Development and InstitutionsCommerce 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)

CorePerCore

Periphery

Periphery

Technology for Luxury production

Brain Drain and Luxury exports

MNCs and Dependency

Core (North) Periphery (South)

CorePerCore

Periphery

Periphery

Technology for Luxury production

Brain Drain and Luxury exports

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?

• 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

• 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

• Need for rapid development• British example• Advantage of hindsight• British investment in a “developing” country:

the U.S.

It pays to be late

• 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

• 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