Development

Categories of Countries according to Level of Economic Development OECD - Organization for Economic Cooperation and Development Industrial and post-industrial economies High technology production, services Examples: USA, EU, Japan, Australia and New Zealand plus some advanced NICS (Mexico, South Korea, Turkey) plus some former CPEs (Poland, Hungary, Czech Republic)

NIC - Newly industrializing countries Export-oriented economic development Early: focus on low-priced, labor-intensive goods Late: focus on large scale industrialized mass production Examples: Taiwan, Brazil, Malaysia

LDC - Less developed countries Economy is still largely agricultural Most technology controlled by multinational corporations High level of international debt Frequently have problems of political stability Examples: El Salvador, Zaire, Bangladesh

Former CPE (centrally planned economies) Large but outdated industrial base Educated workforce Poor marketing systems Immediate problems: · Privatization · Development of legal system Examples: Romania, Ukraine, Russia, China

Brief History of Colonialism 1450-1600 Expansion of European navigation; "discovery" of Western hemisphere 1600-1800 Intra-European trade wars; Britain and France in hegemonic position by 1700; Britain by 1800 Gradual expansion of political control Gradual expansion of political control by militarized trading companies Increased consumer demand for imported goods such as coffee, tea, sugar, chocolate, tobacco. Development of slave trade

Brief History of Colonialism 1800-1880 Industrialization; gradual shift to using colonies as markets USA and Latin America gain independence Meiji Restoration: industrialization of Japan 1880-1914 Machine gun provides overwhelming military superiority to industrial powers, railroad and steamship provide efficient transportation Shift to direct political control, particularly in Africa and China Late colonialism of USA, Japan and Germany

Brief History of Colonialism 1914-1945 Increased political pressure on colonial powers by national elites in colonized areas (e.g. Gandhi) European wars substantially weaken Britain, France and Germany 1945-1965 Virtually complete decolonization under pressure from USA and United Nations

Brief History of Development Issues 1940s: Establishment of Bretton Woods system 1950s: Decolonization 1960s: Foreign aid and UNCTAD 1970s: NIEO - New International Economic Order OPEC decade 1980s: Debt crisis 1990s: Export-led industrialization 2000s: ?

History of the 1980s Debt Crisis 1973-1979 OPEC price increases give international banks of excess of money: the "petrodollar recycling" problem Industrialized countries are in economic turmoil (inflation; recession) due to OPEC price increases therefore These funds are rapidly invested in newly industrialized countries, particularly in export-oriented industries 1981-1983 Recession in OECD countries leads to reduced demand for NIC exports Decline of OPEC leads to reduction of petrodollars going to banks therefore NICs can't repay the loans and threaten bankruptcy

Development: Colonial problems • Lack of infrastructure – Physical: roads, electricity – Education and health – Stable and uncorrupt government institutions – Depoliticized military • Dependence on agriculture and raw materials • Declining terms of trade • Price instability • North-South trade linkages with colonial power

Price Volatility: Agriculture

Price Volatility: Mining

Post-colonial problems Inspired by Soviet Union: • Central economic planning • Excessive bureaucracy ("rent-seeking") • Urban bias and top-down development Inspired by United States: • Military regimes and excessive military spending • Massive foreign borrowing • IMF intervention Other problems: • Inflation: departure of money of middle class • Human rights violations: departure of children of the middle class

Prices can also go down…

Models of Development Europe Function

How it was done

Financing

internal

Markets

internal and colonial

Primary exports

industrial goods

Trade Orientation

mercantilist

Comparative advantage

high technology

Role of government

provide internal political stability; maintain colonial systems to provide raw materials

USA Function Financing

How it was done external (European banks)

Markets

internal

Primary exports

agricultural and raw materials

Trade Orientation

liberal

Comparative advantage

natural resources

Role of government

provide infrastructure (e.g. public education; railroads; roads; irrigation) Tennessee Valley Authority (TVA) provides model for internal development; industrial policy is confined to defense

USSR Function Financing

Markets Primary exports Trade Orientation Comparative advantage Role of government

How it was done internal; urban areas developed in preference to rural ("urban bias") internal; then colonial after WWII raw materials (oil, minerals, timber) mercantilist none centrally planned economy

Japan (export oriented) Function

How it was done

Financing

internal

Markets

external

Primary exports

industrial goods

Trade Orientation

liberal

Comparative advantage

initially low wages, then mass production then quality production

Role of government

provide infrastructure; systematic industrial, trade and development policy (MITI)

Early Development Strategies • • • •

Export-oriented development Import rather than invent technology Deemphasize traditional agriculture Use multinational corporations (MNCs) to provide – Marketing and management expertise – Technology transfer – Finance • Low wages and social services • Low environmental standards

Risks of Export-Oriented Strategy • • • • •

Imported technology may be inappropriate and/or expensive MNCs inhibit the development of national business Foreign financing leads to excessive interest payments Mechanized agriculture leads to rapid urbanization Economy cannot remain competitive indefinitely based only on low wages • Low environmental standards lead to major health problems • Resources such as forests, clean air, etc are finite

Sources of Development Funding Foreign aid Advantage: 1. It is free Disadvantages: 1. There isn't very much of it 2. Comes with conditions 3. Mostly gets spent back in donor anyway 4. There is a tremendous amount of waste 5. It distorts the development of markets

US Public Perceptions of foreign aid

US Private Contributions

Note; “International Affairs” includes international aid

Loans Advantages: 1. Lots available, particularly in late 1970s 2. Non-political 3. No foreign ownership Disadvantage: 1. You have to pay back the loan and interest in convertible currency 2. Repayment is not linked to the success of the project 3. If you get into trouble, the IMF may impose conditions

Foreign Direct Investment Advantages 1. Increasing amounts available 2. Usually includes marketing, management and technological expertise 3. You only have to pay if the venture is successful Disadvantages 1. Development is partially controlled by outside investors 2. Loss of national ownership 3. Foreign exchange is lost through repatriated profits 4. Transfer pricing-and tax evasion-is possible

Post-1990 expansion of FDI

TYPICAL IMF CONDITIONS • Devalue currency • Reduce subsidy programs for food and energy – Occasional result: IMF riots

• Reduce government spending; raise taxes • Reduce restrictions on foreign direct investment • Reduce restriction on movement of foreign exchange • Reduce trade restrictions IMF will: • ·Loan additional money directly (coordinating with World Bank) • Encourage loans from OECD countries • Coordinate with major banks to restructure debt

So what’s not to like?? • Structural adjustment programs have only about a 50% success rate • Moral hazard: IMF is protecting banks from their own mistakes, and reducing the incentive for them not to make more mistakes • The sacrifices required in structural adjustment programs tend to fall disproportionately on the poor – Wealthy individuals have less need for a social safety net and can also move their wealth out of the country. Income inequality increases

• Neoimperialism: IMF is controlled by the wealthy countries • As with nuclear proliferation, the developed countries are enforcing policies they did not follow themselves – Protection of trade and infant industries – US states defaulted on many loans in 1840s when canals went bankrupt

MULTINATIONAL CORPORATION DEBATE Arguments Favoring MNCs: Business internationalism: MNCs are less militaristic than states Liberal economic theory Technology transfer Production techniques Management techniques Marketing Increased competition with national oligopolies

MULTINATIONAL CORPORATION DEBATE contd… Arguments Opposing MNCs Interference with internal affairs of states Encourage low wages and lax environmental regulations Absorb local capital, inhibiting growth of local business "Brain drain" and dual loyalty problems Transfer pricing is used to evade taxes Repatriation of profits causes loss of foreign exchange MNCs create inefficient bureaucracies; licensing is more profitable

Transfer Pricing (Hypothetical) Brazil: Manufactuering cost of shirt: $3 Shirt is exported for: $5 Taxable profit in Brazil: $2

United States: Shirt is imported for $5 Shirt is sold for: $8 Taxable profit in US: $3

Transfer Pricing (Hypothetical) contd… After: MNC sets up subsidiary in Cayman Islands, which has no corporate taxes

Transfer Pricing (Actual) Examples found in a 2001 Congressional study of possible transfer pricing by U.S. multinational corporations: Imports Toothbrush Disposable razor blade (1) Vinyl record Ink-jet printer

$5,655 $461 $5,670 $179,000

Exports Bulldozer Diamonds ATM Metal building

$528 $3/carat $36 82-cents

Estimated loss in tax revenues: $45-billion