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Development and Institutions
Commerce and manufactures can seldom flourish
long in any state which does not enjoy a regular
administration of justice, in which the people do
not feel themselves secure in the possession of
their property, in which the faith of contracts is
not supported by law, and in which the authority
of the state is not supposed to be regularly
employed in enforcing the payment of debts from
all those who are able to pay. Commerce and
manufactures, in short, can seldom flourish in any
state in which there is not a certain degree of
confidence in the justice of government.
-- Adam Smith, Wealth of Nations
Today’s Agenda
• Review Dependency Theory
• South’s response to Dependency Theory
• Failures and debt: A decade of development
wiped out
• But why do some countries develop while
others don’t?
• Modified Liberalism: Institutions
MNCs and Dependency
Core (North)
Periphery (South)
Periphery
Brain Drain and Luxury exports
Core
Per
Core Technology for Luxury production
Periphery
MNCs and Dependency
Core (North)
Periphery (South)
Periphery
Brain Drain and Luxury exports
Core
Per
Core Technology for Luxury production
Periphery
Southern Response to Dependency
Theory: Economic Nationalism
• The “South” did not have the strength to
participate in the international economy
• By 1960s, Independence for many countries
• And had clear majority in the U.N.
• Rose up against the GATT
The Problem of Development from an
Economic Nationalist Perspective
• Exploitation of the South by the North
• Wealth of the Rich depends on the Poverty of
the Poor
• Northern Dominance over the South
– Colonial legacies
– International institutions
– Example of Doha Round of WTO Negotiations
The Domestic Solution: ISI
• What is ISI?
• Infant industry arguments
• But ISI distorts free trade
The International Solution: NIEO – A
Global welfare state
• Historical Origins
• Theoretical Origins: Dependency Theory
• Rich Country Response
NIEO Program: Transfer of resources
from North to South
• Finance
– No “conditionality” for loans
– Creation of a new international currency
• Trade
– Free access to rich markets
– Stable prices for commodities
• MNCs
– Right to nationalize resources
– International regulation and supervision of MNCs
• Aid
– All states must conform to a target of .75% of GDP in Aid
Any Progress?
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•
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The South’s voice was heard
Aid Targets not met
No international Currency
The Generalized System of Preferences
No governance over MNCs
No real progress…..
The Failure of “stages,” NIEO, ISI, and
the Problem of Debt
• NIEO was abandoned
• Tariffs remained in place after industry was
thriving
• Because of “distributional coalitions”
• The growth of a base of inefficient industries
which could not compete internationally
• Which left countries dependent on aid and
loans
Why the Debt?
• Oil Shocks of the 1970s
• Private banks were willing lenders
• A marriage made in heaven.
Why was the debt a problem?
• Debt is not necessarily a bad thing—in fact it
can be a good thing.
• Then what’s the problem?
The Fed raises interest rates
Internal and external causes of debt
• Global recession
• Culture and institutions
• An unregulated international financial system
How it works
Poor
The Result
• Interest payments outstrip export earnings
• Net transfer of financial resources from South
to North
A Decade of Development wiped out
by Debt
• Declining growth rates
• Falling living standards
• Riots
Liberal response:
• Heavy loans made in the 1970s because of the
oil crisis
• Net outflow because countries did not use
their loans wisely
Joe’s story
Is Dependency Theory just a
complaint?
• Provides explanation for poverty of the south
but not a good prescription
• NIEO failed
• Bowing out of the international neo-liberal
economy won’t work
• Have any strategies to promote development
actually worked?
Testing Dependency Theory
• Dependency perspectives have evolved
• There has been an impressive rise of former poor
countries of the South in Latin America and in
Asia.
• ISI worked in some places, as we shall see
• Countries could develop WITH Dependency!
• Dependent Development
• Negotiations between governments, firms, and
MNCs
A modification of Dependency Theory:
Dependent Development
• Sometimes the surplus is invested in the host
country---location of plants, services
• This can stimulate domestic industry and
business
• The result: “Dependent Development”
• So maybe stagnation is not inevitable
If dependent development is possible, why do
MNCs invest in some countries and not others?
• The answer might be government policies and
institutions
Why institutions are needed to spur
development
• Poor countries can’t afford to wait while
natural market forces work their beneficial
effects.
– Market forces take too long
– Produce unbalanced economies
– Vulnerable to price shocks
– Vulnerable to manipulation by strong trading
partners
Poor Countries can be seen as “late
developers” ….adding to our terminology
• Liberal and modified Liberal Theory
– Developing countries
– Less Developed Countries (LDCs)
– Emerging markets
– Late Developers
– Newly Industrializing Economies (NIEs)
• Dependency theory
• Underdeveloped Countries
• Neutral?
– The “South”
Requirement for development: A
developmental State
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Example of Soviet Union
Compatible with Keynes
Compatible with embedded liberalism
Historical experience
Gerschenkron’s contribution
If You’re Early, use the market! (?)
If You’re Late, Use the State!
• Development Banks
• The STATE
– Czarist Russia and Soviet Union
The advantages of backwardness
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Need for rapid development
British example
Advantage of hindsight
British investment in a “developing” country:
the U.S.
It pays to be late
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•
•
Latecomers grow faster
Access to state-of-the-art technology
Quick move to heavy industry
Development is possible through contact with
the International Economy
Latecomers grow faster…
Leapfrogging: Access to the Latest
Technology
They move quickly to competitive
industries
Development is possible through contact
with the international economy
The more integration, the more
growth
SUMMARY OF ALL DEVELOPMENT
THEORIES
Accumulation of Capital is the Key to
development
•
•
•
•
•
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Theories differ on the BEST way
Trade?
Aid?
Technology transfer?
State mobilization of capital?
ISI?
Growth of a middle class?
Dependent Development?
And the explanations are…..
• Liberal claim…….
• Marxists and dependency theorists
maintain….
• Economic Nationalists demand……
• And Modified Liberals (Institutionalists)
believe……
Who is right?
• Maybe it depends on the conditions under
which a country tries to develop
• And countries have to learn to play their cards
right
What did Asia do right?
With the Fastest growth rate in the
world……
Growing share of World GDP
China and India
And
export
high
tech
goods