DEPENDENCY SCHOOL, THEORY OF INTERNATIONAL TRADE

THEORY OF INTERNATIONAL TRADE, NEOLIBERALISM

Structure of the presentation 1) theories of growth 2) theories of international trade –

neoclassical and its criticism 3) structuralist perspective - Prebish 4) new school of dependency studies 5) world system theory - Wallerstein

Production- possibility frontier PPF shows the maximum amount of

alternative combination of goods and services that a society can produce at a given time when there is full utilization of economics resources and technology

The PPF shifts outward over time as more resouces become availabe or technology is improved

PRODUCTION-POSSIBILITY FRONTIER Economic problem of limited

production – explained by PPF ECONOMIC GROWTH occurs when

the economy´s productive capabilites increase

- growth depicted as an outward shift of PPF

PPF and growth

When production is at its maximum, increased output of A requires reduced production of other goods,

there s opportunity cost to the increased production of A

Increasing opportunity costs – continous expansion in the production of A is secured by sacrificing increasing amount of other goods.

Opportunity cost

= the benefits forgone when a specific decision is made

Of two options - the opportunity cost of the option chosen is the opportunity forgone for the other option

(accounting vs. economic theory OP)

Increasing costs

Recourses are not homogenous - not equally efficient in the production of goods and services

Not equally productive when used to produce alternative good

This imperfect substitutability of recourses – due to differences in the skillds of labour, fertility of soil, specialized funcion of machinery, buildings etc.

Post-war concepts of development BINNS, T.: Dualistic and unilinear

concepts of development pp. 91-95, in: companion_II.pdf.

Dualism or dichotomous nature of development

Advanced and modern sector of the economy coexisted alongside the traditional and backward sectors (Binns, 2008:82).

„we must embark on a bold new program for making the benefits of our scientific advances and industrial progress available for the improvement and growth

Truman´s presidential address

Arthur Lewis

1954 : Economic Development with unlimited labour

Proponent of dualistic structure of underdeveloped economies

Goal - absorption of underempoyed labour force in susbsistence agriculture

Very influential in the 60s and 70s

Arthur Lewis

Criticism: failed to appreciate the positive role of small agriculture

Some successes of Green revolution – raising productivity in the rural substistence sector - help development process rather then obstacle

Dualism in geographical concepts Early spation development models Different qualities and potential of

contrasting regions Initial regional inequalities as a

prerequisite for eventual overall development

Unilinear models - WW Rostow

Institutionalists - Gunnar Myrdal, Albert Hirschmann Cumulative causation Particular regions – by virtue of some

initial advantages - moved ahead = new increments of activities and growth will be concentrated in those regions already ahead.

Criticism of Rostow´s model (and similar ones) 1) unilinear development - ´things can

only get better´ x cf sub-Saharan countries and LA

Sub-Saharan worse off then at the independence

2) eurocentic model – developing countries will imitate the development path in Europe and America

3) development occurs in stages

Neoliberalism, SAPs

Reading: SIMON, D. : Neoliberalism, stuctural adjustment and poverty reduction strategies, in : companion_II.pdf, pp. 86

Dramatic oil price increases – 1973 and 1979 – triggered a slowdown, severe recession and debt crisis 1981-2

Crisis of Keynesian model Profound disillusionment - record

of the state involvement in economic and social life

Keynesian state involvement - inefficient, bureaucratic, unnecessary drain on public coffers (Binns, 2008:87)

Opportunity cost

= the benefits forgone when a specific decision is made

Of two options - the opportunity cost of the option chosen is the opportunity forgone for the other option

(accounting vs. economic theory OP)

Dependency - readings

Conway, D.; Heynen N.: Dependency theories: from ECLA to André Gunder Frank and beyond, in. Companion_II.pdf

International division of labour Based on Ricardo´s model of

international trade Factor endowment theory Specialization on the production of good

in which partricular country has comparative advantage

FACTOR ENDOWMENT THEORY

Different countries – different factor endowments

Cf china, South Africa Heckher Ohlin Hypothesis of

international trade Specialization according to the

prevailing factor endowements USA, UK – focus on what kind of goods? Sierra Leone?

Raul Prebish, Singer

LA historical marginalization and resultant underdevelopment – perpetuated by such unequal commercial arrangements

LA shoukd benefit from export strategies

Evidence showed oterwise Structuralist economists – argued that

core countries benefited at LA expense

Frank – development of underdevelopment Metropolis satellite relations occured

not only among states bust also on region and sub-regional levels

Dependebcuy – perpetuated through global capitalims

Importance of historical significance and transformative impact of capitalism´s penetrartion into continents structures

ISI

Import substitution industrialization Prebish - insisted on major structural

changes in development policy Favoured switching to more domestic

production under tariff protection as a means of replacing industrial imports

ISI Capital goods, intermediate product and

energy would be purchaised with national income revenue from export of primary commodities (Conway, Heynen, 2008:93)

New forms of dependency Multinational corporate power and

authority over technology transfer anc capital investment emerged as a new form of dependency (Conway, Heynen, 2008:93).

Fernando Cardoso

Associated dependent development

Triple alliance Domestic elite in cooperation wt

transnational corporation ISI under authoritarian regimes,

state policies favoured multinational capital at the expense of labour

Theory of international trade SAPSFORD, D.: Smith, Ricardo, and

the world marketplace 1776-2007: back to the future?

Smith on international trade

Classical depencency school LA – ECLA , Prebish – head of ECLA Voices of the periphery Prebish – criticized outdated

international division of labour LA – asked to produce raw materials

for industrial centers

André Gundar Frank

development of underdevelopment Concepts of modernization school

distilled from the categories derived from the Western world

Western categories are unable to guide an understanding of the problems facing 3W

Frank

Modernization school ignores the historical experience of colonialism

Metropolis-satellite relationship explain how underdevelopment works

Replicated within countries Calcuta

Frank

Satellite flourishes when cut off from the centre

Industrialization during WWI WWII

Social destruction .

Creation of client serving class Extension of the colonial

power Corruption of local elites Disintegration of communities,

social conflicts

Hegemony

Educational system Did not enhance knowledge

and technological advances Ubiquous knowledge

Baran – colonialism in India Politics of de-

industrialization unfavorable terms of trade Appropriation of 10% Plus asymetry of power -

Raul Prebish

Structuralist approaches Critique of Ricardian theory of

international trade - empirical evidence – did not prove

LA – growth during both wars Close links with centers not

beneficial to the growth of peripheries

debt relief

The anatomy of structural adjustment programmes (Simon, 2008:86) Structural

Adjustment Programmes - designed to cut government expenditure, reduce the extent of state intervention in the economy and promote liberalization and international trade

SAPs explicit about the necessity of export promotion based on the Ricardian notion of comparative advantage

Nature of international trade International trade is unbalanced and

unequitable

initiatives connected with debt relief the structural adjustment

programmes (SAPs) of the 1980s, the Heavily Indebted Poor

Countries Initiatives (HIPCI) 1990s Multilateral Debt Relief Initiative

(MDRI) announced after the summit of the G-8 states in Gleneagles in 2005.

Mexico

debt crisis broke out in August 1982 when Mexico, Brazil no longer able to service their debts – triggering panic

Developed countries advanced enormous commercial loans to the debtor countries

during the 1970s - Pearson Report to warn

The Reasons of the Debt Crisis

The Reasons of the Debt Crisis Developing countries - substantial

economic growth in the 1960s (average of 6.6% between 1967 – 1973, see Todaro 1994:459)

the OPEC countries decided to increase oil prices. They rose four times (Pilbeam 1998:290), which started to cause problems in both the developed and the developing world as oil was needed everywhere.

Debt crisis

Walt Whitman Rostow that all countries have potential to develop along the same trajectory,

the only obstacle being delay due to the lack of resources to promote rise of economic capacities of the “backward” states

Debt crisis

The loans, even though very large, did not seem risky at first because of the relative strength of primary commodity prices in the 1970s (Mulhearn 1996:170). I

in addition, surplus of money on the international markets meant higher levels of inflation; interest rates were thus relatively low, which made borrowing even more attractive.

Loans from commercial banks Commercial lending boomed

as countries were reluctant to borrow from institutions such as the IMF or the WB due to the required conditions - AAA rating

IMF policies - SAPs

Geared to maximizing the propects for and amounts of repayment by the debtor countries

SAPs explicit about the necessity of export promotion based on the Ricardian model of comparative advantage

International trade is often unbalanced and unequitable

Debt service payments tripled between 1975 and 1979 (Todaro 1994:463) but debtor countries managed to maintain the growth which made debt servicing possible.

Debt crisis

Rapid countermeasures and strict penalties imposed

Threat of domino effect among debt-ridden countries – bankrupcy

Undermine the whole systém IMF assimed leading role in addressing

the crisis The problem of default – diagnosed as

entirely the fault of the debtor countries.

Interpretations of debt crisis Western countries interpreted the crisis

as the fault of developing countries – Government being corrupt,

interventionist, bloated by bureaucracy, loss-making state enterprises

Dramatic increase in interest rate paid (monetarist policies of expensive money) was not considered as sufficient explanation

ODIOUS DEBT

Question of the legitimacy of debt Non-democratic regimes – burden on

the whole of population when appropriated by administration?

Question whether loans in question were contracted willingly not asked

CAMPAIGN – Jubilee 2000

OIL SHOCKS

After the second oil shock in 1979, oil prices increased from $13 per barrel in mid-1978 to $32 billion in mid-1980 (Pilbeam 1998:297).

The governments of the industrialized countries imposed strict monetary policies in order to stabilize the economy and to lower inflation levels.

Global recession

Global recession at the beginning of the 1980s

a new wave of protectionism in the developed world

deteriorating terms of trade for developing countries.

This coincided with falling primary commodities prices

Global recession

Compared to 1980 prices, the export earnings from cotton fell by 47%, coffee by 64%, from cocoa and sugar by 71%, 77% respectively (Commission for Africa 2005:109).

TERMS OF TRADE

Terms of trade= A proportion between money earned from exports and money spent on imports.

Development in the 1980s and the 1990s

At first, the debt crisis was seen only as a temporary shortage of liquidity problem not as something which was supposed to cause difficulties in the international system till the new millennium.

The main concern was to ensure that there would be no collapse of any important banks due to default of a major debtor.

Liquidity; solvency problems A liquidity problem means that the

government does not have enough foreign currency to meet its obligations but is able to repay them in the long run, a solution may be just rescheduling.

On the other hand, if a solvency problem is the case, the government is not and probably will not be able to repay debts even if rescheduled, the only solution is thus debt forgiveness

Debt structures

Latin American countries entered the 1980s as much largely indebted than the sub-Saharan states.

At the end of the decade Brazil owed about $120 billion, Mexico $100, Argentina $70 and Venezuela $50 billion (Wiarda 1990:411).

The creditors

the largest amount of money in Latin America was owed to commercial banks while in sub-Saharan Africa to official creditors such as states and multilateral institutions.

The World Bank could provide more funding for different plans and programmes to deal with the situation. The International Monetary Fund was not entitled to do this as it could lend money only to support reform policies not particular projects.

IMF

Pilbeam (1998:419) argues that both of the institutions were restricted in their actions by the amount of possible capital to be lent because the IMF did not have enough resources and the WB had to keep its AAA rating.

Programme for Sustained Growth In 1983 and 1984, $126.4 billon of

private debts of 25 developing countries had to be rescheduled, $118.1 billions owed by the Latin American governments (Parkins 1996:60).

In 1985 the Programme for Sustained Growth was announced by the US Secretary of Treasury James Baker

SAPs

management of the debt crisis in developing countries the IMF

Structural Adjustment Facility in 1986, renamed to the Enhanced Structural Adjustment Facility (ESAF) a year later.

SAPs

debtor countries were required to pursue a number of reforms which are known as the structural adjustment programmes (SAPs)

designed to improve the economic situation. The usual requirements of the SAPs were

Washington Consensus

cuts in government expenditure on health, education, employment or food subsidizes, currency devaluation, export promotion, trade liberalization, privatisation and deregulation.

These measures met with strong criticism in developing countries as well as in academic circles, and they became know as „the Washington Consensus[

„lost decade”.

The achievements of these programmes are questionable because they were followed by declining living standards, rising unemployment and rising inequalities within the societies so the 1980s are frequently referred to as a “lost decade of development”. A

Africa

the mid-1990s attention started to shift from Latin American countries which seemed to be more or less stabilised to sub-Saharan Africa where the situation was not improving.

In 1996 total external debt of Africa was $320 billion which was equal to the region’s GDP per year, making it the most indebted part of the world as Latin American proportion of debt to GDP was “only” 60% (Ayittey 1999).

HIPCI I

In 1996, the IMF and the WB launched a joint programme called the Heavily Indebted Poor Countries Initiative (HIPCI).

to reduce the external debt of the world's poorest states to sustainable levels

to ensure that the countries had enough resources to make repayments and to finance economic growth at the same time

BWI

BWIs reaching first the decision point and then the completion point.

At that moment debt relief was granted.

the HIPC Trust Fund with basic capital of $500 million to pre-pay debts

BWI

to help and cover debt service if a country could not meet it and to purchase debts and then cancel them.

The IMF established the ESAF Trust Fund to provide the poor countries with grants which were, as argued by Raffer and Singer (2001:185), then used to repay the IMF but it allowed the institution to maintain reputation that it did not reduce debts.

Washington Consensus

The term Washington Consensus was initially coined in 1989 by John Williamson

to describe a set of ten specific economic policy prescriptions

considered to constitute a "standard" reform package promoted for crisis-wracked developing countries

by Washington D.C based institutions such as the International Monetary Fund (IMF), World Bank and the U.S. Treasury Department.[1]

The consensus included ten broad sets of recommendations[12]:

Fiscal policy discipline; Redirection of public spending from

subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;

Tax reform – broadening the tax base and adopting moderate marginal tax rates;

Interest rates that are market determined and positive (but moderate) in real terms;

Competitive exchange rates; Trade liberalization – liberalization of

imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;

Liberalization of inward foreign direct investment;

Privatization of state enterprises; Deregulation – abolition of regulations

that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and,

Legal security for property rights.

Washington consensus

the term has come to be used in a different and broader sense, as a synonym for market fundamentalism;

in this broader sense, Williamson states, it has been criticized George Soros and Nobel Laureate Joseph E. Stiglitz

The Washington Consensus is also criticized by others such as some Latin American politicians and heterodox economists.

Washington Consensus

The term has become associated with neoliberal policies in general

drawn into the broader debate over the expanding role of the free market, constraints upon the state, and US influence on other countries' national sovereignty.

Anti-globalization movement

Many critics of trade liberalization, such as Noam Chomsky, Tariq Ali, Susan George, and Naomi Klein, see the Washington Consensus as a way to open the labor market of underdeveloped economies to exploitation by companies from more developed economies.

Anti-globalization movement The prescribed reductions in tariffs

and other trade barriers allow the free movement of goods across borders according to market forces, but labor is not permitted to move freely due to the requirements of a visa or a work permit.

The criticism is that workers in the Third World economy nevertheless remain poor,

any pay raises they may have received over what they made before trade liberalization are said to be offset by inflation,

whereas workers in the First World country become unemployed, while the wealthy owners of the multinational grow even more wealthy

Anti-globalization

critics further claim that First World countries impose what the critics describe as the consensus's neoliberal policies on economically vulnerable countries through organizations such as the World Bank and the International Monetary Fund and by political pressure and bribery.

They argue that the Washington Consensus has not, in fact, led to any great economic boom in Latin America,

but rather to severe economic crises and the accumulation of crippling external debts that render the target country beholden to the First World

Poverty Reduction and Growth Facility

Reduction of poverty became the main target which went in line with the Millennium Development Goals (MDGs) discussed by the United Nations and agreed on a year later.

The IMF’s Enhanced Structural Adjustment Facility (ESAF) introduced in 1987 was changed into the Poverty Reduction and Growth Facility.

The requirements to qualify for the HIPCI II were lowered and debt relief is now provided from the decision point, not the completion one.

Countries need to create a Poverty Reduction Strategy Paper (PRSP) where the freed resources are used effectively to alleviate poverty. The other two key elements emphasised are country-ownership and civil society participation.

Countries can achieve the decision point after three years of economic stability and an interim PRSP

HIPCI II

In March 2008 thirty-three countries were receiving debt relief under HIPCI II;

twenty-three of them reached the completion point

ten were benefiting from some debt reductions as they were in the interim period between the decision and completion points (IMF 2008).

The total external debt

The total external debt of all developing countries at the end of 2005 was $2,800 billion and debt service payments over the year reached $511 billion (Jubilee 2000: The Basics about Debt).

For sub-Saharan Africa, which is the most problematic region now, the external debt increased by 175% from $84.1 billion in 1980 to $231.4 billion in 2003 (African Development Report 2006:13) while its share of world exports between 1980 and 2001 fell from 4.6% to 1.9% (Randriamaro 2003:121).

Gleneagles

Despite this, a new debt relief initiative which was named the Multilateral Debt Relief Initiative (MDRI) was agreed on in 2005 at the G-8 summit in Scottish Gleneagles.

it emphasises debt forgiveness not just relief and focuses on multilateral creditors.

Most of the private banks’ loans have already been repaid with money from the BWIs, and bilateral relief is granted by the Paris Club so the multilateral institutions were the last ones to lend.

Paris Club a group of major creditors set up in 1956 when Argentina’s debt had to be restructured for the first time.

HIPCI II

The qualification criteria for the MDRI are the same as for the HIPCI II, and after reaching the completion point debts of the countries which are owed to the IMF, the International Development Association (IDA)[1] and the African Development Bank (AfDB) are cancelled.

HIPCI II

On 6 January 2006, the IMF was the first multilateral institution to cancel the debts owed to it by 19 of the world’s poorest countries.

IDA - an agency which belongs to the World Bank group and provides concessional lending for the low-income countries i.e. loans with long maturities (10 years) and low fixed interest rates of 0.5% per year.