Theories of Economic

Development
The Liberal Paradigm
 Today’s Agenda
• Review: Neo-Liberalism, Casino Capitalism, demise of the welfare state, the
Transformation of International Institutions
• Is the World Developing or Underdeveloped?
– The good news: Growth and aggregate improvement in human welfare indicators
– The bad news: inequality and a growing gap between rich and poor
• Liberal views on development and explanations for the growing gap
• A. Rostow and Stages
• B. Liberalism and integration into the international economy:
– Staples Theory (Trade)
– Product cycle (MNC),
– Institutions (Washington Consensus)

• C. Internal Requirements for Development

– Move from a traditionsl to a modern society
– Democracy

• D. Summary of the Liberal position

•  
Review: The rise of a “casino” economy

• End of hegemony removes international

“safety net”
• Need to compete in the global economy for
economic growth and to remove BoP deficits
• Requirement for competitiveness: End of the
welfare state
• International institutions that promote and
protect a neo-liberal international economy
 Retreat of the Welfare State: Inequality in
rich countries
Per cent of Disposable …..and the poorest
income held by the (bottom 30%)
wealthiest (top 30%)

Denmark 48.3 13.8

Finland 45.6 17.0
Sweden 45.8 15.8
Norway 46.1 16.3
Netherlands 46.3 15.8
Germany 48.9 14.7
Canada 49.2 14.3
Italy 53.2 12.0
United States 52.5 11.8
 New Role for the IMF: spread
liberalism to developing countries
• Balance of payments lending in exchange for
liberal reforms: structural adjustment
• Washington Consensus: stabilize, privatize,
liberalize: put on the “golden straightjacket”
• No chance for the welfare state
• Contributes to freedom of finance capital to
roam the earth
• Contributes to freedom of multinational
corporations to roam the earth
New Role for the World Bank: focus on fostering
neo-liberal policies as condition of lending
• Moved from the task of financing
reconstruction projects for Europe after WWII
• To the task of financing development projects
in poor countries
• Imposed the same conditions on lending as
the IMF
 GATT becomes the WTO
• WTO is a binding treaty
• Becomes the LAW in its member states
• An arena for negotiating the conditions for trade liberalization
• Overseas implementation of multilateral free trade agreements and punishment
for non-compliance
• Goodbye embedded liberalism: members not permitted to protect their
populations

– Goodbye child labor protections

– Goodbye environmental protections
– Goodbye health and safety protections
– Hello Private actors: banks, multinational corporations

• Hello Private Actors: banks, multinational corporations

This institutional framework permits The rise
of Multinational corporations
• Given these new “global guardians” of the
market, private actors have new powers
• Corporations sit on advisory boards of WTO,
IMF, and World Bank
• Global FDI grew from $50 billion to $2.5
trillion in 30 years
 …and the growth of unregulated global
finance
• International movements of money – both
volume and speed
• cross-border bank lending has grown about
10% annually.
• daily foreign exchange trades now exceed by a
wide margin the combined reserves of all
central banks.
The result: Increasing privatization
• Some say international institutions governing
the global economy have been weakened
• Only those who prefer embedded liberalism
say that
• The institutions have simply changed (and
strengthened) to govern an international neo-
liberal economy
• Privatization is the goal of neo-liberalism
 So….. If the U.S. pursued economic nationalism after
hegemony, how did we get a neo-liberal global
economy?
• U.S. hegemony supported embedded liberalism
• Without a hegemon and with IFIs and WTO
transformed to protect neo-liberalism, Private
forces are unleashed and unregulated
• Many governments were then free to pursue
economic nationalism
• Why didn’t the world devolve into the
fragmentation of the 1930s?
 Because of the U.S. market and the $
• First of all, freedom, not stability, is the goal
• The U.S. market still stimulates exports abroad
because
– Americans consume wildly
– Demand met by imports
• The U.S. is also a magnet for foreign capital
– Strong dollar
– Low inflation rate
• But Financial crisis suggests instability
Maybe fragementation will yet occur. Without embedded liberalism,
economic nationalism can rear its head: indicators are PTAs and
Subsidies

• What are PTAs?

– Two or more parties with preferential access
– Viviolates MFN obligation
– End of 2004: 300 PTAs
– 50% of global trade
• Rich countries give mammoth agricultural
subsidies
INTERPRETATIONS
 The WTO: A Distributive Justice Critique:
neoliberalism creates growing inequality
• The rich get richer, the poor get poorer
• A “race to the bottom”
• “non-commercial values” cannot play a part in
trade rules
• Property rights preferred to health and human
lives: “right to profit” over “right to life”
 And Institutions of economic neo-liberalism
undermine democracy
• Are these organizations a new source of global
dominance, surveillance, and manipulation of
the nation-state?
• Conditions of IMF and world bank loans not
subject to domestic debate in borrowing
countries
• WTO rules supersede domestic laws
 The Economic Nationalist Critique
• Organizations undermine state sovereignty
and make private actors more powerful than
states
A Liberal rebuttal: Global Growth without a
hegemon and with neo-liberalism
Is the world developing or
underdeveloped….”emerging markets” or just poor
countries?
 Who is North and Who is South?
• North = World’s Rich
• South = World’s poor, or developing nations,
or emerging markets (more complicated)
– Used to be called the Third World
– We can no longer lump together the countries of
the “south”
– Some are growing and “emerging” and some are
not.
 The Good News
• 20th century economic output off the charts!
• South Korea and China doubled productive
output in 10 years
• Humans are, on the whole more healthy now
than 100 years ago.
Health and income have improved
• World Health Chart.lnk
 Health and well-being
GapminderFlash_MDG4_07jan09.exe
..\gapminder_world_chart_2006.pdf
 The Bad News: From Local to Global
Inequality
• The Pre-modern world: inequality within
societies
• Today: inequality between societies
• What determines whether you will be rich or
poor?
• Where is the “class struggle” now?
The Bad: A growing gap
 Income distribution
movie.swf
Who consumes the most?
Global Consumption, 2004
(in billion US dollars)
 Liberal explanations for global growth with
global inequality?
• Walt Rostow: the intellectual context
– No previous conceptual apparatus
– But experience with Marshall Plan
– But there were historical patterns of development
– Winning the cold war meant:
Helping the “Third world” develop
Within the liberal capitalist model
 Liberal Economic Development:
“Modernization”
• From an agrarian to an industrial society
through absorbtion of “western” liberal
models, i.e.
But this requires a “jump start” in the cold war
environment: help from the rich liberal countries
The Stages of growth are…….
 Stage 1: Traditional society
• Why no growth?
 Stage 2: Preconditions for Growth
• Population growth will outpace economic
growth in traditional society
• Stimulus needed to mobilize capital and
resources
– Revolution and institutional restructuring
– Technological innovation
– Favorable international environment
– External Injection of capital
 Stage 3: The Takeoff
•Productive investment must rise to 10 per cent
of national income
•Needed: rapid accumulation of capital and
productive investment
Taxes
Finance
Stock market
Trade
Foreign investment
aid
 4. The Drive to Maturity
• Employment growth
• Growth in national income
• Rise of consumer demands
• Strong domestic markets
5. High Mass Consumption Society
The Importance of Capital Accumulation

• Capital accumulation is the name of the game

• So how does it happen?
Economic development and the International
Economy
• International interdependence will lead to
economic development of ALL countries in a
liberal system
• Trade serves as an engine of growth
 The Staples Theory
• Staples are field crops or minerals
• Earnings finance industrial growth
• Canada and Australia developed this way
• This justifies the theory of comparative
advantage
• Export-led growth is the way to develop
 Trade and the product cycle
• Corporations maximize their own growth and
the growth of the countries in which they
operate
• Three stages of corporate expansion and
growth
 the introductory or innovative phase

• Located in advanced countries

• Comparative advantage in product
development because of large home market
• And lots of resources
• Corporation enjoys monopolistic position
• Foreign demand grows
• Corporation exports
 The maturing phase of the product cycle
 

• Technology diffuses
• Innovative firm loses competitive edge as
technology becomes available
• Advantage shifts to foreign production to
replace exports and hold market share
• Innovative firm establishes foreign branches
 The Standardized Phase
• Production fully routine
• Comparative advantage shifts to the
developing country
• Export platforms develop
So….is there a symbiotic relationship between the MNC
product cycle and global economic development?
Now….there are many sources of
innovation…..
Research and Development
High Tech Exports
 Role of International Institutions: Washington
Consensus on conditions for loans and aid
• Internal liberalization of Markets
• Integration into the world Economy
• Reduction of extensive government programs
because they…….
– Tend of allocate funds to non-productive activities
– Entrepreneurs can’t find funding
– Create wrong incentives
– Stimulate pressure for trade protection
 So why do many countries stagnate and
show little or no economic growth?
• External connections like trade and
investment are important, but that’s not all…..
• There are internal requirements for
developmet as well….
• Traditional culture must give way to modern
culture….
 Tradition and Modernity
Tradition Example Modernity example
collective unit of Religion, ethnic Individual as the U.S. Bill of Rights,
social organization group, tribe unit of social
organization
Personal ties family, tribe Pragmatic and markets,
govern social functional ties professions,
organization and govern behavior. associations
behavior
essentialist ethnic identity, Multideminsional
identity religious identity, Individual identity
Identity derived ethnic clensing, Free choice of See above
from mystical identity
principles
Ascriptive Kingdoms, families Functional Parliaments,
hierarchies, hierarchies
 Democracy and Markets
• Democracy and markets encourage each
other: political and economic freedom are
two sides of the same coin
Summary of Liberal Theories of Development

Internal External
•Human Capital •Opportunities to Catch Up
•Entrepreneurial Spirit •Foreign Investments
•Efficient Government •Trade
Stimulants •Savings •Aid
•Research and Development
•Investments
= Modern Society
•Political Instability •Trade Barriers in the
•Corruption North
•Traditional Society •Absence of project
finance
Hindrances •Absence of Balance of
Payments finance
 Conclusion
• Smith, Friedman, Rostow…. “not to worry”
• People will act rationally
• Capital will be accumulated
• If markets are allowed to operate, they will
take care of the rest
• Long live the invisible hand!