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Part.3
States and Markets
in the Global Economy
Part III presents four case studies of international political economy (IPE) analysis.
Each study poses particular questions or explores particular themes that apply
around the globe.
Chap.11: the development conundrum.
Chap.12: regionalism.
Chap.13: postcommunist countries.
Chap.14: political economic relations in Middle Eastern and North African states.
110329_Tsinghua_final_02.pptx
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International Political Economy
Chap. 11
The Development Conundrum:
Choices Amidst Constraints
Professor Yu Xunda
2013. 06.
Suggested Readings
 Ha-Joon Chang. Kicking Away the Ladder—Development Strategy in Historical Perspective. London: Anthem
Press,2002.
 Ha-Joon Chang. Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. London:
Bloomsbury Press,2008.
 Hernando de Soto. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.
New York: Basic Books, 2000.
 Stephen A. Marglin. “Development as Poison: Rethinking the Western Model of Unity,” Harvard
International Review, 25(Spring 2003).
 Theodore H. Moran. Beyond Sweatshops: Foreign Direct Investment and Globalization in Developing
Countries. Washington, DC: Brookings, 2002.
 Oxfam. Paying the Price: Why Rich Countries Must Invest Now in a War on Poverty. Oxford: Oxford
International, 2005.
 The Economist. “Recasting the Case for Aid,” January 22, 2005.
 Tina Rosenberg. “That Taint of the Greased Palm,” New York Times Magazine, August 10,2003, pp.28-33.
CONTENT
1. What Are Developing Nations?
2. How To Develop? Four IPE Development Strategies
3. Lessons Of The East Asian Miracle And Financial Crisis
4. Development And Globalization
1. What Are Developing Nations?
1. What Are Developing Nations? --- Introduction
Those countries included in the South, the LDCs, the developing countries, or the emerging
economies are societies with diverse histories, cultures, economies, and political systems.
 Much is made of the gap between North and
South and whether global inequality has
The characteristics they share:
increased, decreased, or remained about the
High instances of poverty; earning less than $2 per day;
same over the last half century.
Income inequality and lack of a middle class;
Lack of education;
Inadequate health care;
 Inequality, both between nations and within
Hunger;
nations, is an important issue, and there are
High instances of infant mortality;
endless debates over how the global pie ought
Lack of infrastructure;
to be divided and why the division is so much
Weak governments;
uneven today.
Dependency on foreign aid and humanitarian assistance.
1.1 Independence and Underdevelopment
As the colonial empires gradually disintegrated during the mid-twentieth century, new nation-states
emerged into an international order shaped by the Cold War.
Three camps:
The First World: the U.S and its industrial democracy allies.
The Second World: the Soviet Union and its allies.
The Third World (or LDCs): newly formed nations in Asia, Latin America, and Africa
Development Paradox----
 On one hand, the promises of development were an end to poverty and the start of true independence;
 On the other hand, development meant exploitation, manipulation, and continued subjugation.
This discord is manifested in three major forces that shaped the development conundrum for LDCs.
 Some LDCs approached development both as a response to the exploitative colonial conditions and as a resistance to
cultural domination by the West.
 The second force to shape development for many LDCs was the Cold War.
 The economic success of the developed countries provided a strong rationale.
1.2 Is Development Possible? ---(1)
Individually, LDCs were unable to exert much influence on the international system and its institutions.
Then, a number of them tried to promote a collective identity.
Practices: --- the 1955 Afro-Asian Bandung Conference
---the 1961 Nonaligned Movement (NAM)
The threefold purpose of NAM:
 Advocating political independence for remaining European colonies
 Positioning themselves outside the sphere of the Cold War scenario.
 Promoting the interests of the LDCs as whole.
One of the main priorities of the South--------------neo-colonialism
Complementing the domination of multinational corporations was a restrictive system of trade, financial, and technology transfer
that made LDCs economically vulnerable and weakened their development prospects.
Having failed to influence the international system through their collective action, some LDCs began to doubt
that development was even possible within the existing international structure.
Because of the international division of labor, production specialization, and the free-trade system.
1.2 Is Development Possible? ---(2)
Dependency theories--------Dependence was considered significant, as it resulted in underdevelopment in LDCs.
 A distinction between underdevelopment & undevelopment.
 A metropolis-satellite system along with underdevelopment that originated in the European
colonial order prior to 20th century.
 Several mechanisms reproducing the dominant-subordinate relation and worsen the
underdevelopment process in LDCs.
 Through multinational companies (MNCs)；
 The unequal exchange relationship;
 The international financial and foreign aid.
1.3 UNCTAD and the NIEO: LDCs Organize to Change the System
Frustrated by their meager success, many LDCs turned to their membership within international
organizations to cooperate and change the IPE structures.
 In 1964, the UNCTAD and the G-77.
---------GSP: a Generalized System of Preference
 In 1973, the OPEC and those oil-producing development countries.
 In 1974, a New International Economic Order (NIEO)
However, based on the general opposition of the industrialized countries, efforts by LDCs in the 1970s
to change the system failed.
LDCs were left with the following choices:
 Promoting autonomous local development without the global market
 Accepting global markets
1.4 The Market Unleashed
In the 1980s, the conservative Regan administration and the free-market ideology.
By the 1990s, the fall of the Soviet Union and the collapse of communism gave even more
momentum to the “Washington Consensus”.
Also with the deepening globalization which affirmed privatization and free trade.
2. How To Develop? Four IPE Development Strategies
2.1 The Economic Liberal Perspective ---(1)
 The economic liberal perspective on development requires that LDCs become intimately
integrated into the global market economy.
 From the liberal perspective, FDI and MNCs are a major source for capital, jobs, export
revenues, and technology in LDCs.
 As “latecomers,” LDCs can use the market to develop and industrialized, while
learning from the pitfalls and policy mistakes of the now developed nations.
2.1 The Economic Liberal Perspective ---(2)
A “race to the bottom”
 The economic liberal model focuses on internal conditions in LDCs stifle economic development. Other variants of this perspective
also emphasize the social aspects of development.
The theory of “staged of growth”-----------W.W.Rostow
five basic stages of economic development:
 traditional society,
 preconditions for take-off,
 take-off,
 drive to economic maturity,
 high mass consumption and self-sustained.
He perceived the stages of development as universal, arguing that in the long run, the North can model the
development process for the South.
The trickle-down effect
Economic liberal ideas have related in part to the economic growth achieved by many states, including Japan, the
Asian Tigers, the Philippines Malaysia......all of whom adopted some variant of outward-looking export-oriented policies.
2.2 The Structuralist Perspective ---(1)
 Moran argued that a passive strategy that counts on
sweatshop earnings to “trickle down” and eventually
create more growth is wrongheaded.
He proposes a “buildup” strategy.
The buildup strategy must be broad-based, not just
aimed at attracting MNC funds.
 The Marxist and early structuralist critiques of the
development problem begin with the relationship of core to
peripheral countries
 The Western industrial model is inappropriate for LDCs
as the developed nation’s “neo-imperial” connections to
the South via trade, aid, and FDI often result in dual
economies.
2.2 The Structuralist Perspective ---(2)
For the ardent Marxist-structuralists, the liberal trickle-down market model ultimately benefits only
elites and core nations and does not produce wider societal development.
 The Marxist-structuralist model was closely associated with pro-Soviet communist
models during the Cold War. They sought similar benefits by focusing on self-sufficiency and
isolation from the capitalist international economy.
Inward looking strategies & import-substituting industries (ISI).
 Structuralists viewed the ISI strategy as a way for countries in the periphery to achieve
development while minimizing the risk and adverse effects of dependency ties with the core.
The inward-looking and nationalistic import-substitution approach was implemented to reduce
dependence on foreign capital, technology, and markets and to promote “home-grown” industries.
2.2 The Structuralist Perspective ---(3)
Also the import-substitution approach path is a series of stages:
 The 1st stage --------promoting local manufacture of consumer goods
 The 2nd stage -------expanding the manufacture of labor-intensive consumer goods along
with diversifying into capital-intensive goods.
However, the performance of these economies was not as
strong as that of the export-oriented East Asian NICs.
Based on this, many structuralists are open to the idea that
export-oriented growth and an aggressive trade posture can
reap important benefits for a developing nation.
2.3 The Mercantilist Perspective
The mercantilists consider international trade as essential but also strategic to national development. But
they are not enthusiastic about the laissez-faire and limited -government doctrine.
States have a critical role to play in coordinating a trade strategy that would be conducive to promoting
economic development.
 Several developing countries in East Asia adopted strategies that are generally termed export-oriented growth.
 It is based on a combination of mercantilist and liberal prescriptions for economic growth and development.
There are certain common trends among the East Asian NICs:
 First, the export-oriented policies of East Asian NICs involved changing the fundamental composition of
the their production.
 Second, this export-led growth strategy involved promoting a high level of saving and investment.
2.4 Self-Reliance
The self-reliance strategy reflects the conclusion reached by many development experts and
officials that there is no one “magic bullet” approach for development.
This model stresses the importance of taking into
consideration the unique circumstances, economic challenges,
and resources of each country, when considering the
combinations of strategies that many be appropriate.
 Which strategy will be adopted should be decided not on the
basis of theory alone, but rather on the assessment of the
complex domestic and international factors a particular LDC
confronts.
3. Lessons Of The East Asian Miracle And Financial Crisis
3.1 Lessons Of East Asian Miracle And Financial Crisis --(1)
---------- What were the lessons learned from the debate between import-substituting
industrialization and export-oriented growth?
1973, the WB released a study titled The East Asian Miracle: Economic Growth and Public Policy.
The report argued that the “East Asian Miracle”—high growth without great inequality
——was due to two basic factors.
 The East Asian countries were successful at
“getting the fundamentals right”.
 Second, some of the state policies were
effective in increasing growth, especially
“export-push” policies.
3.1 Lessons Of East Asian Miracle And Financial Crisis --(2)
Conclusion:
LDCs avoid both types of state-led growth strategies and adopt instead the neoliberal Washington
Consensus of free trade, free capital markets, and limited government intervention.
They pointed out that many of the positive factors in Asian economic development, such as high saving rates,
strong education system, and relative income inequality, were dictated by state actions, not due to the
absence of them.
The Asian financial crisis caused debates.
Some argued that the crisis was caused or exacerbated by unwise state involvement in the
economy (often called crony capitalism)
The Asian financial crisis was created by a combination of market imperfections and what states did
(business-government relations that sometimes encouraged financial abuse) and did not do (the lack of
effective regulation and more comprehensive social safety nets).
The key of development in LDCs is not open markets, more government, or less government. Rather, they
need good government.
4. Development And Globalization
4.1 Global Competition and Interdependence
The 1990s began the era of intense global economic interdependence.
This decade brought three major changes:
 Economic liberation in China, begun in the 1980s, accelerated as Hong Kong was returned from
British rule in 1997 and China was granted membership in the WTO in 2001.
 The collapse of the communist government of the Soviet Union and its Eastern European satellite
nations turned them all into “emerging market” economics.
 A series of government reforms in India turned its strategy from inward-looking state development to
outward-looking market development.
 Such global competition for products, resources, investments, and markets created problems and
opportunities both for LDCs and for the advanced industrial countries.
4.2 Trade and Finance Policies
The option of completely autonomous development gradually faded from the scene, it was
replaced by the notion that development needed to take advantages of global resources and
market opportunities.
More and more of the resources for development came from financial markets, not from
transfers of aid.
 A consensus emerged among LDCs that the rules
of international trade and financial organizations
were unfavorable to the interests of LDCs.
 LDCs begun to demand more access to
rich-country markets.
4.3 The Informal Economy and the Mystery of Capital
The informal economy is the part of the economic
system that operated outside of direct government control
or regulation.
It is often an important part of the LDC economy and a
source of opportunity for grassroots entrepreneurship.
However, in many countries, government regulations and legal
issues make it difficult for people to get started in the informal
economy, to take full advantage of its opportunities, and to leverage
their success.
4.4 Microcredit and Macrocredit
One of the most interesting features of the globalization era has been the realization that economic development,
if it is to succeed, must proceed at all levels at once.
One of the great errors of grand development strategies was the notion that development financed by
“macrocredit” would trickle down from international capitalist institutions or a planning agency to the villages
and city streets.
Microcredit is one of the beneficiaries of this “trickle up” approach.
-----------to provide credit to people to start their own small businesses, lifting themselves from poverty
through their own initiative.
E.g the Grameen Bank
 The reason that microcredit institutions are successful involves an economic problem called asymmetric
information, which always limited grassroots development.
4.5 Development in the New Millennium
Despite years of debates about competing models and strategies, the perspectence of poverty remained
critical and endemic in many parts of the world.
E.g: the problem of access to health care.
In 2005, the UN announced the Millennium Development Goals (MDGs) to refocus the international
community’s commitment to addressing dire economic and human conditions in the world’s poorest
nations.
The goals are as followings :
Eradicating extreme poverty and hunger,
Achieving universal primary education,
Promoting gender equality and empowering women,
Reducing child mortality rates,
Improving maternal health,
Combating HIV/AIDS, malaria, and other diseases,
Ensuring environmental sustainability,
Developing a global partnership for development.
 The industrialized states can
and should provide more aid to
the poorest nations.
 Also IMF-led austerity has
frequently let to riots, coups,
and the collapse of public services.
Discussion Questions
• How serious is the problem of global poverty today? Explain citing data from this chapter.
• What four forces have shaped the development process for LDCs? How do these forces create tensions
within LDCs and between LDCs and industrial nations? Explain。
• Briefly trace how the issues regarding economic development have changed since the early postcolonial
days of the 1950s and 1960s. In particular, discuss the tensions between the UNCTAD and the NIEO,
between import-substitution industrialization and export-oriented growth, and between the advocates of the
Asian Miracle and those who favor the Washington Consensus.
• The chapter’s author argues that developing countries need good government more than they need less
government or more government. What are the characteristics of good government with respect to economic
development? Explain. (Hint: consider some of the factors discussed in the last section of this chapter)