Aggregate data on economic growth doesn’t tell you how the poverty varies within a country
you have to look at gini coefficients etc
Can also vary within families
women might be poorer than men in the same family
Self-sufficiency
the dollar amount doesn’t tell you are self-sufficiency of farmers
people in the countryside are always poorer
but they have other means of survival
Poverty not only a matter of income — some measure of well-being
access to clean water, sanitation, education and health services
Also social standing
what allows you to participate in society as an equal
Adam Smith: “starched white shirt”
How to find a job:
some countries: shoes, trousers, shirt
other countries: a car, a cell phone
Explanations
How should the differences in wealth and development be explained?
Imperialism, Marxist version:
The Third World is poor since they First World is rich
Our wealth depends on their poverty
we have become rich since they have become poor
they have become poor since we have become rich
But
the world economy is not a zero-sum game
you need to specify some mechanism whereby this would happen
Lenin
Imperialism, the Highest Stage of Capitalism, 1917
but actually it’s a ripoff from John Hobson
Capital flows from rich countries to poor
there are not enough investment opportunities in the West
the working class is exploited
they cannot buy the things they themselves produce
International capitalism is looking for new places to invest
first comes the investments
they come to own big chunks of the economy
then come the political/military control
as a way to protect their investments
Russia as a good example of this
Lenin had to explain why a revolution was possible in Russia
a country with no proper working-class would never have a revolution
but Russia as a victim of imperialism had a role in the revolutionary struggle
Later theories
“exploitation”
But in which direction is money moving?
into poor countries our out of them?
Taking home profits
but the profitable investments continue to be in the poor country
money will return
International politics of poverty
Presupposes an idea of development and “progress”
cf. the League of Nations and the “Mandate Period”
development as a way to become independent
a measurement of how close you are to catching up with the West
Western ideals of “progress” becoming more widely shared
internet allows comparisons that previously were impossible
The Cold War setting
World poverty as a battle ground
the US had to show that capitalism was working for poor people in the world
they needed to “take off” — path of development
or they would defect to the Communist camp
Communism
central planning
abolition of private property
today we think of this as disastrous, but it didn’t always look that way
One independent country after another declares itself “socialist”
a way to break with the West and the legacy of colonialism
get help from other Communist countries
Dependency theory
Poor countries develop but in a dependent way
their development takes place is the terms of world capitalism
They are given the role of producers of natural resources
very little by means of technological development
Industrialization too
but we are only putting things together
no research and development
The domestic elite in the periphery joins the elite in the center
together they exploit the poor people of the periphery
The elite has the same consumption patterns
no interest in developing their countries
they benefit more than anyone from cheap labor
Terms of trade
declining terms of trade as an explanation for why poor countries are becoming poorer
Definition:
the ratio of the prices at which a country’s exports are sold to the prices paid for its imports. A country’s terms of trade improve if it gets more for its exports relative to what it pays for imports, and they deteriorate if it gets less.
Uneven trade
many poorer or developing countries have relied heavily on exporting primary commodities (like agricultural products, minerals, and raw materials), while importing manufactured goods from developed countries
With growing income levels there is going to be comparatively less demand for the things that poor countries produce
natural resources
you can only eat so much
new technology — the proportion of raw materials is declining
This leads to
long-term price decline for primary goods
This will reduce the relative value of their products
they can buy less and less of foreign goods with the goods they are exporting
more exports are needed to finance the same amount of imports, leading to a loss of income and purchasing power
The outcome:
chronic trade deficits, debt accumulation, reduced ability to invest in development, and increased vulnerability to global market fluctuations
developed as an answer to the problem of declining terms of trade
there are really two kinds of economics — one for the rich, the other for the poor
Poor countries should break with the world economy and develop in our own fashion
use their own saving
develop their own technology
The predominant view in the 1950s and 60s
international agencies supported it too!
A lot of misallocation of resources
a lot of corruption
infant industries that never grew up
Raul Prebich
Center-Periphery Model:
Dichotomy of the World Economy: Prebisch divided the world economy into two distinct zones: the ‘center’ (or core), comprising industrialized, developed countries, and the ‘periphery’, consisting of underdeveloped, primary-commodity-exporting countries.
Economic Dependence: He argued that peripheral countries were in a state of economic dependence on core countries. This dependence was characterized by the periphery exporting raw materials to and importing manufactured goods from the center.
Unequal Exchange and Deteriorating Terms of Trade: Prebisch observed that over time, the terms of trade tended to move against the primary-commodity-producing periphery and in favor of the industrialized center. This meant that the periphery would continually get less for what they export relative to the cost of what they import.
Income Elasticity: Part of this phenomenon was attributed to the fact that the income elasticity of demand for primary commodities (often produced by peripheral countries) is lower than that for manufactured goods. Thus, as incomes rise globally, the demand for manufactured goods increases more rapidly than for primary commodities, leading to declining prices for these commodities relative to manufactured goods.
Economic Development Strategies:
Import Substitution Industrialization (ISI): Prebisch advocated for ISI as a strategy for economic development. ISI involves reducing dependency on imported goods by developing local industries. The idea was to encourage the domestic production of goods that were previously imported, to foster industrialization and reduce the outflow of capital.
Role of the State: He emphasized the importance of state intervention in the economy to promote industrialization, manage foreign exchange, and regulate foreign investment.
Regional Integration: Prebisch also promoted the idea of regional economic integration among developing countries as a means to expand markets, reduce dependence on the center, and enhance collective bargaining power.
Legacy and Critiques:
Influence on Latin American Economic Policy: Prebisch’s ideas greatly influenced economic policies in Latin America, particularly from the 1950s to the 1970s.
Critiques: Critics of Prebisch’s theories argue that ISI can lead to inefficiency, lack of competitiveness, and neglect of export potentials. Also, over-reliance on state intervention can lead to bureaucratic inefficiencies and corruption.
Continued Relevance: Despite these critiques, Prebisch’s core ideas about the structural imbalances in the world economy and the need for a development strategy tailored to the specific conditions of developing countries remain influential in development economics.
Walt Rostow and “take-off”
The Traditional Society:
characterized by subsistence agriculture or hunting and gathering; limited technology; and a static, rigid social structure.
The Preconditions for Take-off:
phase where the society starts to develop more productive agricultural practices and begins to generate surplus capital that can be invested in other areas of the economy.
The Take-off:
industrialization begins to occur, and economic growth becomes a more common and sustained process.
The take-off is facilitated by:
development of a manufacturing sector,
structural changes in the economy (from agriculture to industry),
increased investment in industrial production,
development of new technologies and infrastructure,
growth of a skilled and educated workforce.
The Drive to Maturity:
during this stage, the economy diversifies from heavy industry to include a wider range of manufacturing and services. The economy enjoys the benefits of technological and entrepreneurial maturity.
The Age of High Mass Consumption:
marked by a shift from production of heavy industry to consumer goods, leading to high levels of material wealth and widespread consumption.
Critique
Linear Progression: Rostow’s model suggests a linear progression of economic development, which has been criticized for being overly simplistic and not accounting for the varied and non-linear paths different countries have followed.
Western Bias: The model is seen as ethnocentric, mainly reflecting the development experience of Western Europe and the United States, and may not adequately address the unique challenges and circumstances of other regions, especially post-colonial societies.
Political and Social Factors: Critics argue that Rostow’s model downplays the role of political, social, and cultural factors in economic development.
Environmental Sustainability: In the contemporary context, Rostow’s model is often critiqued for not considering environmental sustainability, an increasingly crucial aspect of development.
Gershenkron and “the advantages of backwardness”
Catching Up with Advanced Economies:
Gerschenkron posited that backward economies (those that are less industrially developed) have certain advantages that can enable them to catch up more rapidly with more advanced economies.
Role of the State:
Gerschenkron emphasized the crucial role of the state in driving industrialization in backward countries
the state can mobilize resources, direct investment, and foster the development of industries more effectively in these contexts, as opposed to relying solely on market forces.
Substitute for Missing Prerequisites:
backward countries often lack the prerequisites for industrialization that advanced countries had (like a wealthy, capitalist class willing to invest in industrial ventures)
substituted by other means — such as state intervention, or by importing technology and know-how from more advanced countries.
Opportunity to Leapfrog:
opportunity to leapfrog stages of development that advanced countries had to go through
latecomers can adopt the latest technologies and organizational methods without having to go through the incremental development and obsolescence of earlier technologies.
Learning from the Experience of Others:
Less developed countries can benefit from the experiences, both positive and negative, of countries that have already industrialized
Critique:
not universally applicable to all backward countries. The success of state-led industrialization depends on a variety of factors, including political stability, quality of governance, and the capacity of the state to mobilize resources effectively
Gerschenkron’s model led to an overemphasis on heavy industry at the expense of consumer goods and services, which may not always be the most beneficial path for economic development
the theory’s emphasis on strong state intervention can sometimes lead to authoritarian governance styles, which may suppress democratic processes and civil liberties
Gerschenkron’s theory often overlooked the social and environmental costs of rapid industrialization.
Arthur Lewis on the role of labor
The traditional Sector:
characterized by subsistence agriculture with low productivity and a surplus of labor.
The Modern Sector:
characterized by higher productivity industries, often urban and capitalist in nature.
Labor Transfer and Surplus:
the traditional, agrarian sector had an excess of labor—a surplus that did not significantly contribute to output
this surplus labor could be transferred to the modern sector without negatively affecting agricultural output.
Capital Accumulation:
economic growth in the modern sector leads to increased profits, which are reinvested to expand industrial capacity. This expansion creates more jobs and further draws labor from the traditional sector.
Wage Differences and Productivity:
at first wages in the modern sector are higher than in the traditional sector, reflecting higher productivity. Over time, as labor continues to move to the modern sector, wages in the traditional sector begin to rise, and wages in the modern sector stabilize.
Economic Growth and Development:
the continuous transfer of labor and the reinvestment of profits in the modern sector fuel economic growth. Eventually, the economy transitions to a point where the traditional sector becomes a smaller part of the economy, and the modern sector dominates.
Critiques:
[ver-Simplification: Critics argue that the dual-sector model oversimplifies the complexities of developing economies, especially the diversity of sectors and the informal economy.
neglect of Agricultural Development: The model has been criticized for underestimating the importance of agricultural development and rural development as integral parts of economic growth.
labor Market Dynamics: The assumption of a surplus of labor in agriculture and its easy transferability to industry doesn’t always hold true, especially considering skills mismatch and geographic constraints.
NIEO
The rise and fall of the idea of a “new international economic order”
“The most serious challenge to US global leadership since the end of the Second World War”
adds an economic dimension to the struggle for independence
Post-war boom
but this did not include the newly independent countries
little economic growth, industrialization
very dependent on commodities
Communism as a constant temptation
height of the Cold War
challenge to the United States
“Neocolonialism”
MNCs dominate the economy of many countries
we talked about this before
The demands
More Favorable Terms of Trade:
developing countries sought better prices for their raw materials and more favorable terms of trade to improve their economic situation
Greater Development Assistance:
NIEO called for increased financial aid and better access to markets in developed countries, aiming to facilitate development and reduce poverty in the Global South
Sovereignty Over Natural Resources:
A key demand was the right for countries to have full permanent sovereignty over their natural resources and economic activities, enabling them to regulate and control foreign investment within their bordersA commodity fund — stabilize prices and export earnings
Technology Transfer:
NIEO emphasized the need for technology transfer from developed to developing countries under fair and most favorable terms, to help them build their industrial bases.
Debt Relief:
Many developing countries were burdened with external debt, so the NIEO included calls for debt relief and restructuring to manage their financial obligations better.
Fairer Regulation of Multinational Corporations:
NIEO sought to establish a code of conduct for multinational corporations to prevent exploitation and ensure that their activities contributed positively to the host countries.
Reforms in the Global Institutional Framework:
This included reforming international institutions like the IMF and the World Bank to better represent the interests of developing countries.
Preferential Treatment for Developing Countries:
The NIEO proposed preferential treatment in trade for developing countries, such as reduced tariffs and better market access to the markets of developed countries.
The United Nations
The forum where NIEO was implemented
not Bretton Woods etc
UN — one country, one vote
the majority of members are no longer Western countries
the only forum where small countries have influence
the North/South division is more important than the East/West division
The dependency theory examples are always from Latin America
indeed very high levels of external loans
a lot of dependency on foreign money
But this is not always the case
East Asia: very high levels of domestic spending
China: state control can squeeze money out of the economy
Export-led growth
a whole world market to sell do
The role of the state
infant industries
gathering savings
supporting research and development
nurturing “national leaders”
Economic theory and economic growth
The solution seems simple:
we need more economic growth
Not so much economic theory
more statistics
and history
Economic theory
not very good at explaining economic growth
We talked about before
the contrast between prices and values
Economists only think in terms of investments
invest and you will be rewarded
But how this only can explain incremental change
and this is always going to be the far smaller part
The world economy has grown exponentially
McCloskey — “the great enrichment”
cannot be explained by input/output models
we are talking about qualitative leaps
Cf. technological inventions
move us from one kind of an economy to another
from horses to steam — from electricity to the internet
Aid dependency
Many countries highly dependent on foreign aid
fail to develop
and live off the largesse of aid donors
In 1970, the United Nations agreed on 0.7% of Gross National Income per country as the target for how much should be dedicated for international aid.
President of Tanzania, Benjamin W. Mkapa, stated that “Development aid has taken deep root to the psyche of the people, especially in the poorer countries of the South. It is similar to drug addiction.”
Motives for aid
obviously humanitarian
but also supporting one’s own exports
military and economic considerations
Stuns economic growth
aid replaces development
food aid does damage to local production
difficult for local products to compete
cf. the threat of starvation as a result of the war in Ukraine
the views of the donors as more important than local constituencies
Political dependency
the donors influences local politics
reduces the bargaining power of the people — weakens democratic institutions
easier for “presidentialism”
Corruption
most aid dependent countries have very high levels of corruption
funds are used for private ends — rent-seeking behavior
Recent trends
reduced dependency in countries like Ghana and Mozambique
Alternative forms of aid
somehow the recipient must be in charge of the programs