Globalization and
Underdevelopment
Or, If globalization is so great, why
are there so many poor people?
© Randall W. Stone, 2002
Statistics
• Infant mortality:
– 4 of 1,000 in the richest fifth of countries;
– 200 of 1,000 in the poorest fifth
• Childhood diseases:
– 2 million die of dehydration from diarrhea
– 2 million die of pertussis, polio, diptheria, tetanus,
measles. Vaccination costs $15.
– 3 million die of bacterial pneumonia. The
antibiotic treatment costs $.25
Easterly 2001
© Randall W. Stone, 2002
Statistics
• Nutrition
– Calorie intake 1/3 lower in the poorest fifth of
countries than in the richest
• Child labor
– 42% aged 10-14 in the poorest countries
– 2% in the richest fifth
• Women’s rights
– None of the poorest fifth has equal rights for
women
Easterly 2001
© Randall W. Stone, 2002
Case study: Ghana
• Auspicious start
– At independence in 1957, Gold Coast
exported 2/3 of the world’s cocoa
– Best educational system in Africa
– Under British rule, Nkrumah built roads,
clinics, schools
– Leading economists were optimistic
© Randall W. Stone, 2002
Case study: Ghana
• World Bank project: Akosombo Dam
– Electricity
– Aluminum smelter owned by multinational Kaiser
Aluminum
– Artificial Lake Volta for water transportation
– Fishery
– Irrigation
• But Ghana was poorer in the 1980s than in
1957, and is not much better off today
© Randall W. Stone, 2002
What went wrong?
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5 military coups
Famine in the 1970s
Drought
By 1983
– Per capita GDP was 2/3 of the 1971 level
– Calorie intake was 2/3 of recommended
level
© Randall W. Stone, 2002
Financing gap approach
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Evsey Domar (1946)
Roy Harrod (1939)
Sir Arthur Lewis (1954)
W. W. Rostow (1960) The Stages of
Economic Growth: A Non-Communist
Manifesto
Growth is proportional to net investment
Problem: the evidence
© Randall W. Stone, 2002
Solow’s paradox (1956, 1957)
• Investment cannot lead to long-run
growth
• Diminishing returns
• Technological innovation  growth
• But, how do we explain variation across
countries?
• Does technology vary? Why?
© Randall W. Stone, 2002
Other explanations?
• Human capital
• Complementarities
• Incentives & institutions
– Saving & investing
– Maximizing profits (not rents)
– Competition
– Resource allocation
– Missing markets
© Randall W. Stone, 2002
Globalization
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Trade
Technology
Capital flows
Capital controls
Interdependence
Communications
© Randall W. Stone, 2002
Joseph E. Stiglitz
• Nobel Prize in Economics
• Major contributions in the economics of
information—transaction costs,
principal-agent models, incentives
• Expertise in public economics &
development
• Council of Economic Advisers, 1993-97
• Chief Economist, World Bank, 19972000
© Randall W. Stone, 2002
Globalization & Discontent
Major claims:
• IMF, World Bank & WTO are managed
in the interest of the richest countries
• Current trade regime is unfair
• Abolishing capital controls exposes poor
countries to too much risk of crises
• IMF programs hurt the poor and do not
promote growth
© Randall W. Stone, 2002
Indictment of the IMF
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Poor economic analysis
“Market fundamentalism”
Little local knowledge
Lack of transparency
Excessive attention to inflation
Overextension beyond core
competencies
© Randall W. Stone, 2002
Critique of conditionality
• Little evidence that it works:
– Influencing policy
– Increasing growth
• Political backlash
© Randall W. Stone, 2002
Recommendations
• Adjustment should be gradual
• Wider role for state involvement in the
economy
– Regulation
– Deficit spending
– Industrial policy
• Reform of IFIs and WTO in the interests of
the poor
• Abolish conditional lending
© Randall W. Stone, 2002