1. Outline for: Development I
Capitals Channels
Foreign Aid
IGO lending
World Bank Group
Regional Development Banks
Private Sector Loans and Other Private Channels
Microcredit

2. The Need for Capital in the Global South
Capital (GDP) Population GDPpc
North lots little = high
South little lots = low
Suggests two ways to reduce the North-South Gap
Move population from the South to the North
2. Move capital from the North to the South
How feasible is the first option?

3. Capital Channels
Direct N Govt to S Govt.
Foreign aid / official development assistance
2. N Govt to S Govt thru an IGO
A. World Bank and International Monetary Fund
B. Regional Development Banks
3. N Private sector and S Govt.
A. Borrow from banks in the N
B. Issue debt to investors (often in the N)
All private sector
A. Trade and FDI
B. Remittances

4. Foreign Aid
Advantages – its free
Disadvantages?

5. IGO lending
Advantages – loans are low interest
Disadvantages ?

6. World Bank Group
Now includes 5 different institutions
International Bank for Reconstruction and Development (IBRD)
International Development Association (IDA)
International Finance Corporation (IFC)
Multilateral Investment Guarantee Agency (MIGA)
International Center for Settlement of Investment Disputes (ICSID)
Structure: President – traditionally an American (currently Jim Yong Kim)
Board of Executive Directors – reps from 25 countries + WB President
Board of Governors – reps from all member-countries
Vote shares: USA 16%
Japan 7%
China 4.5%
Germany 4%
UK 4%
France 4%
Capital base: about $90 billion loaned out in 2008/09

7. Regional Development Banks
Inter-American Development Bank Washington DC
African Development Bank Ivory Coast
Asian Development Bank The Philippines
Islamic Development Bank Saudi Arabia
European Bank for Reconstruction and Development London

8. Private Sector Loans
2 forms: 1) borrow from banks in the N
2) issue debt to investors (often in the N)
Advantages – lots of capital available thru these channels
Disadvantages ?

9. Other Private Sector Channels
Trade
FDI
Remittances

10. Microcredit
Very small loans to individuals in poor countries so that they can start businesses
Grameen Bank – founded in 1983 in Bangladesh
Muhammad Yunus awarded Nobel Peace Prize in 2006
Does microcredit work?
Micro/Macro Paradox

11. Preview
Region Development Strategy Outcome?
Latin America Import-Substitution Latin America Debt Crisis
Industrialization (ISI) Washington Consensus
Asia Export-Oriented Growth China’s growth
Asian Financial Crisis
Eastern Europe Shock Therapy EU Integration
Africa Foreign Aid Continued Underdevelopment

12. Outline for: Development II
Import Substitution Industrialization (ISI)
Latin American Debt Crisis
The New IMF: structural adjustment loans
Washington Consensus
Export-Oriented Growth
Asian Financial Crisis
Shock Therapy: Eastern Europe in the 1990s
Africa?

13. Import Substitution Industrialization (ISI)
A strategy to move up the economic development ladder
Industrialization means moving into manufacturing
Start by manufacturing the items that are currently imported
Big government role
Obtain capital to fund the shift to manufacturing.
Government may even need to start the new industries: state owned enterprises (SOEs)
2. Close domestic markets to foreign producers.
Why did so many Latin American countries follow this strategy?

14. Latin American Debt Crisis
Where to get the capital for ISI? Borrow from Northern banks
Why would Northern banks loan to risky governments in the South,
notably those in Latin America?
Oil Shocks and petrodollars
Did ISI work? Not very well
Twin deficits: Government Budget Deficit
Trade Deficit
Inflation and currency over-valuation
Southern governments could not pay back Northern banks
Why bad for the North?
Why bad for the South?

15. The New IMF: Structural Adjustment Loans
Make loans to Southern govts so that they could repay Northern banks.
Then Southern govts need to repay the IMF, their new creditor.
Why would Southern governments take these loans?
Why would the IMF take on this new role?
But how will the Southern countries be able to grow enough to repay the IMF?
Structural Adjustment: cut G, raise i

16. The Washington Consensus (1990s)
New view after the debt crisis that too much government was the problem.
Developing countries should:
Engage in free trade: cut trade barriers
Decrease government spending
Increased law/order and strengthen private property rights
Northern governments should decrease foreign aid

17. Export-Oriented Growth (EOG)
Industrialize, but focus on manufactured goods that can be exported
Strategy associated with Asian Tigers (NICs)
Arguably worked better than ISI, but why?
Asian governments had more domestic capital, did not need to borrow as much
Under-valued exchange rates (makes exporting easier)
Asia got on the light manufacturing rung before Latin America.
Often identified as “more capitalist” development strategy than ISI, but a big state role in EOG
Exchange rate management
Industrial policy
Is EOG really different than ISI?

18. Asian Financial Crisis
Late 1990s – period of non-inflationary growth in Global North,
lots of capital available at low interest rates
Asian banks borrowed capital from Northern banks, then lent this capital out domestically
If you borrow in foreign currency, then you want to keep your ex rate high.
But if you follow an EOG strategy, then you want to keep your ex rate low.
International investors saw Asian banks to be over-extended
Took their money out, ex rate fell even further
IMF structural adjustment again
IMF as a moral hazard problem

19. Shock Therapy: Eastern Europe in the 1990s
How to move from a centrally planned economy to a capitalist one very quickly?
Do everything at once: sell SOEs (privatization)
open markets (remove trade barriers and price controls)
democratization
Why do it all at once?
Did it work?
Can its success be replicated elsewhere?

20. Africa?
Lowest regional GDP per capita
Disadvantaged both geographically and historically
How to get capital into Africa?
Trade
FDI
Remittances
Loans from Northern banks
IGO lending
Foreign aid