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Globalization and Underdevelopment Or, If globalization is so great, why are there so many poor people? © Randall W. Stone, 2002 Statistics • Infant mortality: – 4 of 1,000 in the richest fifth of countries; – 200 of 1,000 in the poorest fifth • Childhood diseases: – 2 million die of dehydration from diarrhea – 2 million die of pertussis, polio, diptheria, tetanus, measles. Vaccination costs $15. – 3 million die of bacterial pneumonia. The antibiotic treatment costs $.25 Easterly 2001 © Randall W. Stone, 2002 Statistics • Nutrition – Calorie intake 1/3 lower in the poorest fifth of countries than in the richest • Child labor – 42% aged 10-14 in the poorest countries – 2% in the richest fifth • Women’s rights – None of the poorest fifth has equal rights for women Easterly 2001 © Randall W. Stone, 2002 Case study: Ghana • Auspicious start – At independence in 1957, Gold Coast exported 2/3 of the world’s cocoa – Best educational system in Africa – Under British rule, Nkrumah built roads, clinics, schools – Leading economists were optimistic © Randall W. Stone, 2002 Case study: Ghana • World Bank project: Akosombo Dam – Electricity – Aluminum smelter owned by multinational Kaiser Aluminum – Artificial Lake Volta for water transportation – Fishery – Irrigation • But Ghana was poorer in the 1980s than in 1957, and is not much better off today © Randall W. Stone, 2002 What went wrong? • • • • 5 military coups Famine in the 1970s Drought By 1983 – Per capita GDP was 2/3 of the 1971 level – Calorie intake was 2/3 of recommended level © Randall W. Stone, 2002 Financing gap approach • • • • Evsey Domar (1946) Roy Harrod (1939) Sir Arthur Lewis (1954) W. W. Rostow (1960) The Stages of Economic Growth: A Non-Communist Manifesto Growth is proportional to net investment Problem: the evidence © Randall W. Stone, 2002 Solow’s paradox (1956, 1957) • Investment cannot lead to long-run growth • Diminishing returns • Technological innovation growth • But, how do we explain variation across countries? • Does technology vary? Why? © Randall W. Stone, 2002 Other explanations? • Human capital • Complementarities • Incentives & institutions – Saving & investing – Maximizing profits (not rents) – Competition – Resource allocation – Missing markets © Randall W. Stone, 2002 Globalization • • • • • • Trade Technology Capital flows Capital controls Interdependence Communications © Randall W. Stone, 2002 Joseph E. Stiglitz • Nobel Prize in Economics • Major contributions in the economics of information—transaction costs, principal-agent models, incentives • Expertise in public economics & development • Council of Economic Advisers, 1993-97 • Chief Economist, World Bank, 19972000 © Randall W. Stone, 2002 Globalization & Discontent Major claims: • IMF, World Bank & WTO are managed in the interest of the richest countries • Current trade regime is unfair • Abolishing capital controls exposes poor countries to too much risk of crises • IMF programs hurt the poor and do not promote growth © Randall W. Stone, 2002 Indictment of the IMF • • • • • • Poor economic analysis “Market fundamentalism” Little local knowledge Lack of transparency Excessive attention to inflation Overextension beyond core competencies © Randall W. Stone, 2002 Critique of conditionality • Little evidence that it works: – Influencing policy – Increasing growth • Political backlash © Randall W. Stone, 2002 Recommendations • Adjustment should be gradual • Wider role for state involvement in the economy – Regulation – Deficit spending – Industrial policy • Reform of IFIs and WTO in the interests of the poor • Abolish conditional lending © Randall W. Stone, 2002