Bretton Woods System The political basis for the Bretton Woods system was centered in 2 key conditions: The World Wars in Europe had been caused at least in part by the instability of the global financial economic system → need to figure how to construct a stable financial system And the concentration of power in small number of countries The importance of the BWS is that it led to the construction IMF and the International Bank for Reconstruction and Development aka the World Bank o The IMF and the World Bank tend to be known as the Bretton Woods Institutions o IMF designed to coordinate policies across countries or money exchange rates, to make short term loans to countries facing temporary financial crisis so that their economies wouldn't go completely down and collapse. By giving them money to prop themselves up until they can get back on their feet o They support financial blackouts o WB; offers loans for reconstruction ( infrastructure destroyed by war) and to finance long term construction for long term growth The role has expanded to a broader aspect to provide loans and technical advice and research on poverty alleviation Ending poverty in the world IMF has expanded what it does Gives short-term loans and mid-term loans as long as the countries that they give loans to follow certain terms Limits on budget deficits, lowering of trade barriers, freeing up the exchange rate Really important because it signals the beginning of what is know as provisionality community driven development (CDD) - Jessica Devora Community Driven Development o CDD involves giving local community groups direct control over the planning of local products o It’s about the structure of development programing o Introduced to the counterpoint where you have a the WB or an outside organization come in and decide needs to be done and instead o CDD is about getting the community together, the money comes from outside but you hold the meeting in the community to decide what the local community priorities are, o elect some leadership group from within the local community to oversee the project o Project is implemented and monitored by the community itself The problem is that CDD projects are rooted in sites of poverty and weak institutions Poverty creates incentives for stealing as well as weak institution → a lot of corruption CDD is suppose to facilitate oversight by the people but it does not Moving away from the central gov. And the WB makes oversight difficult Decentralization has a tension between increased accountability from below and the need for maintaining oversight from above Local people sometimes don't have the capacity to sanction, oversee the people who become entrusted to carry out the projects conditionality Definition: In political economy and international relations, conditionality is the use of conditions attached to a loan, debt relief or bilateral aid. These conditions are typically imposed by international financial institutions or regional organizations. Significance to course: IMF giving medium term loans to countries that agreed to meet certain targets/objectives (basically being like, “we will loan you money, IF…”). Conditionality is an attempt to make sure foreign aid and loans are invested where they need to go, not into the pockets of the leaders. However, it hasn’t been too successful. Conditionality in giving contracts isn’t successful because the IMF or World Bank really have no enforcement authority over the contracts. While enforcement mechanisms are written into aid contracts the time money and manpower it would take to enforce such conditions isn’t feasible. Furthermore, countries that are granted loans from the IMF and the World Bank are essentially disincentivized to meet such conditions because doing so would mean that they lose out on their aid money. Also, those who impose the conditionality are unlikely to walk away--donors care about the poor and about their status, thus leaders essentially take donors hostage. And even further, direct aid to countries alone can’t generate the development and change necessary for each country to meet such conditions. This idea goes back to the whole debate over transformational models for development discussed in Week 10 where Posner talked about how money alone won’t fix the problems. distributional consequences of trade When trade occurs between two countries both countries can have a level of consumption higher than they would have had without trade, it is the result of the comparative advantage and trade In theory free trade works but in practice the distribution of the benefits of trade are not equal and have many consequences It may benefit the economic performance of a country as whole but affects different groups differently Specialization benefits some and disadvantages other groups who don’t benefit Unevenness of trade openness undermines benefits of trade exposure to conflict and present-bias Growth shocks have effect on conflict (civil war) War affects physical capital, human capital (able bodied men and women), decimates also SOCIAL CAPITAL; social bonds o In poor countries people invest in social relationships, norms of reciprocity in kinship o Studies point that exposure to conflict increase altruistic behavior and trust, cooperation Suggest that people exposed to violence (war) inc. social participation, participate in altruistic behavior We tend to give more in environments if they have been exposed to violence War may foster social cooperation Summary index; effect is positive; people who are exposed to violence are more positive in their social cooperation Big effect on social group participation, community leadership participation Prosocial behavior in studies Direct exposure to violence makes you more likely to be present oriented o Don’t bank on the future o Want to consume right away Flour-bag experiment o People received a coupon that would get them one bag of flour, but if they delayed when they got their bag flour, would get one bag of flour for each day they delayed. Ex: Do not use coupon the day they receive it, and instead wait one day, get two bags of flour. Researchers found that those that had been exposed to direct violence were more likely to use the coupon right away. information and accountability It is useful to provide information to poor people about service delivery, because it can lead citizens to pressure politicians to actually deliver public resources, and pressure the public providers to deliver better services with those resources. More information putting in the hands of citizens can empower them to exert pressure on providers and officials, to do better job and improve people’s welfare. But providing information often does not work. E.g. MP’s report card, information campaign in Mexico and Kenya’s education improvement. There are eight reasons explaining those failures. 1. The citizen does not understand the information; 2. The information is not new; 3. This issue is not a priority to the citizen. 4. The citizen does not feel responsibility to act. 5. The citizen is not aware of what actions to take. 6. The citizen does not have sense of efficacy to think his/her actions will have impact. 7. The citizen does not believe his/her individual actions will have impact. 8. The citizen is not sure others will act. International Bank for Reconstruction and Development Definition: The International Bank for Reconstruction and Development (IBRD) aims to reduce poverty in middle-income countries and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and analytical and advisory services. -aftermath of WWII, Europe was destroyed and had to be rebuilt -wars that ended in Europe has been caused partly by instability of financial system→ solution: how should the system be structured so that the war doesn’t occur again? Build strong international institutions. IMF and IBRD (Bretton Woods institutions) World Bank: → established in 1945 → previously: long-term loans to finance reconstruction of things destroyed by war → now: expanded to a broader mandate: provide loans and technical advice to conduct research on poverty. Ending poverty in the world → comprised of two main bodies: established in 1945: IBRD and 1960: IDA (International Development Association) → IBRD: interest rates are slightly higher than borrowings; funds come from private bond sales long vs. short routes of accountability Jessica Devora Long route: clients as citizens have to hold policymakers or politicians accountable for allocating resources towards service delivery → the policy makers in turn have to hold the service providers accountable for delivering the services Short route: is the direct accountability of providers to clients outsourcing - arno Definition: the practice used by various companies to reduce costs by transferring their manufacturing or other processes to outside suppliers rather than completing it internally. Often an effective cost-saving strategy for most companies when most work is transferred to developing countries who need the labor and would be willing to concede towards significantly lower wages Significance: More often than not, outsourcing leads to devastating conditions that leave foreign workers in inhumane and disgraceful conditions. These conditions get bad enough that it can take the lives of their own workers, (e.g: Bangladesh garment factory collapsing and killing many people; and injuring even more). With no reprimention, (because the companies who manage these outsourced facilities don’t have an obligation to uphold ethical conditions if they are not enforced) humans rights are often a huge issue for companies who engage in outsourcing their processes and automations. “race to the bottom” Socioeconomic phenomenon in which governments deregulate the business environment or taxes in order to attract or retain economic activity in their jurisdictions, resulting in lower wages, worse working conditions and fewer environmental protections. It is an outcome of globalization and free trade, the phenomenon may occur when competition increases between geographic areas over a particular sector of trade and production. Significance: This can be an issue for accountability when companies are virtually allowed to engage in any practice they want without much of a check or regulation. tied aid - Wiki Tied aid is foreign aid that must be spent in the country providing the aid (the donor country) or in a group of selected countries. A developed country will provide a bilateral loan or grant to a developing country, but mandate that the money be spent on goods or services produced in the selected country. Tied aid often serves the interests of the donor country and can deter development because it doesn’t allow recipients to use the money in ways that would be most efficient in tackling the problems they face in their country. Tied Aid is s/t provided by reasons that have nothing to do with development; countries that give aid have in interests in promoting development but have other interest in protecting himself, furthering their national interests Conflict and Development, Week 6 - Joseph conflict trap - civil wars are a trap. Countries that can grow enough to raise their level of income and diversify their exports from primary commodities can get lucky to avoid the trap. Collier compares the countries of the bottom billion to playing Russian roulette, where the round being fired is a country being involved in a civil war; the risk of such a country within a five year period of getting into a civil war is 1 in 6. Civil wars undo economic growth. The risk of conflict differs according to economic characteristics, and these characteristics are affected by conflict o Significance: (Paraphrasing Collier) By 2050 the world is going to be wealthier, with more current developing countries becoming developed, but their will be only a modest decline in civil wars; the minority countries of the bottom billion, who generate the most civil wars are likely to be stuck in the conflict trap “unless we do something about it. Countries in the conflict trap aren’t the only ones affected, these traps make development more difficult for the neighboring region. Economic matters are more important for a country to escape the trap than for a country to pursue democracy. o causes of civil war: 1) initial level of income: civil wars more likely to occur in low-income countries; 2) slow, stagnant, or declining growth: decline causes war, Collier uses rainfall shock to explain his argument; 3) dependence on primary commodity exports increase the risk of civil war. Money paid for natural resource concession to rebel groups can finance and motivate conflict o Coup d’etat: occur as a result of factors similar to civil war: 1) low income and 2) low growth. o Civil wars and coups as they relate to conflict trap: keep low income countries from growing and as a result keeps a country dependent on primary commodity, factors that Collier has shown leaves a country prone to conflict o Two forms of political conflict that can trap a country are: 1) civil wars and 2) coup d’etats rainfall shocks and conflict - In low income countries, rainfall shock is too little or too much rain o this shock can affect the economic growth of low income countries and has no direct connection to civil war o Setbacks to growth caused by rainfall shocks make civil war more likely grievances as a cause of civil war - rebel movements justify their actions in terms of grievances, such as repression, exploitation, or exclusion; use grievances as a weapon. Grievances are common, rebels usually find or make up something to complain about Rebel groups gain sympathy from the more politicized end of the academic profession, Collier questions this approach where and argues rebels may be less heroic than governments they oppose Rebel groups receive donations from diasporic communities, key to financing their movements. Have learned to manipulate their public image Collier argues evidence of well founded grievances provoking rebellion is weak No relationship between: 1) political repression and risk of civil war and 2) income inequality and risk of civil war and 3) colonial history and risk of civil war: Collier states there is no being locked into conflict by history Grievance illusions: 1) image of rebellion, rebel leaders hide their true intentions for power behind other factors, such as helping local inhabitants. 2) ethnic strife (pg. 25) Grievance has evolved into greed Gender and Development “missing women” is a term to address the fact that there is a significant less proportion of women then what would be normal if women and girls lived and died at the same rate as men in Sub-Saharan Africa. These are women who were never born, die in early childhood, or above the age of 60 who would have never passed has they been a man in the same experience and living conditions. There is a shortfall of women due to sex selective abortions, infanticide, and insufficient health care for female children are the front-runners for this issue. gender reservations in Indian village councilso From lecture notes: Researchers required village councils to be ⅓ women Randomly assigned this rule This allowed them to compare village councils where there were women to those where there were none. Found that village councils with more women improved infrastructure and helped parents have higher aspirations for their daughters. oil and women o When you have oil in your economy, oil transforms that economy and leads to a rise in exchange rates because everyone wants your oil so supply and demand tells you that the value of currency goes up o This leads to a shift away from the traded sector (agriculture, manufacturing) but to construction and services o Problem for women when they join the workforce, they tend to join in the traded sector as they run small farms and businesses o Women tend not to be in the non-traded sector because tend to involve heavy labor or involve contact with men outside the family o Matters because women’s labor force participation raises their status o When women can make money, they are invested in as a force in society and can come in contact with other women; gain influence in families o If oil leads to a decline in women's labor force participation → lower levels of women empowerment Do Leaders Matter? “great man” view of history (Melanie)- Week 7, Jones & Olken, pg. 838 o Theory coined by Thomas Carlyle that the evolution of history is largely determined by the causative influences of certain individuals; major events happen due to an individual’s skill, charisma, brilliance, or stupidity o Ex: the idea that the history of the 20th century is attributed to Lenin, Stalin, Hitler, Mao, Roosevelt, and Churchill o Leaders make decisions in how much we invest in schools/healthcare/infrastructure, they set budgets and create policies, decide if we go to war or seek peace, whether or not to engage in systematic corruption o However, statistical tests reject the deterministic view that leaders are incidental to the evolution of their national economies Changes in leaders in democracies have no effect on economic growth Leaders in autocracies have large effects on growth o “Do Leaders Matter?” evidence , there are strong leader effects in regimes without political parties and no effects where there are political parties INCOME, rather than institutions per se, drives the difference in leader effects. Poorest countries show no leader effects while middle income and rich countries show significant effects Maybe because poor countries have weaker state institutions and failed states, which limit a leader’s ability to influence national outcomes ETHNIC FRAGMENTATION: overall the autocrat/democrat distinction seems more important than distinction by ethnic frag. While political institutions may matter, their impact is not deterministic. BUT the important effect is to constrain the power of individual leaders. Institutional constraints and the effects of leadership on growth Logically, leadership has a stronger effect on growth (positive or negative) when a leader has more discretion. This occurs where there are few institutional constraints. Democracies tend to have higher institutional constraints than dictatorships, so if you’ve got a dictator, they’d better be a good one. The leaders of democratic institutions matter less for a country’s growth trajectory. Here, we see convergence in terms of outcomes, since all POTUS’ are (more) beholden to the will of the people. This explains why people tend to favor executive actions when their preferred party is in power. Trade and Migration comparative (vs. absolute) advantage o Comparative advantage: refers to a country’s ability to produce a particular good or service at a lower opportunity cost than another country. o Absolute advantage: refers to a country’s ability to produce a particular good or service more efficiently than another country. o Ex. According to a key principle in the theory of international trade, even a country who does not have an absolute advantage in producing a good or service benefits from trade because the law of comparative advantage allows for specialization. A country should focus in allocating its resources to the good or service they are best at producing (or have a lower opportunity cost). o Comparative advantage and trade allows both countries (economic actors) to enjoy a higher level of consumption even if some benefit more than the other. remittances - A Remittance is a transfer of money by a foreign worker to a person in his or her home country. Remittances provide one of the largest financial inflows to developing countries. o Remittances are often higher than foreign aid. Sometimes higher than major exports. o Remittances are countercyclical; capital flows (other than remittances) tend to flow into countries when the country is doing well but when economies reach moments of crisis that is when kin in other countries are sending in money to make up the down fall; it is kind of like a source of insurance against economic downturns in countries where people have migrated form. o GDP excludes remittances; GNI includes it. o The poor countries of the world are high recipients of migrant remittances closure of Suez canal o Before, sending goods from Mumbai to London would take 10,800 Nm but after canal was constructed it takes 6200 Nm → cheaper and faster trade! o More countries can trade more now because it is economical o But when the canal closed for 8 years during the war, it created a big shock on the trading system o Trade declined because it became more expensive o Volume of trade massively increased, then decreased like a cliff while it closed, and increased when it re-opened o Closure of Suez gave an exogenous source of change between trading partners o Uses to that estimate per capita incomes; ability to trade undermined by closure of Suez Sweatshops and the Domestic Politics of Trade Fanjul brothers sugar program, which guarantees a domestic price for raw sugar that can be as much as three times the world price, → too costly Campaign contributions come from the Fanjul brothers Sugar protected by the Cuban embargo on sugar Do not want to pay for the everglades restoration project which they had a fair share in polluting its waters Gov. restricts imports of sugar Preserving this spread between domestic and world sugar prices costs consumers an estimated $2 billion a year, and nets the Fanjuls — who have been called the first family of corporate welfare — tens of millions annually. sugar situation hurts American businesses and consumers, but its worst impact is on the poor countries that try to compete in the global agricultural markets Sugar lobbyist argue that sugar should not be included in the agreement even though it is one of the few products that some Latin American republics can hope to ship to the American market. o strength of the protectionist sugar lobby in Washington cotton farmers in Burkina Faso The irony that the U.S ( advocate of free trade & free market values) spends billions of taxpayer money to subsidize American cotton farmers. They produce so much cotton that it has driven down world prices. So much so that it currently costs Burkina Faso's cotton industry, traditionally one of the lowest-cost producers, about a dime more than the prevailing global price to get a kilo of cotton to international markets. These cotton subsidies are aiding the hunger and poverty in Burkina Faso Americans would be horrified to learn that the volunteers and millions of dollars in aid given by the U.S is undercut by Washington’s bloated cotton subsidies. Significance: Rich nations are enforcing the poverty of poor countries like Burkina Faso, who had an initial comparative advantage in producing cotton, by subsidizing American cotton farmers thus, depressing global prices making it impossible for them to compete in the world market. As a result, BF’s 2 million cotton farmers are held in hunger and poverty → detrimental to development in a landlocked country whose main economic prospect (cotton) is outcompeted by American cotton subsidies. If United States terminated its cotton subsidies, commodity prices would rebound to more realistic levels, allowing third-world cotton farmers to compete and earn a profit on their crops. IFIs and Aid aid illusion : “ the erroneous belief that global poverty could be eliminated if only rich people or rich countries were to give more money to the poor people or poor countries. (269) The argument is that the aid illusion is actually an obstacle to improving the lives of the poor and overall development. bilateral aid and. multilateral aid “Bilateral” aid is given from one country to another, and different countries use aid for different purposes. o Deaton argues that in most cases bilateral aid is “guided less by the needs of the recipients than by donor country’s domestic and international interests (274). o He argues that despite domestic constituency for global poverty reduction in many countries, donors must balance a number of considerations, including political alliances and maintaining good relationships with ex-colonies where donors often have important interests. 80% of official development assistance (ODA) is bilateral. Multilateral aid is aid that is given via multilateral organization such as the World Bank, the United Nations Development Programme (UNDP), or the Global Fund (used to Fight AIDS, Tuberculosis and Malaria). o It is argued that multilateral aid is more transparent and efficient than bilateral because it is less subject to domestic political considerations BUT the WB cannot easily go against the wishes of the largest donors. (277) Significance: It explains why aid often does not reach people in poor countries. Donors “tie” their aid to conditions and policies, rather give aid to countries rather than people. Official Development Assistance (ODA) o The largest component of foreign aid is ODA, it covers funds donated by the governments of rich donor countries for the welfare of development of poor recipient countries. Given in the form of loans or grants from one country to another o U.S. largest provider of ODA in absolute terms, relatively gives much smaller percentage of national GDP than many other countries. o Deaton argues that the UN urges 0.7% share of donor income but that this measurement uses a hydraulic approach (seen as an engineering problem with a calculative fix). He argues that the countries who are willing to reach this target are more inclined to satisfy their own needs to help, less to improve poverty & that they can only monitor this amount. Interventions to Promote Development: Decentralization Decentralization (political vs. administrative or. fiscal) At large, decentralization is the transfer of authority from a central government to local ones. Political: decision-making (eg: state assembly) Administrative: service-provision (eg: state agency, UCPD) Fiscal: resources for implementation (eg: state taxes) If you only have political and administrative decentralization, then you’ll still be beholden to the central government for distribution of federal tax revenue. Money is power, and your political/administrative goals might be stunted. These 3 are really difficult to harmonize, which can lead to “Lost Decades.” big push - Hee Ae Kim · A transformational approach to development that targets many different factors that contributes to poverty, instead of smaller, marginal changes. Jeffrey Sachs is a big proponent of the idea and started the Millennium Villages Project to collect evidence on whether or not targeting many areas of poverty at one time work · “You can’t do anything until you can do everything”: a idea behind the big push theory · Outlined by Paul Rosenstein-Rodan in 1943, says that even the simplest activity requires a network of other activities and that individual firms cannot organize such a large network, so the state or some other giant agency must step in · Sachs argues that if public investment and foreign aid are big enough, they will boost household incomes, spurring savings and boosting local investment · Big push inspired the Millennium Villages Project, which has had mixed results; critics (Easterly) argue that the trials were not random, the changes follow national trends, and is not a long enough experiment to know if, when the money stops flowing, change is sustainable · Significance: if there is evidence that transformational development works, then the international community needs to focus on contributing larger donations for a limited amount of time to eliminate poverty instead of giving smaller amounts to affect marginal changes Millennium Villages (Chloe) o Sachs: invested 120 million dollars in Millennium Villages o 9 African countries, each in different agricultural zones, poor and relatively large villages (35,000+ ppl) o 2006: did everything to promote development (program ran for 10 years) o Multidimensional package of programming (120$ per person per year = 4 million per village per year) Health Housing for staff at clinic, additional staff, referral hospital, functioning laboratory, free, ambulance, bed nets, spraying for malaria, HIV/AIDS Infrastructure Road, schools, clinics, electrified households and clinics, mobile phone connectivity, improved cook stoves Education Schools, teachers, school meals, computers, gender-sensitive activities What happens when the funding ends? Are the improvements sustainable? o Critiques Improvements in the millennium villages was just a broader trend. Other villages that weren’t being treated - you see the similar trend Selected villages were not chosen randomly. There were local willing persons and NGOs already working with them. GiveDirectly Unconditional cash transfer program o Challenges to development enterprises GD visits a poor village in Kenya; Kenyans are skeptical because usually all cash transfers come with a condition o Religious groups will usually not help mothers who had children out of wedlock→ this shows the conditionality of cash transfers The village from Kenya that received GD’s funds was lifted out poverty The founders of GD say that unconditional cash transfers are the best way to go because the people that are receiving the money are the ones that will know what they need to use that money on o NGO’s don’t know what the people need. NGO was providing HIV/AIDS treatment to an African village but then when the villagers were asked what they truly wanted, they said it was access to water and that HIV/AIDS wasn’t that big of a deal to them When you give people cash they will spend the money locally which will have a multiplier effect and help the economy grow. When you give people stuff there will be no multiplier effect and therefore no change in the economy Giving money directly is much cheaper than creating developmental programs that will require staff and costs incurred. Recipients of GD described the cash transfers as transformative o People began to save their cash to create small business→ a group of sisters brought their savings together to create bank, a man saved up to buy a fishing net and hire someone to work for him fishing. GiveDirectly advocates say that the question should always be: “would we better off just giving this money away in cash” A lot of people feel uneasy about simply giving out money without any conditions, people think that money will be spent unwisely on “temptation goods” → based on evidence the when unconditional cash transfers are used the money spent on temptation goods does not change or will decline. o People feel encouraged to invest their money instead GD is funded by investors from Silicon Valley for both philanthropic and not so philanthropic reasons o Silicon Valley is toying with the idea of a universal wage for everyone, not just does living in poverty in developing countries. Certain people from Silicon Valley feel like it is their responsibility to address the expected high levels of unemployment that will arise from automation which largely originates from the technology of Silicon Valley.
