October 26 th Carlos Toriello Overview of International Development

Poverty Definitions “Poverty is not just low GDP; it is dying babies, starving children, and oppression of women and the downtrodden.” William Easterly Measuring Poverty: the poverty line  1.4 billion people live on less than $1.25 a day in 2005 (one in four)  1.9 billion (one in two) in 1981 International development agencies seek to reduce this poverty  Traditionally rich and Western actors

The invention of International Development Point 4: Truman Inaugural address (Jan. 20th 1949) Fourth, 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 of underdeveloped areas. More than half the people of the world are living in conditions approaching misery. Their food is inadequate. They are victims of disease. Their economic life is primitive and stagnant. Their poverty is a handicap and a threat both to them and to more prosperous areas.

The invention of International Development Creation of development agencies  International Monetary Fund  World Bank  USAID  Bilateral banks Economists enter “poor” countries Growth: people’s standard of living should keep increasing. The only way is to increase is to produce more goods.

Foreign aid fills the gap Harod-Domar model (1946)  GDP will grow proportionally with investment  Financing gap: difference between investment and savings  Domar admitted it was unrealistic in 1957  Still present in 2000 Developed during depression  Interest was in short-run business cycle

Rostow’s Stages of Development Traditional society, Transitional Stage, Take Off, Drive to Maturity, High Mass Consumption “Take off” fit the Domar model Soviet Russia believed to be an industrial power  Assumed to follow the stages Highest foreign aid as percent of USA GDP (0.06%) led by Rostow during Johnson Only 1 out of 138 countries fit the financing gap Excuse: physical capital is necessary for development, but not sufficient

Technology is Key to Growth The Solow Growth Model  Long run technological change is the only source of growth  Labor productivity Applied to the United States, taught everywhere  Finance the construction of physical capital (factories, infrastructure, etc.) Didn’t work too well…

Enter education Improve the human machinery  Explosion: the median primary enrollment increased from 80% in 1960 to 99% in 1990 Economic studies point to lack of association between education and growth  Measurement: enrollment What is education for?  Skills needed to grow

Overwhelmed productive capacity Excess population  Foreign aid to finance population control Thomas Malthus to Paul Ehrlich  Unsustainable population leads to rise in death rates UNICEF  Family planning could bring more benefits to more people at less cost than any other single technology now available to the human race. No relationship, again  Population growth has started to fall because of falling birth rates, not increasing death rates Development is the best contraceptive  As people become richer, they have less children

Loans for reform Aid financing reform, no longer investment Adjustment lending  After 1982, IMF attached greater conditions and gave out more loans Lending with little adjustment and growth  Growth predicted at 3.5%  Typical growth between 1980 and 1998 was 0%  Success: Korea, Peru, Ghana and Mauritius  Accountability  No regard for corruption when lending  Debt passed along to future government Historic irony – Cold war?  Policy got worse as aid went up and vice versa

Debt forgiveness High debt repayments makes it impossible to finance critical social and economic programs and also results in running down of assets  Jubilee 2000: Bono, Sachs, Dalai Lama and Pope  World Bank suggested it since 1981 Debt reduction began in G-7 summit of 1988  1989 and 1997, debt relief was $33 billion and new borrowing was $41 billion  High debt may mean irresponsible government  Remain irresponsible after debt relief  Rewards irresponsibility

Irresponsible lending? Recall the “financing gap”  Private and foreign investment leaves country  Gap filled by IMF, World Bank and others Conditions for debt relief  Granted to those who have proven that they are no longer irresponsible  It is never repeated