution

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Who consumes the most?Global Consumption, 2004(in billion US dollars)

Liberal explanations for global growth with global inequality?

• Walt Rostow: the intellectual context– No previous conceptual apparatus – But experience with Marshall Plan– But there were historical patterns of development– Winning the cold war meant:

Helping the “Third world” developWithin the liberal capitalist model

Liberal Economic Development: “Modernization”

• From an agrarian to an industrial society through absorbtion of “western” liberal models, i.e.But this requires a “jump start” in the cold war

environment: help from the rich liberal countriesThe Stages of growth are…….

Stage 1: Traditional society

• Why no growth?

Stage 2: Preconditions for Growth

• Population growth will outpace economic growth in traditional society

• Stimulus needed to mobilize capital and resources– Revolution and institutional restructuring– Technological innovation– Favorable international environment– External Injection of capital

Stage 3: The Takeoff

•Productive investment must rise to 10 per cent of national income•Needed: rapid accumulation of capital and productive investment

Taxes Finance Stock market Trade Foreign investment aid

4. The Drive to Maturity

• Employment growth• Growth in national income• Rise of consumer demands• Strong domestic markets

5. High Mass Consumption Society

The Importance of Capital Accumulation

• Capital accumulation is the name of the game• So how does it happen?

Economic development and the International Economy

• International interdependence will lead to economic development of ALL countries in a liberal system

• Trade serves as an engine of growth

The Staples Theory

• Staples are field crops or minerals• Earnings finance industrial growth• Canada and Australia developed this way• This justifies the theory of comparative

advantage• Export-led growth is the way to develop

Trade and the product cycle

• Corporations maximize their own growth and the growth of the countries in which they operate

• Three stages of corporate expansion and growth

the introductory or innovative phase

• Located in advanced countries• Comparative advantage in product

development because of large home market• And lots of resources• Corporation enjoys monopolistic position• Foreign demand grows• Corporation exports

The maturing phase of the product cycle

• Technology diffuses• Innovative firm loses competitive edge as

technology becomes available• Advantage shifts to foreign production to

replace exports and hold market share• Innovative firm establishes foreign branches

The Standardized Phase

• Production fully routine• Comparative advantage shifts to the

developing country• Export platforms develop

So….is there a symbiotic relationship between the MNC product cycle and global economic development?

Now….there are many sources of innovation…..

Research and Development

High Tech Exports

Role of International Institutions: Washington Consensus on conditions for loans and aid

• Internal liberalization of Markets• Integration into the world Economy• Reduction of extensive government programs

because they…….– Tend of allocate funds to non-productive activities– Entrepreneurs can’t find funding– Create wrong incentives– Stimulate pressure for trade protection

So why do many countries stagnate and show little or no economic growth?

• External connections like trade and investment are important, but that’s not all…..

• There are internal requirements for developmet as well….

• Traditional culture must give way to modern culture….

Tradition and Modernity

Democracy and Markets

• Democracy and markets encourage each other: political and economic freedom are two sides of the same coin

Summary of Liberal Theories of Development

Stimulants

Hindrances

Internal External•Human Capital •Entrepreneurial Spirit •Efficient Government •Savings •Research and Development •Investments = Modern Society

•Opportunities to Catch Up •Foreign Investments •Trade •Aid

•Political Instability•Corruption•Traditional Society

•Trade Barriers in the North•Absence of project finance•Absence of Balance of Payments finance

Conclusion

• Smith, Friedman, Rostow…. “not to worry”• People will act rationally• Capital will be accumulated• If markets are allowed to operate, they will

take care of the rest• Long live the invisible hand!