Download selection effects

POL 4410: Week 9
International Development
Structure
1. International Aid:
1. Debt
2. Aid
3. IMF and the World Bank
4. NGOs
2. International Inequality
1. Convergence
2. Divergence
Debtdebt is the amount
• ‘External’ or ‘foreign’
a country owes to foreign creditors
(banks, foreign governments, IMF,
World Bank)
• ‘Sustainable debt’ is the relative burden
of holding this debt. Measures:
debt/GDP; debt/exports; debt/tax
revenue
• ‘Odious debt’: this is debt incurred by a
regime for purposes that do not serve
interests of the state. Such debts are
presumed to be personal.
Who Used Debt?
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Major users were ISI states (see next
week).
Why? Because such states could not
afford their imports of technology through
currency earned from exports
Instead they had to borrow this currency.
And how would they pay back currency
without future earnings? Why did banks
lend?
Sustainable Debt
Sustainable Debt
Frieden (1)
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2 periods: era of borrowing 1970s; debt crisis
1982-84.
Two sectors of capital: liquid and specific
assets.
Two types of class-conflict: weak and strong.
Weak class conflict led to sectoral policies
whereas strong conflict led to free-market
policies.
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Frieden (2)
Chile: strong labor / capital hostility. This
meant government had non-sectoral
policy and consequent decline of
manufacturing. Debt crisis failed to lead to
political revolt.
Brazil had weak labor / capital hostility.
Government used debt for sectoral
policies - expansion of manufacturing.
During downturn, sectors fought back
against austerity and overthrew
government.
Foreign Aid
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Millennium goal of 0.7% of GDP as aid. US
currently spends 0.15%.
Much aid goes to debt relief. Jubilee 2000
was plan to produce debt relief for HIPCs.
Live 8 intended to increase this goal.
Agreement to write off $40bn debt of 18
HIPCs to IMF and bank.
Problem of ‘moral hazard’ and debt
forgiveness
The IMF: Aid?
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Role of the IMF is to bail out states with BOP
crises.
Each state must contribute annual dues
proportional to national income
Countries can borrow up to 25% of dues
Further borrowing requires entering a Structural
Adjustment Program (SAP) which has conditions
attached - ostensibly to reduce future BOP
problems
Overall funding of $215bn.
Przeworski &
Vreeland
• Countries enter IMF when reserves low
and BOP high, when rejection costs are
high, and when sovereignty costs are
low.
• P and V find that countries that enter
IMF programs tend to have worse
economic outcomes post-program than
states that do not enter, even controlling
for selection effects.
P and V
P and V
The World Bank
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The World Bank lends developing states (under
$865 per capita) money for development
projects.
As with IMF, voting is tied to income. US holds
16.4% of votes: 85% supermajority needed to
pass major decisions
Why loans not grants?
Has authorized capital of $184bn (10% from
dues, most from borrowing)
NGOs
• Gates Foundation ($32bn endowment):
Global Health Program; Global
Development Program; United States
Program
• Oxfam ($300m per annum)
• Red Cross
• Amnesty
International
Inequality
• We must try to distinguish between
WITHIN-STATE inequality and
BETWEEN-STATE inequality.
• While former has increased in many
areas, the latter is much larger.
• There has been ‘divergence big time’
(Lant Pritchett, 1997)
Within-State Variation
• H/O predicts this should rise in
developed states and decline in
developing states. Why?
• The former has happened but no the
latter. Why?
• What would Rudra argue?
Within-State Graph
World Poverty
World Income
Distribution
Income Growth by percentile
Income distribution
1970
Income Distribution
1999
1990
1999
Impact of China and
India
Showing Divergence
• Pritchett 1997 estimates that a lower
bound for income is P$250 per annum.
• Purchasing Power Parity vs. Market Xrates.
• For poorest countries today to have not
diverged from US growth they would
have to have had incomes way below
P$250
Convergence in
OECD
Divergence
Elsewhere
Divergence
Winners and Losers
Next Week
• TUES: Development Strategies pre1990s
Fascism, Communism, Social
Democracy, ‘Embedded Liberalism’; ISI;
EOI
• THUR: New Winners and Losers and
their development strategies: Asian
Tigers; European Tigers; China and
India; Sub-Saharan Africa; Latin
America