Theories of Economic Development

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 neoliberal economy • Privatization is the goal of neo-liberalism 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 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 Internal Stimulants Hindrances 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! ... 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