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Development Theories
Note: Development entails growth. So, the
Billion dollar question: Can we
grow/develop forever?
(Actually our entire economy is predicated
on the expectation of growth.)
Some Development FYI’s
• GDP v. GNI
– GDP=Gross Domestic Product- just the stuff and services
produced inside a state
– GNI=Gross National Income-stuff and services produced by all
citizens (nationals) regardless of boundaries
• GDP Growth: Increase in GDP from one year to the next
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-#’s through 1% GDP growth is low, (poor countries & recession)
2%-5% GDP growth is respectable (most Developed countries)
Greater than 5% GDP growth is strong (Brazil, India, Thailand)
Greater than 10% is crazy fast (China)
• GDP/GNI growth is not equally distributed. Almost
everywhere the trend is that wealth is concentrated in the
hands of a few. The gap is widening.
GDP Growth: Economic Crisis of ‘08
Economic, Demographic, and other
Data
• So, here is the thing….
• Data from developing countries should be taken
with lots and lots of skepticism!
• Now, Pope, why so cynical?
– Data is self-reported. They make some up.
– They don’t have any way of collecting the data. After
all, they don’t collect taxes. You think they do a better
job with data?
– Some data gets politicized. For example, it used to be
pretty common to deny that HIV caused AIDS.
Wallerstein’s World Systems Theory
• The “Core”- developed
economies of the
northern hemisphere &
Australia/New Zealand
• “Periphery”- less
developed/developing
economies of the
southern hemisphere
• Core has associated
peripheries: e.g. USLatin America &
Europe-Africa
Note: This is generalization. Similar to the “North-South” Gap: Northern Hemisphere
countries are rich, Southern Hemisphere countries are poor.
The point: uneven development: the core benefits at the expense of the poor
Wallerstein con’t
• Similar to “Dependency Theory”- the idea that
the core exploits the periphery. The Core gets
raw materials and markets for manufactured
goods in the periphery.
• An amendment:
“semi-periphery”little bit core, little bit periphery:
– BRICS,
– NIC’s, and
– Tigers
“Semi-Periphery”
• Newly Industrialized Countries (NICS)- for
example: South Korea, Taiwan, UAE, Israel,
Poland, Saudi Arabia, Japanish, and their pals.
Joined the US/West Europe club in the last 60
years or so.
• BRICS- Brazil, Russia, India, China, South Africa.
Rapidly developing countries.
• MINT?
• Tigers/Dragons: Singapore, Taiwan, Hong Kong,
South Korea
Trade barriers
Trade barriers exist to “protect” domestic industries. (called
“Protectionist” policies). They make imports expensive and
force consumers to buy domestic products.
• Tariffs: taxes on imports or exports. Makes foreign
products expensive, and uncompetitive.
• Quotas: only a certain number of imports are allowed in.
(screws with supply & demand, makes imports
expensive)
• Subsidies: Government pays an industry, thereby
offsetting costs of production. Keeps uncompetitive
products “competitive” and keeps failing industries
afloat.
• Currency manipulation. Keep currency valued low to
encourage exports. It’s a long story.
Two main
Industrialization/Development
Strategies
• Import Substitution Industrialization (ISI) aka
“self sufficiency”
– Encourage domestic industries for domestic
consumption
vs.
• Export led growth aka “international trade”
– Encourage domestic industries to export
Import Substitution Industrialization:
ISI
• Trade barriers keep foreign products out
• Currency is not convertible (meaning can’t be
converted to Dollars, Euros, Yuan, etc.)- keeps money
in the country
• Lots of government oversight & often state-owned
utilities. Requires large (and usually
inefficient/corrupt) bureaucracy.
• Spread the investment across all industries & facets of
economy
• Common policy in 1950’s- 80’
• India, Latin America, Africa
ISI continued
• The goal was that domestic industries would be
nurtured by the state until they could successfully
compete in the global market. Then, trade
barriers would be lifted.
• The reality is that trade barriers created
inefficient industries with poor products. Lots of
corruption because of the large bureaucracy.
Sluggish growth. Lots of government debt. To
get debt relief, the world financial community
forced barriers to be lifted, which effectively
destroyed domestic industry.
• Lots of problems in 1990’s-present. Brazil,
Argentina, and others had debt crises.
Export-led Growth
• This theory requires that states identify a
product they can produce with a comparative
advantage (something they can produce more
better than other countries- cheaper, faster,
stronger).
• They should focus on producing that thing and
exporting it. The resulting tax revenues get
used to invest in infrastructure, education,
health care, etc. Ignore producing products for
domestic use- food, clothes, etc.
Export-led Continued
• Asian Tigers/Dragons: Singapore, Hong Kong,
Taiwan, South Korea. Used cheap labor to
start with light manufacturing: textiles, cheap
electronics, gadgetry. From there invested in
HDI factors which fed investment in heavier
manufacturing, finance, etc.
• Gulf States: Saudi Arabia, Kuwait, UAE, etc.
Used oil revenues to invest in education,
infrastructure, terrorism, and human rights
abuse.
Rostow Model- advocates
International Trade approach
• All states are on a continuum of five stages and progress
from one stage to the next:
1. Traditional society: high percent of population in
agriculture. Wealth allocated to “non-productive
activities” (religion & military)
2. Preconditions for takeoff: An elite initiates economic
reform. Investment in new technology and infrastructure.
Stimulates increased productivity.
3. Takeoff: Rapid growth in a few activities like textiles or
agriculture.
4. Drive to Maturity: Technology previously contained to a
few takeoff industries diffuses to other sectors.
5. Age of Mass Consumption/ “Modernity”: Shift from heavy
industry to consumer goods like cars, fridges, Iphones
Export-led/Int’l Trade Triumph
• The prevailing doctrine of development is now the
export-led growth approach.
• Look at the surge in free trade areas: EU, NAFTA,
CAFTA; bilateral FTA’s: US- Israel, Morocco, Australia,
Bahrain, etc.
• Pro’s: NIC’s showed it could work, industries become
competitive, much needed money invested from
foreign businesses, natural resources sold to fund
development
• Con’s: uneven natural resource distribution (not
everyone has oil), focusing on takeoff industries means
consumer goods and food need to be imported (more
expensive), markets can eventually decline- developed
country markets for gadgets decline as population
plateaus/declines
India GDP Per-Capita
World Trade Organization (WTO)
• Founded in 1995.
• Two principle ways it works to promote trade:
1. Helps countries reduce trade barriers & promote the
flow of money (investment)
2. Helps enforce agreements countries make.
1. For example, Chinese currency is valued artificially low,
which promotes exports. The US can take them to trade
court where Judge Judy will get in China’s face about
cheating and accuse America of living outside its means.
• Protests- so there are pretty much always protests at
WTO meetings. Critics charge that it values the
interests of MNC’s more than poor folks.
Financing Development
• Foreign Direct Investment (FDI): investment
made by a foreign company in the economy of
another state
• Bretton Woods Institutions: created in 1944 to
promote economic stability after World War II.
Includes World Bank and International
Monetary Fund. Part of UN now.
FDI
• 3/5 of FDI is from one developed country to
another developed county
– 40% of all FDI to China (you want to invest
someplace with promise of a big return)
• 2/5 FDI from a developed country to LDC
– Investment in LDC’s is risky because of political
and economic instability, so FDI to places like DR
Congo and Somalia is limited.
Bretton Woods
• World Bank: Basically makes loans to poor
countries where FDI is limited.
– International Bank for Reconstruction & Development
(IBRD): loans to reform government, develop financial
institutions, and implement infrastructure projects
– Many of these projects are failures (about half): Funds
are stolen or spent on weapons, projects don’t attract
new investment, or projects don’t work because of
poor engineering or construction.
• International Monetary Fund: Makes loans to
stabilize currencies in countries where instability
threaten international trade.
• A lot of developing countries ended up not being
able to pay off these loans….
If you are a poor indebted country:
How to get debt relief
• For loan relief, the IMF and World Bank requires a
developing country to prepare a Policy Framework
Paper (PFP) which outlines a Structural Adjustment
Program: economic goals and strategies explaining
how to reach the goals. Usually requires:
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Spending only what it can afford (no debts)
Directing benefits to poor, not just elite
Diverting investment from military to health and education
Encouraging a more productive private sector
Government reforms including accountability and
efficiency
• Critics say structural adjustment causes cuts to health,
education, and social services, and higher
unemployment from cuts to the public sector
Microfinance: small loans to individuals in
developing countries where people have
little access to credit
• Most famous is Bangladesh’s Grameen Bank.
The founder, Muhammad Yunus won the
Nobel Peace Prize in 2006
• Super small loans (average is $60), usually to
women to start small businesses.
• 99% loan repayment
• Critics charge that Grameen charges predatory
interest rates (90+%)
Finance probs. in Developed countries
• Two schools of thought:
• Austerity (gov’t spending cuts will cause businesses to invest tax
savings, promoting growth and keep debt low) (Adam Smith & “The
invisible hand”)
vs.
• Stimulus (government spending to stimulate the economy by
putting people to work; once economy recovers, tax increases will
pay off debt) (Keynesian economics & “priming the pump”)
• Eurozone:
Northern Europe (stronger) vs. Southern Europe (weaker)
– Sovereign debt crisis: weaker Eurozone states want stimulus programs
to improve economy. Stronger Eurozone states want austerity to
lower debt. Currency value cannot be used to do either. For example,
in pre-Euro times, Spain could print money to put people to work to
stimulate the economy. Now they can’t do that. Likewise, in pre-Euro
times, Germany could raise interest rates and encourage people to
save (austerity).
Fairtrade- commerce in products that are made
and sold by standards that protect worker rights
• Handicraft goods (think 10,000 Villages) and
food-coffee, fruit, chocolate.
• Producer standards: cuts out the “middle man”
(wholesalers, importers, etc), allowing the actual
producer to earn more (about 1/3 more than
conventional production). Producers are often
organized into cooperatives- gains them access to
credit, lower overhead costs.
• Worker standards: Fair wages, health and
environmental standards, no child labor.
Cooperatives are usually democratic and try to
reinvest in communities.
“Sustainable Development”
• What is sustainable development?
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Carbon footprint is neutral
Limited/no pollution
Resource neutral; requires renewables (esp. energy)
Socially fair & equal distribution
• The unicorn of development economics- does it exist?
In other words, can an economy “develop” (aka grow)
without consumption?
– Pope’s take…
• Nope…at least not in the way the current world economy is
structured.
Big Picture
• Development is uneven. The historic “core”
began developing 150 years ago, NIC’s started 60
years ago, BRICS started within the last 20 years.
• Access to natural resources and capital to finance
development is key to development.
• Economic growth depends on access to energy.
• The WTO, World Bank, and IMF promote free
trade as a means of development.
• Criticism of the international trade approach is
mounting, as exemplified by the Fairtrade
movement