1 comparative politics of development why are some states poor?

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Comparative Politics of Development

Why are some states poor?

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I. The Development Paradox: How can wealth become poverty and poverty become wealth?

A. Poor countries in 1000 become rich ones later. Why don’t China and India rule the world?

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Rise of the West

In 1750, China and India were the largest producers of manufactured goods (including crafts), accounting for more than half of global manufacturing.

The countries that would later constitute the Third World accounted for 73% of global manufacturing, including crafts.

But by 1913 the Third World accounted for only 7.5% of global manufacturing.

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World Wealth, Year 1

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World Wealth, Year 1900

% World Production, 1500-2000

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I. The Development Paradox: How can wealth become poverty and poverty become wealth?

A. Poor countries in 1000 become rich ones later. Why don’t China and India rule the world?

B. Colonies (USA), fragmented states (German Confederation), resource-poor states (Japan) and late developers (NICs) all ended up more prosperous than many countries (Mexico, Brazil, African states) rich in natural resources and provided with aid from rich countries. Why?

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II. Modernization Theory

…aka Neoclassical or Development EconomicsA. Western-centric “stages of development”

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II. Modernization Theory

…aka Neoclassical or Development EconomicsA. Western-centric “stages of development”B. Implications

1. S-Shaped Growth Curve

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Predicted Growth Over Time

Diminishing Returns to Capital

Capital-Fueled Growth

Lack of Capital

TIMEPer

Cap

ita G

DP

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II. Modernization Theory

…aka Neoclassical or Development Economics

A. Western-centric “stages of development”

B. Implications1. S-Shaped Growth Curve

2. Convergence – Size of national economies will eventually be determined only by population (more or less equal GDP per capita)

C. Recommendations: Agricultural surpluses, resource extraction, foreign investment, loans and aid, monetary stability, free capital markets, “modern” (Western) values, political stability (possibly authoritarianism)

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D. Problems with modernization theory

1. Authoritarian regimes often renege on promises of development, become corrupt

2. West used state intervention to developa. Only the UK relied on free trade, because

only the UK could be the first to industrializeb. Germany and France needed industrial banks

to direct investment to growth industriesc. Russia and Japan needed massive state

involvement and protectionismd. NICs used “developmental state” approach to

target export sectors

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3. Modernization stalls

a. Capital wasn’t reinvested in industry

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3. Modernization stalls

a. Capital wasn’t reinvested in industry

b. Developed countries refused to lower barriers on textiles and other goods

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3. Modernization stalls

a. Capital wasn’t reinvested in industry

b. Developed countries refused to lower barriers on textiles and other goods

c. Debt crisis: burdens accumulated when commodity prices fell

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Commodity prices stall while the cost of living rises….

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3. Modernization stalls

a. Capital wasn’t reinvested in industry

b. Developed countries refused to lower barriers on textiles and other goods

c. Debt crisis: burdens accumulated when commodity prices fell

d. Capitalist countries intervened against state involvement in economies (most common before 1960s)

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E. Neoliberalism: An update to modernization theory

1. New Institutionalism: Institutions must create incentives for investment (transparency, prevent corruption, prevent rent-seeking) embrace democracy and limited government

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E. Neoliberalism: An update to modernization theory

1. New Institutionalism: Institutions must create incentives for investment (transparency, prevent corruption, prevent rent-seeking) embrace democracy and limited government

2. Embrace export-led development: invest in infrastructure relevant to modern industries

3. Structural Adjustment: Austerity programs to reduce government spending and tax burden (increasing private investment, preventing debt spiral)

4. Focus on “micro” incentives to individuals/firms rather than “macro” national development projects (dams, power plants, railroads, etc.)

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F. Evidence against Neoliberalism

1. Sill cannot explain NICs: autocracy “worked” in Taiwan, South Korea, Singapore, Hong Kong

a. “Developmental State” – government picked winners and losers

b. Export-led industrialization did not emerge “naturally”

2. Difficult to sustain free market and democracy in poor states

3. Self-serving: All recommendations tend to help foreign investors, but many harm domestic poor

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III. Dependency Theory

A. Overview – Underdevelopment is perpetuated by the global economic order; prosperity will require empowerment of poor people in poor countries

B. History matters -- Past events influence present options (path dependence)

1. Europe: UK, France, Prussia, Russia all followed different paths, because only the UK could be first

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2. Colonialism

a. Economic effect: Colonial powers exploited colonies, siphoned wealth to home countries (slave labor, trade monopolies, head taxes, etc)

b. Institutional Effects: Recall the 1500 population-development trade-off from slavery-based institutions

c. Social effects: i. Development of pro-colonial local elites: (collaborators

and administrators) sympathetic to ideology and culture of colonial power

ii. Divide-and-Conquer: Colonial power makes itself “necessary” for stability

iii. Metropole-satellite division: Within-country division between “developed” urban areas for elites and resource-producing rural areas for exploitation

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iv. Colonial predictors of present-day economic inequality Former slave society (esp. tropical colonies) European settlement:

More Europeans = more inequality (if a minority) “New Europes” (European colonists become

majority) = less inequality Conclusion: Privileged minority in colonial period

= inequality in present day These two variables account for more than half

of the variation in inequality between nations today

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Inequality and European Settlement

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3. Post-colonial development

a. Neo-colonialism: Local elites of colonial era installed as government

b. Dependent development: Former colonies have lost indigenous economic structures, possess infrastructure and economic systems geared to production of primary exports (mining, cash crops, etc.)

c. Key idea: Underdevelopment ≠ Undevelopment – Dependent countries don’t need to “catch up” by following the paths of rich countries

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C. How is dependency perpetuated?

1. Global economic system: Divided into core and periphery. Periphery’s function is to export cheap raw materials to core, then import expensive processed goods back

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Core – Periphery: 1800

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Core – Periphery: 1900

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Core – Periphery: 2000

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Primary Exports, 1990

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Primary Exports, 2002

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Secondary Exports, 1990

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Secondary Exports, 2002

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High-Tech Exports, 1990

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High-Tech Exports, 2002

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C. How is dependency perpetuated?

1. Global economic system: Divided into core and periphery. Periphery’s function is to export cheap raw materials to core, then import expensive processed goods back

2. Unfair terms of trade: Primary commodities lose value relative to manufactures

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Terms of Trade Decline, 1980-2001

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Terms of Trade Improvement, 1980-2001

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3. Why don’t dependent countries just industrialize like the core states?

a. Lacking capital, peripheral states require foreign investment and loans strings attached

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FOREIGN AID, DEBT, AND INTEREST PAYMENTS OF DEVELOPING COUNTRIES, 1992 AND 1997 (IN $US BILLIONS)

65 53.7116.7 165.3

1666.8

2361.6

0

400

800

1200

1600

2000

2400

1992 1997

aidinterest (estimated at 7%)debt

$US Billions

Year

Aid as percentof interest: 55.7%

Aid as percentof interest: 32.5%

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Total Debt Service, 1990

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Total Debt Service, 2002

Votes in the IMF

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3. Why don’t dependent countries just industrialize like the core states?

a. Lacking capital, peripheral states require foreign investment and loans strings attached

b. Profits are used to buy imports rather than re-invest in the country

c. Local elites are part of the exploitive system – Exploited metropoles themselves exploit satellite areas

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The Triangle of Dependence

Local ElitesDominate Masses,

Pay OffMilitary Elites

Military Force ProtectsElites and MNCs. Foreign

military intervention backs up local military

MNCs and Foreign Investors

Pay Off Local Elites

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d. The Role of MNCs: perpetuation of “core” dominance MNCs outcompete local firms through

economies of scale or dumping MNCs repatriate profits instead of investing

them in-country MNCs construct alliances with local elites

(bribes, or simply offers of jobs and capital) MNC mobility creates “race to the bottom” in

labor standards Threats to MNCs are international threats

more likely to trigger military intervention

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D. Policy Recommendations: It’s not about “catching up” – periphery must follow a different path to prosperity1. Radical Variant: De-Linking (Autarky) and

South-South Links. Example = Maoisma. Emphasize industrialization at expense of

agriculture (esp. Great Leap Forward)

b. Prevent foreign investment, capital transfers

c. Focus on domestic “market” instead of trade

d. Avoid dependence or vulnerability: Redundant autarkic development in regions

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Performance: Maoism in ChinaCHINA: Real GDP Growth Rates, 1953-2003

-20

-15

-10

-5

0

5

10

15

20

Year

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2. Moderate variant: Import-Substituting Industrialization (ISI)

a. Tariffs and Subsidies directed to replacing imports with domestically-produced goods

b. Shift from primary to manufactured products

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C. Evidence for Dependency Theory

1. Mild de-linking (devaluation and tariffs) protected some Latin American states from Great Depression

2. Explains different paths of Australia, Argentina from 1913 to present

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Argentina in 1913: Nearly “Developed” – Compare to 1987…

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Argentine Capital Dependence Hobbles Economy From 1913 On Capital scarcity during/after WW I and Great

Depression undermines development

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Latin America: Exporters relying on foreign investment performed poorly

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C. Evidence for Dependency Theory

1. Mild de-linking (devaluation and tariffs) protected some Latin American states from Great Depression

2. Explains different paths of Australia, Argentina from 1913 to present

3. Recent neoliberal programs have had mixed results:

a. China – Apparently works (but still high state control – see textbook for economic “Eras”)

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CHINA: Real GDP Growth Rates, 1953-2003

-20

-15

-10

-5

0

5

10

15

20

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

Year

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Real GDP Growth Rates, 1953-2003

-20

-15

-10

-5

0

5

10

15

20

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

Year

China

USA

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C. Evidence for Dependency Theory

1. Mild de-linking (devaluation and tariffs) protected some Latin American states from Great Depression

2. Explains different paths of Australia, Argentina from 1913 to present

3. Recent neoliberal programs have had mixed results:

a. China – Apparently works (but still high state control – see textbook for economic “Eras”)

b. Mexico and Brazil – Structural adjustment has not produced growth

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MEXICO: Real GDP Growth Rates, 1953-2003

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

Year

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BRAZIL: Real GDP Growth Rates, 1953-2003

-8

-6

-4

-2

0

2

4

6

8

10

12

Year

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D. Shortcomings of Dependency Theory

1. ISI = inefficiency. Worse products for the price (poor states’ markets are too small to support economies of scale) subsidies are expensive and undermine incentives to expand size of domestic market

2. Consumers rejected protectionism -- Even dependency theorist Cardoso governed Brazil as a neoliberal!

3. Urban focus undermines farming: All those city workers need cheap food…. price controls and perverse incentives OR urban revolutions

4. The problem of the NICs… Investment increased growth!

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Dependency in Taiwan: Investment increased during “take-off” period

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V. Selectorate Theory: Institutions First

A. Division of society:1. Leader: Decides public policy

2. Selectorate: set of people with legal right to participate in selection of the government

a. Democracies: Adult citizens

b. Monarchies: Royalty or nobles

c. Some autocracies have large selectorates (single-party states, rigged elections, etc.) Why…?

3. Winning Coalition: Number of selectorate actually needed to gain/retain power

a. Democracies: About half of S

b. Autocracies: Military leaders, governors, key nobles, election supervisors (to fix the vote), etc.

4. Disenfranchised: Powerless

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Selectorate Theory’s Division

Society’s Disenfranchised

Selectorate

Winning Coalition

Leader

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B. Regime Types: Three combinations

W = Size of winning coalition

S = Size of selectorate

W/S = Regime Type

Typical Regimes:Winning Coalition Size

Small Large

Selectorate Size

SmallMonarchy/

JuntaN/A

Large Autocracy Democracy

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C. Policy Tools

1. Allocation of resourcesa. Public Goods

i. Benefit the entire selectorate (S) – both supporters and opponents/defectors

ii. Collective in nature: non-rivalrous (I can enjoy the good without taking any away from you) and nonexcludable (providing for one provides for all). Classic examples = economic growth, peace, absence of crime, clean air, etc.

b. Private Goods: Benefit supporters only (W) – Implies excludability

2. Leaders prefer to use private goods to remain in power (punish defection)

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D. The loyalty norm: effects of S and W

1. W/S is Large: Chance of selector being needed in next coalition is high defect if private goods at less than maximum

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Large W/S: Democracy and Monarchy/ Junta (Chance of being needed is high)

Selectorate Winning Coalition

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D. The loyalty norm: effects of S and W

1. W/S is Large: Chance of selector being needed in next coalition is high defect if private goods at less than maximum

2. W/S is Small: Chance of selector being needed in next coalition is low defection offers little prospect of increased private goods

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Small W/S: Autocracy (Chance of being needed is low)

Selectorate Winning Coalition

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D. The loyalty norm: effects of S and W

1. W/S is Large: Chance of selector being needed in next coalition is high defect if private goods at less than maximum

2. W/S is Small: Chance of selector being needed in next coalition is low defection offers little prospect of increased private goods

3. Small W: Easy to reward/punish with private goods

4. Large W: Hard to reward/punish with private goods

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5. Institutions and Incentives

a. Leaders want: Small W (easy to bribe if desired) and large S (very small W/S means defection is unattractive). Result: Corruption possible but not required

b. Members of the winning coalition want: Small W (more private goods) and small S (large W/S means leader must devote most resources to bribes). Result: Corruption required.

c. The selectorate wants: Large W (focus on public goods) implies Large S. Result: Corruption difficult.

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E. Evidence for Selectorate Theory

1. Explains many previous failuresa. Agrarian elite coalitions reduced productivity

(large estates, agricultural protectionism) but…b. Urban elite coalitions also reduced productivity

(food subsidies, Big Development and patronage, “the Iron Triangle” of rent-seeking)

c. State control patronage and kickbacks (emphasis on private goods simply takes different forms in “socialist” or “capitalist” autocracies)

2. Economic/Political freedom associated with greater prosperity (weakly) and life expectancy (moderately)

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3. Evidence for Selectorate Theory: Democracy (Large W) and Public Goods

Economic Growth Trade Policy

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4. Limits of selectorate theory

a. No advice for democrats: “Pursue public goods so people re-elect you” is vague

b. Growth is only part of development – government may opt for social insurance, education, social welfare programs, etc in lieu of economic growth (trade-offs between public goods)

c. Independent economic institutions (central banks) seem to work in industrialized democracies

d. Most NICs had Small W polities

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V. Conclusions: The puzzle of poverty

A. Overview:Modernization Dependency Selectorate

Core Assumption

Economies naturally progress through stages

Structure of world economy prevents peripheral development

Leaders choose public or private goods depending on their incentives

Economic policies

Free trade: Sell primary commodities, then industrialize

Reduce dependence (autarky or ISI)

Vague: Free trade and other “good of the many” policies like education

Politics Insulate economic policy from public (autocracy or independence)

Prevent foreign-domestic alliances and empower urban workers

Democracy more important than specific policies

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B. No Panaceas

1. No theory completely explains NICs: Autocracy and Protection Export-led growth

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Per-Capita GDP, 1954-2003

0

5000

10000

15000

20000

25000

30000

35000

4000019

54

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

Year

Brazil

China

South Korea

Mexico

USA

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B. No Panaceas

1. No theory completely explains NICs: Autocracy and Protection Export-led growth

2. No clear solution to “path dependence” – Different policies needed in LDCs, but which policies will work (path dependence discounts other countries’ experiences)?

3. Are institutions and economic policies the only independent variables that matter? For example…

C. The Puzzle of Gender Inequality

Gender inequality can impede development (economically inefficient, underutilization of talents, etc – recall the evidence from Scandinavia)

But where does gender inequality come from?

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