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.swf13 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

CottonMachinery Engl and 35 (Total production =8) India96 (Total production=15) CottonMachinery Engl and 110 (Total production =11) India160 (Total production=16) CottonMachinery Engla nd 56 (Total production =11) India124 (Total production=16) The Beauty of Comparative Advantage Before Specialization And Trade GWP = 23 With Specialization But without Trade GWP still 23 With Specialization And Trade GWP = 27 amd both Better off

Dual Economies and Dependency Core (North) Periphery (South) Core Per Core 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) Core Per Core Periphery Technology for Luxury production Brain Drain and Luxury exports Resource Extraction + Imports

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) Core Per Core Periphery Development Aid Exports (paid for by aid) Export s

How did this come about? Core (North) Periphery (South) Core Per Core Periphery Slaves Resource extraction Concentration of Industry Raw Materials Outdated 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