Unit Ten: Development and
Underdevelopment
Dr. Russell Williams
Required Reading:

Cohn, Ch. 10.
Class Discussion Reading:


Robert Hunter Wade, “What Strategies are Viable for
Developing Countries Today? The World Trade Organization
and the Shrinking of Development Space,” Review of
International Political Economy, 10-4 (November 2003), pp.
621-644.
Shaun Breslin, “The ‘China model’ and the global crisis: from
Friedrich List to a Chinese mode of Governance?” International
Affairs, 87:6 (2011), Pp. 1323-1343.
Outline:
1.
2.
3.
4.
5.
Introduction
Trade and Development Strategies: 1945-1982
The Crisis in Development
Orthodox Liberal Development Strategies
Contemporary Alternatives?
1) Introduction:
What is “development”?

Traditional definitions focused on political and
economic paths followed by the North
=“Modernization theory”

Contemporary focus is simply “economic
growth”

Social or ecological concerns?
Post war era assumed South would develop,
however:

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Growing gap between rich and poor countries (?)
Few countries have “joined the club”
“Development” involves two concerns:
1) Financial assistance and investment


LDCs “capital poor” – “Heckscher-Ohlin Theory”
Development supported by:

“Official Development Assistance (ODA)”: Money given at below
market interest rate loans (concessional loans) or grants


World Bank Development Assistance: Money given as loans, but
often at better interest rates then LDC’s could get on their own

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Problems: Funds are limited and declining
Funds subject to conditions
Problem: WB has to borrow money; therefore its loans must be
commercially viable
Private Lending and FDI

Problems: Bad management = debt crisis
States must be attractive to investors
“Development” involves two concerns:
2) Domestic trade policies and the global trade regime
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
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What strategies promote development?
What strategies are allowed under trade rules?
Under “embedded liberal” system, South pursued a variety of
strategies


Domestic autonomy meant many chose to respond to structural
challenges of resource dependency etc. through protectionism
Under “Orthodox” or “Neoliberal” era, South has less
autonomy:

More reliance on markets . . . .


Failure of alternatives (?)
Role of financial problems (?)
2) Trade and Development Strategies:
(1945 – 1982)
South ambivalent about GATT participation; skeptical of liberal
analysis of free trade and comparative advantage
 Instead: “Import Substitution Industrialization (ISI)”

Derived from:
 Realist/Mercantilist analyses (List)
 “Structuralism,” Dependency theory and Marxism
“Structuralism”?

Highlighted developmental “challenges” facing LDCs that
invalidated liberal analyses
1) Reliance on natural resource exports
= price volatility (!)
“Structuralism”? (cont . . . )
2) “Mono-exporters”: Specialization on one primary export
commodity

E.g.
Coffee = 80% of Burundi’s export earnings (1984)
Cocoa = 75% of Ghana’s export earnings (1984)
Coffee and Cocoa = 69% of Brazil’s export earnings (1950)
= potential “terms of trade shocks” . . .
3) Singer-Prebisch Theory: Resource exporters suffered from
“declining terms of trade”

E.g. As incomes increase:
Demand
for natural resources does not increase . . . . People only need so
much cocoa . . . .
Demand for manufactured goods always increases

Inevitable relative economic decline = LDCs have a harder time
paying for desired manufactured imports
“Structuralism”? (cont . . . )
4) Absence of domestic investment linkages and savings

LDC would not develop away from natural resource industries
because of financial arrangements

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MNC profits exported
Low domestic demand discourages local reinvestment
=Problem of subsistence agriculture

Poorly organized financial services industries
Structuralism promoted internal development strategies

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Industrialization through tariffs on manufactured imports
Direct state involvement in investment linkages

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E.g. State enterprises
National economic planning
=Four distinct types of structuralist economic interventions!
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“Easy ISI”:

Replace easily produced imported consumer goods with local
products - E.g. textiles, shoes, etc.


Improves balance of trade
Generates “human capital”
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Transfer earnings from export sectors to industrial development
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Tended to work fairly well, particularly in larger states
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E.g. Brazil
However, gains were short term, states thought development
required progression to more capital intensive goods . . . .

“Secondary ISI”: (“Latin American Approach”)

Replace complex manufactured products with local goods

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Requires large investment = debt financing
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E.g. Automobiles, appliances etc.
 Stimulate “backward linkages” – development of industries providing inputs
 Generates “human capital”
Will require export earnings to finance debt
“ISI-Export Substitution”: (“Export Led Growth” –
“East Asian Approach”)

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Convert “Easy ISI” producers into export industries
Large role for the state:
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Promote correct investments: Tax breaks and incentives for desired
industries
Industrial planning – “Strategic Trade Theory”: Create desired
comparative advantages
Support for free trade, but protectionism for “infant Industries”

Liberalization is staged based on needs of export industries

Socialist strategies ? ? ?
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“Nationalization” and “expropriation” of infrastructure
Disengagement form MNC and global trade
More emphasis on “basic needs” development
3) The Crisis in Development:
After 1980 ISI seen as a failure – Problems include:

Competitiveness of ISI economies = Absence of economies of
scale

Financial problems = External debts grew rapidly

“Balance of Payments” crises = Problem for “Secondary ISI”
countries:
 Current account:
Machinery imports increase?
Exports don't

State “competence” (E.g. East Asian “developmental states” vs.
?)

Sources of “official development assistance” begin to decline
and MNC FDI becomes more important
 MNC’s not interested in ISI-led development
4) Orthodox/Neoliberal Dev’t
Strategies:
Neoliberalism became dominant development
strategy after 1980s:
Why?

Failure of alternatives (?)
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Ideology – Neoliberal “hegemony”

Promoted by KIEO’s and northern states

Interpretations of the “East Asian Model” emphasized its “liberal”
elements - KIEO’s argue that focus on increasing exports and
internal markets is key to development

Neo Imperialism/Neo Colonialism – IMF “Structural Adjustment
Policies” dictate state policy in many southern states

Power – the North

E.g. the WTO single undertaking and development
A “liberal” development strategy:

Remove trade and investment barriers

Increase export earnings through logic of comparative advantage

E.g. focus on resource exports if that is what you are already
competitive in . . .

Reduce budget deficits and cut social expenditures – show
stable, sound economic management

Eliminate state economic subsidies and privatize state owned
industries

Result: Increased access to MNC FDI = capital and technology
necessary to becoming more efficient at what you already export
and necessary to development of new industries
Liberal Economics: Small states have no choice . . . intervention
are inherently inefficient over the long term . . . .
A “liberal” development strategy - Results?
Short term = pretty bad for most countries . . . .

Mexico:
1981 per capita income $3,500
1988 per capita income $3,028
1999 per capita income $3,600
Long term = most states have experienced good growth since 2000

Mexico = 3.0 % annual GDP growth since 1996
However, context of each state is different . . . .


E.g. Many states under IMF SAP’s have not done very well –
particularly “low income” LDC’s . . . .
E.g. Brazil, India and China . . . . All have done well, but . . . .


How orthodox have their strategies been?
Role of large internal markets?
Challenges:


Interpreting the success of this model is very ideologically driven
Domestic politics . . . How do you “sell” decades of pain?
5) Contemporary Alternatives:
If Neoliberalism does not work for your society
what are the alternatives?

Domestic Policies?

“Strategic Trade Theory”, ISI and infant industries . . . .
 Problem: Even if “comparative advantage” can be created in
theory, can it be done in practice?
 E.g. WTO trade rules
 E.g. MNCs and investment rules . . . .

Human capital development
 Education and social spending to create a skilled work force
attractive to investors
5) Contemporary Alternatives:
If Neoliberalism does not work for your society what
are the alternatives?

Systemic Reform?

IFI reform that might help poorest states . . . ?

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Reduced conditionality in development assistance – No more “one size fits all”
More emphasis on internal economic integration
 E.g. stop cutbacks that undermine capabilities of “developmental state”
“Basic needs” development – Now promoted by WB
 Support for infrastructure etc. that the market will not provide in poor states
 Problem: Runs counter to emphasis on economic growth as measure of
development
Debt relief?
“Right to Development” = Special treatment in trade regime to allow
“free riding”?
For Next Time:
Final Exam:
Friday, December 18 – 9:00am to 11:00 (A1043)
Exam is cumulative – same format as midterm.
Eight short answer concepts and TWO essays.