Uneven development - Dependency

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Uneven development - Dependency

• DEPENDENCY SCHOOL, THEORY OF INTERNATIONAL TRADE

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Post-war mainstream theories- MODERNIZATION
SCHOOL AND DEPENDENCY PERSPECTIVE

• THEORY OF INTERNATIONAL TRADE, NEOLIBERALISM

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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

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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

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PRODUCTION-POSSIBILITY FRONTIER

• Economic problem of limited production
  explained by PPF
• ECONOMIC GROWTH occurs when the economys
  productive capabilites increase
• - growth depicted as an outward shift of PPF

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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.

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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)

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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.

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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, 200882).

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Trumans presidential address, 1949

• 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

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Trumans presidential address
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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

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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

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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

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Unilinear models - WW Rostow
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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.

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Criticism of Rostows 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

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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

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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, 200887)

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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)

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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 Ricardos model of international trade
• Factor endowment theory
• Specialization on the production of good in which
  partricular country has comparative advantage

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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?

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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

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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 capitalisms
  penetrartion into continents structures

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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, 200893)

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New forms of dependency

• Multinational corporate power and authority over
  technology transfer anc capital investment
  emerged as a new form of dependency (Conway,
  Heynen, 200893).

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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

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Theory of international trade

• SAPSFORD, D. Smith, Ricardo, and the world
  marketplace 1776-2007 back to the future?

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Smith on international trade
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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

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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

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Frank

• Modernization school ignores the historical
  experience of colonialism
• Metropolis-satellite relationship explain how
  underdevelopment works
• Replicated within countries
• Calcuta

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Frank

• Satellite flourishes when cut off from the centre
• Industrialization during WWI WWII

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Social destruction .

• Creation of client serving class
• Extension of the colonial power
• Corruption of local elites
• Disintegration of communities, social conflicts

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Hegemony

• Educational system
• Did not enhance knowledge and technological
  advances
• Ubiquous knowledge

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Baran colonialism in India

• Politics of de-industrialization
• unfavorable terms of trade
• Appropriation of 10
• Plus asymetry of power -

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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

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External indebtedness and

• debt relief

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The anatomy of structural adjustment programmes

• (Simon, 200886) 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

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Nature of international trade

• International trade is unbalanced and unequitable

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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.

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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

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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 1994459)
• the OPEC countries decided to increase oil
  prices. They rose four times (Pilbeam 1998290),
  which started to cause problems in both
  the developed and the developing world as oil was
  needed everywhere.

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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

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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 1996170). 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.

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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

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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

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• Debt service payments tripled between 1975 and
  1979 (Todaro 1994463) but debtor countries
  managed to maintain the growth which made debt
  servicing possible.

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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.

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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

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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

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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 1998297).
• The governments of the industrialized countries
  imposed strict monetary policies in order to
  stabilize the economy and to lower inflation
  levels.

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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

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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 2005109).

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TERMS OF TRADE

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

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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.

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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

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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 1990411).

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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.

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• 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.

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IMF

• Pilbeam (1998419) 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.

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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 199660).
• In 1985 the Programme for Sustained Growth was
  announced by the US Secretary of Treasury James
  Baker

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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.

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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

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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

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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

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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 regions 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).

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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

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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

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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 (2001185),
  then used to repay the IMF but it allowed the
  institution to maintain reputation that it did
  not reduce debts.

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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

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• The consensus included ten broad sets of
  recommendations12
• 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

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• 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

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• 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.

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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.

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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.

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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.

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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.

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• 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

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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.

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• 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

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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 IMFs Enhanced Structural Adjustment Facility
  (ESAF) introduced in 1987 was changed into the
  Poverty Reduction and Growth Facility.

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• 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

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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).

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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 200613) while its share of world exports
  between 1980 and 2001 fell from 4.6 to 1.9
  (Randriamaro 2003121).

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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.

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• 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 Argentinas debt had to be restructured
  for the first time.

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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.

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HIPCI II

• On 6 January 2006, the IMF was the first
  multilateral institution to cancel the debts owed
  to it by 19 of the worlds 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.