Development Economics

1
Development Economics Globalization

• (Competing Perspectives)
• P 539
• January 10, 2006

2
Development Economics

• Post WWII western economies focused on full
  employment
• Decolonialization
• Doctrinal competition (capitalism/communism)
• Institutions
• IMF, World Bank
• Top down extension of Keynesian principles to
  3rd World development
• Structuralist approach applied to specific
  conditions, rather than universal science
  applied to all economies
• trade theory recall Lists Caveat
• inflation causation
• End of January 3, Lecture

3
Development Economics, cont

• Trade
• Universal theory of comparative advantage
  questioned
• Center and periphery economies
• Benefits of technical advances favored the center
• Center markets imperfect competition
• Periphery markets eroding terms of trade
  (commoditization)
• Intervention
• Tariffs
• State supervision of industrialization
• Encourage foreign investment (another source of
  capital)

4
Development Economics, cont.

• Inflation
• Monetarist/Structuralist debate
• Decrease money supply, vs.
• Land reform, import substitution, education, etc.
• Structuralist Metrics
• Specific to characteristics of targeted economies
• Emergence of Hybrid Theories

5
Development Economics, cont.

• Hybrid Theory Elements
• Dualistic development
• Mobilization of domestic resources (savings
  rate/capital)
• Mobilization of foreign resources
• Financial aid, loans, investment, knowledge
  transfer
• Industrialization and Agricultural strategies
• Self sufficiency (inward focused policy)
• Trade strategy (convergence/divergence issue)
• Human resource development
• Project appraisal (capital allocation)
• Development planning and policymaking
• State planning vs. Market forces
• Endogenous Factors
• population, technology, institutions,
  entrepreneurship

6
Development Economics, cont.

• Counterrevolution
• The pendulum swings back toward science
• Criticism of the Harrod/Domar models
  concentration on fixed capital investment
• Failure to account for technical progress
• The market forces/state planning debate reignites
  just as
• Conservative governments come to power in
  influential western countries

7
Neoliberalism

• Driving forces
• Chicago/IEA Schools
• Libertarian ideals
• Oil shocks and inflation
• Monoeconomics (universal theory) re-emerges
• Success of outward focused NICs
• The East Asian Miracle
• Industrialization ladder
• The Washington Consensus

8
The Washington Consensus

• Policy recommendations
• Fiscal Discipline
• Public expenditure priorities
• Tax reform
• Financial liberalization (market driven interest
  rates)
• Exchange rates (market driven exchange)
• Trade liberalization
• Foreign direct investment
• Privatization
• Deregulation (including deunionizing)
• Property rights
• Sachs Shock Therapy
• Sachs caveat (safety net and public investment)

9
Critique

• Alternative Perspectives
• Institutional Economics
• New institutionalism
• Extend neo-classical theory to broader issues
• Include transaction costs of institutions
• e.g. definition and enforcement of property
  rights
• Dynamic
• Radical institutionalism
• Cumulative change rich get richer divergence
• Individual rationality nurture vs. nature
• Power and status legitimize exploitive,
  predatory practices
• Equality is the ultimate stimulant
• Democratic participation
• Reject neo-classical economics as a cloak for
  political ideology

10
World Development Indicators

• Metrics focused on targeted outcomes
• Compare the introduction and 8 development goals
  with Joseph Stiglitzs globalization critique (to
  follow)
• Compare tabular data (including US)
• Infant mortality
• Carbon Dioxide Emissions

11
Optional Readings

• Links on the Washington and Post Washington
  Consensus
• Corporate Ownership Social Costs
• Coase links
• More technical treatment of Development Economics
  and Harrod-Domar Model
• Debraj Ray, Development Economics pages 7-53

12
Current Events

• Gates Foundation Extends into Development
• http//seattletimes.nwsource.com/html/businesstech
  nology/2003308397_gateshires17.html
• Microfinancing innovator awarded the Nobel Peace
  Prize
• http//www.pbs.org/newshour/bb/business/july-dec06
  /bangladesh_10-13.html

13
Globalization Competing Perspectives

• Joseph Stiglitz http//www2.gsb.columbia.edu/facul
  ty/jstiglitz/bio.cfm
• Raj Bhala
• http//www.law.ku.edu/faculty/bhala.shtml
• Suzanne Berger http//web.mit.edu/polisci/faculty/
  S.Berger.html

14
Globalizations DiscontentsStiglitz

• Globalization means different things in different
  places
• Autonomously developed policies beneficial
  results
• Following instructions less beneficial
• Top down policies from the center are self
  serving
• Beneficial Globalization East Asian Miracle
• Export based growth
• Closing technological and knowledge gaps
• Darker Side
• Risks created by liberalization of financial and
  capital markets fickle taskmaster

15
Globalizations Discontents, cont

• Lessons
• Capital Liberalization
• Volatility - small boats in a rough sea
• Risk premium
• Poor bear the brunt of downturns no safety nets
• Capital can flee taxes, most people cannot
• Trade liberalization
• Job destruction/creation cycle discriminates
  against the poor
• Governance
• Winners in first wave of globalization
• Regulated financial markets
• Educated, innovated, funded, and regulated
  fledgling industries
• Agriculture, aviation, communications
• Institutions charged with governing this wave
• Lack democratic accountability serve financial
  community
• Governance through ideology

16
Globalizations Discontents, cont

• Unfair Trade Agenda
• Agenda set by industrial nations
• Non-reciprocal terms of trade
• Disingenuous approach to developing country
  status
• Self serving treatment in service segments
• Risk of overpricing through IPR
• Risk of biopiracy

17
Globalisms Discontents, cont

• Geopolitical Implications
• Positions on global environmental issues and
  financial institution transparency are self
  serving
• Positions on Govt stimulation inconsistent
• Global Social Justice
• Uneven distribution of benefits
• Need for global alliance for
• Reduction of poverty
• Environmental sustainability

18
Globalization and TradeBhala

• The Anti-Third World Claim
• Distinguish between international trade law and
  developed nation trade policy
• Focus the debate on the fairness of the rules
• Especially the special and differential treatment
  provisions
• Evaluate critiques individually
• Consider intellectual origin
• Subject matter public health, democracy,
  individual rights, environmental concerns
• Assess specific criticisms critically
• Seek moderation

19
Globalization and Trade, cont

• Consider
• the relationship between trade and growth
• the relationship between growth and development
• focusing on the strong arguments
• separating arguments from ideology

20
Whos Afraid of Globalization?Berger

• Fear of globalization from the perspective of the
  center. Belief that Globalization is
• Good for standard of living, but
• Bad for employment and job security
• Mainstream economists focus on
• Comparative advantage
• Innovation
• MIT study extrapolates on observations from the
  first wave of globalization
• Driven by
• technological innovations
• Transport, information,
• Human response to changing conditions
• Migration
• Narrowed the gap in interest rates and wages
• Prompted regulation
• Immigration controls
• Capital controls
• Tarrifs

21
Whos Afraid of Globalization? cont

• Regulatory controls were
• strengthened virtually overnight in response
  to WWI.
• Gradually relaxed post WWII
• Bretton Woods, IMF, World Bank
• But influential economists favored autonomous
  regulation of capital markets
• Capital Markets finally liberalized through
  Washington Consensus
• Liberalization of immigration controls remains an
  issue today
• This wave of Globalization driven by
• Erosion of political barriers
• Opening of China
• Fall of Berlin Wall
• Liberalization of trade terms, GATT, WTO, TRIPS
• Technology and innovation

22
Whos Afraid of Globalization, cont

• Compare Berger and Stiglitz position on higher
  cost of capital due to volatility
• Berger focuses on outsourcing, focusing on the
  Centers fear
• Stiglitz focuses on employment shocks
• Both discuss the East Asian Miracle, but from
  different perspectives
• Stiglitz is concerned over shocks to less
  powerful developing economies
• Berger is concerned with implications more
  powerful developing economies
• Centers Concern Over Employment Must
• Focus on competitiveness
• Actors in the Center must adapt or perish
• Dynamic analysis Peet, page 35

23
Neo-Mercantilism?

• Wikipedia definition of neo-mercantilism
• Control capital movements, discourage domestic
  consumption to increase foreign reserves and
  capital development.
• 19th Century European US Colonialism was a form
  of neo-mercantilism
• Colonists under control of mother country, not
  free market
• 20th Century Neo-Mercantilism 1930s-1940s
• Trade barriers restored during global economic
  depression
• Late 20th Century Neo-Mercantilism Japan,
  Korea, Taiwan, Singapore China?
• Promote exports with low exchange rates, create
  barriers to imports, use trade surplus to build
  domestic industries
• Why the reference to China?
• What would happen if RMB rose from US1/7.8 to
  US1/4? Worlds largest reserves decline in
  value, increasing unemployment and imports

24
Next Week

• The Role of Governance and Institutions
• Prepare to discuss the readings