Economic Development: Causes of Wealth and Poverty PDF

16~22 Economic development: Causes of the Wealth and Poverty of Nations Causes of (under) development Why are poor countries poor? How can they develop economically? Development - Actors, Interests, Interactions, Institutions ● Interests: everyone prefers more development to less ○ Internationally,...

16~22 Economic development: Causes of the Wealth and Poverty of Nations Causes of (under) development Why are poor countries poor? How can they develop economically? Development - Actors, Interests, Interactions, Institutions ● Interests: everyone prefers more development to less ○ Internationally, rich and poor have a common interest in development ■ Poor want more and better opportunities ■ Rich want markets to buy their goods, sell their products ● Interactions: actors may disagree on policies ○ You cannot get what you want becuase it doesn’t solely depend on you ○ Powerful domestic interest groups might pursue policies that promote particularistic interests ■ You get richer from the expense of others suffering from poverty ○ Rich countries may support policies that hurt the poor countries ○ Rich countries pursue freer trade in manfucatured products ○ However, poorer countries cannot pursue freer trade ● Interests, Interactions, Institutions ○ Domestically, ■ Powerful feoups within countries may thwart development ■ Domestic institutions can either promote or slow development ○ Internationally, ■ Rich and poor countries might have different interests (in terms of policies) ■ International institutions might be biased in favor of rich countries (World Bank, International Monetary Fund) If everyone wants development, why is it so hard to achieve? ● Less developed countries (LDCs) want to develop ● Developed countries want LDCs to develop ● Then why is it so hard to achieve development? ○ Many factors help explain why this goal is hard too attain: ■ Geographic location ■ Domestics factors ■ Domestic institutions ■ International factors ● Geography and climate affect development ○ Landlocked countries: Higher costs of trade and engagement in global economy ■ Access to trade routes (reasonably priced transaction/transportation cost) ■ Double landlocked countries: Requires to pass by at least two countries to get to the sea ○ Tropical countries: poor soil, diseases, infrastructure maintenance are costly ● ● ● ● ● ○ Natural resources Colonization has had lasting effects on geography ○ European empires divided land arbitrarily, with no knowledge of local cultures or ethnic divisions and affinities: ethnic groups are split across borders ○ Many borders combine hostile populations Still wide variation among countries within the same region Geographic location matters but this explanation is too deterministic, since we can’t relocate countries to other regions Natural resources Foreign direct investment, exploitation/ debt of colonial states, who don’t reap the full benefits of their natural resources like indonesia ○ Why are some regions that are rich in natural resources poor and underdeveloped? ■ Angola, Nigeria, Indonesia ○ Resource curse theory ■ the negative effects that can arise when a country is heavily dependent on the export of a single resource, such as oil or minerals ■ This dependence can lead to a lack of diversification in the economy, making it more vulnerable to external shocks, such as fluctuations in commodity prices ■ Predict that initial wealth gives rise to ensuing poverty ■ Patronage and corruption ● Wealth does not stay within the country and breeds corruption ■ Make taxes unnecessary ● Enact policies to promote earning to tax however, they don’t do anything ● If you have your own income source from resources, taxing become less necessary ■ Eliminate accountability ● Since the governmetn is not economicallty independent on the people, it eliminates the accountability mechanism ■ Deter economic diversification ● Diversifying their economic portfolios/ industry into other sectors (eg. UAE in service sectors transportation) Diverge from replenishing natural resources(?) ● Having natural resources deters these(?) ○ A government of a country with few natural resources must implement measures that wull make a country more productive ■ Build a portfolio (eg. in manufacturing, education) Domestic factors ● A government’s policies ○ Governments can provide public goods ■ ● ● Infrastructure: ● Physical infrastructure (roads, airports, ports, etc) ● Institutions → sound stable (rule of law, financial systems, property rights, stable regulatory policies, etc) ○ Not having prood hampers economic growth ● Social infrastructure (public health, education, etc) ○ Important for labor forces ○ Politics of speical/vested interests ○ Particularistic economic interests may be pursued at the expense of society and the pursuit of competition ○ Politicians and military governments may cater to existing powerful interests instead of a greater potential public interest ■ Ex) Wealthy landowners may want poor farmers to not be protected by property rights ■ Ex) Owners of labor-intensive plantations or mines may have little reason to support urbanization, industrialization or education ● They want people to be “uneducated” and be in the workforce for labor ■ Ex) Minority urban sectors drive national economic policies ● Politicians are more likely to concentrate on urban areas than rural areas as people living in urban areas are more likley to vote Domestic institutions ○ Engerman and Sokoloff (2000) and their related works ○ Consider North and South America: ■ Both were colonixed at about the same time ■ South Americqa gained independence within decades of zNorth American colonialization ■ Why diverging path? ■ Distribution of interests → political institution (democratic/undemocratic)--> national economic policies → development ● Equal distribution of wealth (small scale wheat/ tobacco famring) → democratic political instituion → economic policy pursing national interests → rapid econonmic development ○ Enact policies that will benefit most of us ● Unequal distribution of wealth (plantation and mining) → undemocratic political instituions → economic policy pursuing particularistic interests → slow economic development Colonial legacy ● Interests of the colonies were generally secondary to that of the colonizers ○ Most imperial powers used their colonies for their benefit at the expense of the colony itself ● The colonial world can be divided into two types: ○ ○ ○ Countries where European settlers could live easily and establish institutions Countries where settlers were more likely to die of disease or other factors When the settlers’ interests coincide with those of the local population, colonialism is less unfavorable ■ When former colonies left, there is a foundation, however when formers colonizers left, there were no foundations left for the colonized to live in ■ Settlers do not build long term institutions since they are only there for short periods of time Is the Economy baised against LDCS? ● Development economists in 1970s and 80s in Latin America have argued that trade works against th interests of the LDC ○ Deteriorating terms of trade ■ LDCs mainly sell primary products, or agricultural and raw materials, to very competitive international markets (this is because everyone produces it, like beef) ● The competitive nature of these markets forced the prices of these goods to decrease which is good for consumers ● Heavy agricultural subsidies in rich countries ■ Manufactured goods were controlled by a few large oligopolistic firms ● These firms would keep prices high ● Constant trading with developing nations, make profit margin from exports usually higher, making developed countries richer, while relatively, for developing countries are worse off, therefore free trade is (?), ○ In addition, the Engel’s law ○ Terms of trade work in favor of rich countries Are institutions biased against LDCs? ● Some people believe that international political factors are responsible for worsening problems of development ○ Wealthy countries protect their own interests at the expense of poor countries ● World Trade Organization ○ International trade agreements generally reflect the interests of rich countries ■ LDCs constantly push the WTO fro greater trade liberalization for agricultural products, but are repeatedly ignored by developed countries ○ Trade related intellectual property rights ■ Patent, trade marks ○ Services ■ Advanced economists want to promote services, since these sell better, in order to benefit their economy ● IMF/ World Bank ○ Developing countries are mostly affected ○ Controlled largely by rich countries Development strategies ● Import-substituition industrializaton ○ In the 1930s, many developing countries began encouraging industrial development ■ Import substitution industrialization → Industrialization goal of substituting what they used to import, making things accessible domesticalliy ○ In Latin American (& India), the development strategy was ISI ○ Import-substitution industrialization (ISI): ■ Moving away from agricultural / mining to manufacturing ■ A set of policies that reduced imports and encocouraged domestic manufacturing ● High trade barriers ○ Make imports more expensive, if possible make imports impossible through tariff barriers ● Foreign currencies heavily regulated ○ Control spending of foreign currencies ● Subsidies to manufacturing ○ Tax credits, RND expenditures, so domestic firms grow ● State ownership of basic industries ○ Gas, electricity, states own industries, with heavily subsidized costs (?) ● Agricultural sector heavily taxed ○ Become self sufficient ○ By the 1970s, most of the larger developing countries following ISI were largely self-sufficient in manufactured products ■ Started with lighter industries (furniture, canned goods) ■ Starting in the 1950s, Brazil anf Mexico developed their own automobile industries starting from scratch ■ Problem: ● Consumers can only access domestic goods that are low quality since imported products are extremely expensive ● Smaller market is less competitive ○ However, many industries that ISI stimulated were largely inefficient and began to lose support (couldn’t sell in international markets) ■ Selling to only a small, poor market reduced producers’ potential ● Protected markets led to products of low quality ● Exports - competitive sector got hurt and foreign income shrunk ● Provided subsidies for growing domestic industries, and state owned business, running deficits ■ ISI unfairness towards export-oriented agriculture hurt many farmers ■ Deteriorating balance of trade and mounting foreign debts (boworring money since they need foreign currencies) - Latin American debt crisis in 1980s ○ ● ● ● Enthusiasm for ISI declined Export-oriented industrialization ○ Countries in East Asia tried a different approach ■ In the mid 1960s, some countries turned toward export-oriented industrialization (EOI) ● Abundant labor ■ EOI countries encouraged manufacturers to produce for foreign markets/ consumers ■ Techniques such as tax breaks to exporters, low-cost loans and a weak currency helped make their products cheaper ● Currencies are artificially weak - exports are cheaper in the foreign markets ■ EOI countries have witnessed enormous successes during the 60s to 90s ● In the 1980s, countries such as South Korea industrialized quickly by producing and exporting high-quality goods. ● South Korea became competitive in the steel industry. Its car companies Kia and Hyundai are doing well in the U.S. market. ● Labor heavy products to more technologically advanced (like semiconductors) The turn toward globalization ○ As policy prescription for Latin American countries in 1980s ○ The Washington Consensus emerged ■ Moving from banks to the IMF with change of policies recommended from the IMF (aka Washington Consensus) ● Includes IMF, World Bank, Inter American Developemnt bank, US treasury, US congress, White house ■ General acceptance of market-oriented policies (Policy recommendations): ■ Trade liberalization: ● The removal of barriers to imports and exports in an attempt to make national procedures more competitive on world markets ■ Privitization: ● The selling off of many government enterprises to private investors who would presumably run them more efficiently ■ Fiscal and monetary policies were excuted to avoid deficits and high inflation ■ Openess to foregin investment and international capital flows more generally ○ Later applied to Eastern and Central European countries after the collapse of USSR Globalization and its discontents ○ Globalization has its problems and critics. ■ Integration into world markets creates losers as well as winners ■ ○ At the international level, the losers of globalization often are those who live in poor countries. How do we improve the living standard of the billions of people in the developing world ■ Domestic factors within developing countries ■ International factors