The New International Economic Order,1973-1982 The Oil Shock and Commodity Power Commodity Power Leads to Demands for The New International Economic Order (NIEO) Increase LDC Manufacturing to 25% of Total World Manufacturing by 2000 LDCs Manufactured about 9% in 1978 Specific Demands: Increase LDC Control of Natural Resources Cheaper and Easier Access to Northern Technology Increased Foreign Aid (.7% of North’s GNP) Eliminate LDC Debt Greater Influence over IMF and World Bank

The Shift to Market-Based Liberalism, 1982-2001 “The Poor are Poor Because They Are Inefficient.” Development Requires Societies to Allocate Their Resources to those Activities that Yield the Highest Possible Return. Best Achieved By Allowing Markets to Make Decisions About Resource Allocation. By Relying Upon the Government Rather than the Market to Allocate Resources under ISI, Developing Countries Realized a Smaller Return on their Resources Than They Would Have Realized Had Markets Played the Central Role.

Inefficient Resource Use Under ISI Over-Taxed Productive Sector (Agriculture). Agricultural Production Fell as Consequence. Exports Fell Because Agriculture was Most Important Export. Food Imports Rose. Government Revenues Fell. Ghana and Cocoa as an Example. Over-Subsidized Un-Productive Sectors (Manufacturing). Manufacturing Was Too Capital Intensive. Factories Ran at 50% of Capacity. Goods Were Not Competitive in International Market. Ghana and Fruit Processing as an Example.

Rent Seeking Government Permits Required For All Imports. Government Does Not Satisfy All Requests for Import Permits. Import Permits Are Therefore Valuable: People Holding Import Permits Can Buy Goods at Low World Prices, Sell Them at Home at Higher Domestic Prices, and Pocket the Difference. The Price Difference is A “Rent”—An Above Market Return. People Dedicate Their Lives to Capturing the Rents Created By This System. They Become “Rent Seekers.” Consequences of This System Bureaucratic Delay Bribery and Corruption in Government Agencies: A Market for Permits Misallocation of Productive Resources

Strong States Import Substitution Required A Strong State Strong States Are Risky “Good” Dictators Use State Power For Public Good Extract Resources From One Sector and Invest Them in Other Productive Sectors “Bad” Dictators Use State Power For Their Own Gain Extract Resources From One Sector and Spend Them on Palaces, Private Jets, Pink Champagne, and Perfume Baths (e.g., Mobutu in Zaire) Temptation to Use State Power to Own Profit Appears Hard to Resist

Liberalism Ascendant Since Late 1980s Developing Country Governments Have Embraced Liberal Development Strategies Dismantle ISI at Home Sell Government-Owned Industries Stop Taxing Agriculture to Subsidize Manufacturing Embrace Liberal International Trade Reduce Tariffs and Liberalize Imports Target Export Sectors for Development Join “Free Trade Areas” A 180 Degree Turn in Development Strategy

Why the 180? ISI Running Out of Steam By Early 1970s. Success of East Asian NICs Suggests the Viability of Alternative Strategy. The Debt Crisis and Northern Control Over Financial Flows. A Realist Perspective on the Last Fifty Years of North-South Relations.

Who Is Right? Structuralists Have a Point Liberals Have a Point Life in Global Capitalist System is Difficult for Developing Countries Vulnerable to Terms of Trade Shocks LDC Industries Can’t Easily Compete Against Core Country Firms. Structuralists Exaggerate Degree to Which Poverty is Caused by Capitalist System Liberals Have a Point Government Policy Did Make Things Worse Rather Than Better in Most Countries. Liberals Exaggerate Degree to Which and the Speed at Which Markets Will Raise Incomes in Developing Countries.