Economic Development

Dependency Theory, The Economic Nationalist Response, and the

Problem of Debt

Theory-based Terms: The words contain the theory

• Liberal Theory– Developing countries– Less Developed Countries– Emerging markets• Dependency theory• Underdeveloped Countries

• Neutral?– The “South”

What is economic development?

• Overall growth? • Emphasis on consumption and income levels?• Or maximizing people's capabilities--that is,

their ability to lead the kind of life they value.• But does this definition depend on economic

growth?• All of the theories of development say so

Review: Liberalism

• Economic growth is part of “modernization”• Demography and Technology create

conditions for growth• Accumulation of capital• Mass Consumer society

Tradition and Modernity

Summary of Liberal Theories of Development

Stimulants

Hindrances

Internal External•Human Capital •Entrepreneurial Spirit •Efficient Government •Savings •Research and Development •Investments = Modern Society

•Opportunities to Catch Up •Foreign Investments •Trade •Aid

•Political Instability•Corruption•Traditional Society

•Trade Barriers in the North•Absence of project finance•Absence of Balance of Payments finance

Dependency Theory is concerned with global inequality…..

Income distribution,

f13 Lecture Development\movie.swf

And…….

Dependency Theory asks why this difference?

Dependency Theory’s explanation

• Remember the Liberal explanation?• Dependency Theory rejects Liberalism’s

central assumptions, arguing……• The factors that liberals argued would

contribute to growth actually contributed to inequality!

The importance of Technology and technology to development

• The relation between center and periphery causes the inability of the periphery to develop an autonomous and dynamic process of technological innovation.

• Technology – the Promethean force unleashed by the Industrial Revolution – is at the center of stage.

Dependency Theory: a theory of exploitation in international exchange• Marxist theories were concerned with

exploitation at the site of production• Dependency theory focuses on exploitation at

the site of exchange• Core and periphery• Core is enriched at the expense of the

periphery: exploitation• The opposite of comparative advantage

Cotton Machinery

England

3 5 (Total production =8)

India 9 6 (Total production=15)

Cotton Machinery

England

1 10 (Total production =11)

India 16 0 (Total production=16)

Cotton Machinery

England

5 6 (Total production =11)

India 12 4 (Total production=16)

The Beauty of Comparative Advantage

Before Specialization And Trade GWP = 23

With SpecializationBut without TradeGWP still 23

With Specialization And TradeGWP = 27 amd both Better off

Dual Economies and Dependency

Core (North) Periphery (South)

CorePerCore

Periphery

Periphery

Core and Periphery in the Periphery

Terms of Trade• What does this mean?• Dependency theory: TOT are against the South• Why?– Overwhelmingly commodity exporters– Inelastic demand– Multiple suppliers drive down the price

• Oil as the exception• Constant deterioration in TOT means the South is

always disadvantaged unless countries can export manufactured goods.

Oil is the Exception

OPEC

• OPEC sets production levels which sets the price of oil

• Other commodity producers have tried to organize cartels like OPEC but haven’t succeeded because they were large groups

• OPEC is a small group• Collective action is easier in small groups than in

large groups• New oil discoveries undermine collective action

Commodities Trade

• WTO forbids subsidies on manufactured goods

• WTO does not cover trade in commodities• South is dominant producer of commodities• The North subsidizes its agricultural goods• Poor farmers in the South can’t compete• Doha Round has achieved nothing so far

MNCs and Dependency

• MNCs contribute to dependency• No “trickle down”• MNC brings in what’s good for itself, not what’s good

for the country—prevents capital accumulation• No investment in local firms• Raise capital by buying out domestic firms• Alliances between the rich in the South and the Rich in

the North• Create useless consumption through advertising• Brain Drain

MNCs and Dependency

Core (North) Periphery (South)

CorePerCore

Periphery

Periphery

Technology for Luxury production

Brain Drain and Luxury exports

The role of the IMF and World Bank in perpetuating Underdevelopment

• Conditionality and structural adjustment• Only source of qualification for new loans

Aid contributes to Dependency

Core (North) Periphery (South)

CorePerCore

Periphery

Periphery

Development Aid

Exports (paid for by aid)

Exports

How did this come about?

Core (North) Periphery (South)

CorePerCore

Periphery

Periphery

Slaves

Concentration of Industry

Raw MaterialsOutdated and extractivet echnologies

Periphery and core in the “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?

• 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