Globalization, Development, Inequality
and Poverty
IPE – Week 13-14
Lecture Plan
• Thinking about Development (Modernization
Theory, Underdevelopment, Neo-Liberalism, NeoStatism, Human Development)
• Development Theory in Practice
• Crisis of Neo-Liberal Agenda (Washington
Consensus)
• Poverty
• Inequality
• Conclusions
Thinking about Development (1)
• What is “development”?
– A great variety of answers
• sometimes competing conceptions and understandings
– In contemporary times, encompasses almost all
facets of the good society
– A powerful term that can be used politically
Thinking about Development (2)
• In the context of the Cold War, the concept of
development served to
– “win over” the Third World
– divert the encroachment of socialist ideas and the
influence of the Soviet Union
– set the developing world on a path to Westernstyle development
Thinking about Development (3)
• Modernization theory
– Developed in the US
– Development was understood as a process of social
change whereby less developed societies acquired
characteristics common to more developed societies
(“Westernization”)
• Development was viewed both as an endpoint and a process
of catching up
– Comprehensive view of development
• Focused on social and cultural changes in addition to
economic change
Thinking about Development (4)
• Modernization theory (cont.)
– Rostow (1960)
• Stages of economic growth
–
–
–
–
–
Traditional society
Preconditions for take-off
Take-off
The road to maturity
The age of mass consumption
Thinking about Development (5)
• Underdevelopment theories
–
–
–
–
Rival to modernization theories in 1960s & 1970s
Largely discredited by 1980s
Originated in Latin America
Raúl Prebisch (1950)
• Offered a structuralist view of the relationship between the
global system & the conditions of underdevelopment
• The global economic system was divided into “centre” and
“periphery”
• Terms of trade are understood to have systematically
favoured the “centre” and disadvantaged the “periphery”
Thinking about Development (6)
• Underdevelopment theories (cont.)
– Dependency theory
• Development and underdevelopment exist in a
relationship of structural symbiosis
• The structure of the global system serves to perpetuate
underdevelopment, and inequality, in the periphery as
a precondition for development in the centre
– Some countries can expand but only as a reflection of the
expansion of the dominant countries
– World Systems Theory
Thinking about Development (7)
• From 1960s, newly industrializing economies
(NIEs) known as Asian Tigers (Hong Kong,
Singapore, South Korea, and Taiwan) began to
grow spectacularly
– Modernization and underdevelopment theories
could not properly account for this development
– The emergence of NIEs fragmented the notions of
“Third
World”,
“developing
countries”,
“periphery”
– This change contributed to and was a key
component in the debate between “neoliberalism” and “neo-statism”
An approach to economics
and social studies in which
control of economic factors
is shifted from the public
sector to the private sector.
Suggests that governments
reduce deficit spending, limit
subsidies, ‘reform’ tax law,
remove fixed exchange rates,
open up markets to trade by
limiting
protectionism,
privatize
state-run
businesses, allow private
property
and
back
deregulation.
(http://www.investopedia.co
m/ )
Thinking about Development (8)
• Neo-liberalism
– Single most influential paradigm in the contemporary
period
– Rests on the argument that
• “human well-being can best be advanced by liberating
individual entrepreneurial freedoms and skills within an
institutional framework characterized by strong private
property rights, free markets, and free trade”
– Profound cynicism about the role of states
• State intervention results in a wide range of distortions and
contradictions that are inimical to growth and development
Thinking about Development (9)
• Neo-liberalism (cont.)
– Development requires
• the consolidation of market-based mechanisms of organizing
economies and allocating resources
• engagement in the global economy in order to propel
processes of development
– Development fails because of internal factors
•
•
•
•
“incorrect” government policies
institutional underdevelopment
corruption
excessive state intervention in the economy
Thinking about Development (10)
• Neo-statism
– “Developmental state”
• The state shaped, directed and promoted the process of
development
• Markets were “governed” rather than “free”
• Challenged the neo-liberal perspective
• Key similarities between neo-liberalism and neostatism
– Development is conceived as a national process
– Development is understood to be economic growth
Thinking about Development (11)
• Human development approach
– Economic growth did not always result in
beneficial outcomes for the poor
– Redistributive measures were required to target
the poor and unemployed
– Emphasizes the meeting of
• basic material needs
• access to key services
• participation in the political and decision-making
processes
Thinking about Development (12)
• Human development approach
– Amartya Sen (1999): defined development as “a
process of expanding the real freedoms that people
can enjoy”
• Freedom comes from a range of processes: economic, social
and political
• Freedoms were the means and ends of development
• The agents of development were not governments but the
people themselves
– Other contemporary approaches
• Gender-focused
• Environment-focused
Thinking about Development (13)
• Human development approaches
– Take issue with
• the definition of development centred on economic growth
• the notion that what develops are countries/national
states/economies rather than people
– “People-centred” approach
• Development should be a process of
– improving the material and social conditions in which people live
– the expansion of opportunities/capabilities/freedoms that shape
these conditions
Development Theory in Practice (1)
• Mid-1940s to early-1980s
– Developing countries faced twin imperatives of
“catching up” &“breaking out”
• Development priorities of economic growth and
industrialization
• Mitigate dependence on the North and ensuring effective
participation in the new post-war international system
– A North-South divide emerged
• Mirrored in the debate between modernization theory and
underdevelopment theory
– Different emphasis: export-led growth vs. import-substitution
industrialization
The Brandt Line
Development Theory in Practice (2)
• mid-1940s to early-1980s (cont.)
– Import-substitution industrialization
• Implemented widely in Africa and South Asia but most
pronounced in Latin America
• 3 central goals
– State intervention to stimulate & consolidate industrialization
» Restructuring of economic activity away from primary
products
» Preference for foreign capital over trade as motor of
capital accumulation and industrial development
– Integration of the new and expanding working classes through
social reform and employment generation
– Achieving some autonomy vis-à-vis international economy
Development Theory in Practice (3)
• mid-1940s to early-1980s (cont.)
– Import-substitution industrialization (cont.)
• Originally, envisaged as a means to achieve “balanced
growth”
– “Primary ISI”: domestic production of consumer goods
– “Secondary ISI”: domestic production of capital and technologyintensive manufactured goods
• Regional integration projects were pursued to compensate
for the limited size of domestic markets
• Over time, ISI depended highly on foreign capital from
– FDI and transnational corporations – a process of “dependent
development” (Peter Evans)
– Foreign debt in 1960s and 1970s
Development Theory in Practice (4)
• Mid-1940s to early-1980s (cont.)
– Impressive growth of East Asian NIEs from 1960s
• Strongly nationalist in economic orientation
– Concerned with economic growth and securing a global
presence and influence
• Outward-looking development
– Government capacity and strength to manage engagement with
international economy
– Export-oriented industrialization
– US supported industrialization in East Asia in 1960s due to the
region’s strategic importance in the Cold War
• Both neo-liberalism and neo-statism claim to be able to
explain the exception economic performance of East Asian
NIEs
Development Theory in Practice (5)
• The 1980s onwards
– Dominated by neo-liberal agenda
• Free market forces and roll-back the state
• In advanced industrialized countries, especially UK and US,
neo-liberalism was a response to the perceived failures of
Keynesianism and welfare state policies
• In the developing world, neo-liberalism was a response to
the problems of ISI
• Also known as “Washington Consensus”, which was
– A consensus among global network of multilateral institutions,
governments & market actors associated with neo-liberalism
– A list of what governments had to do in order to develop
Development Theory in Practice (6)
• The 1980s onwards (cont.)
– Globalization, or “structural hegemony” of global
capital, required that governments adopt neo-liberal
policies
– Main channels used to promote neo-liberalism
• International financial institutions (IMF, World Bank)
• “Structural Adjustment Programmes” (1980s)
– Loans were subjected to stringent conditionality
– One-size-fits-all policy prescriptions
• “Good governance” (1990s)
– Emphasis on institutional reform on top of macroeconomic
stabilization and adjustment
Critics of (neoliberal) globalization
argue that
– Neo-liberal policies work against the goals of
growth and human development, often with
devastating consequences
– Neo-liberal policies take little or no account of the
nature of the global political economy that impose
obstacles to development
– The recurrent financial crises (i.e.2008) are crises
of globalization
Behind the free market ideology
there is a model, often attributed
to Adam Smith, which argues that
market
forces—the
profit
motive—drive the economy to
efficient outcomes as if by an
invisible hand...It turns out that
these conditions are highly
restrictive. Indeed, more recent
advances in economic theory—
ironically occurring precisely
during the period of the most
relentless
pursuit
of
the
Washington Consensus policies—
have shown that whenever
information is imperfect and
markets incomplete, which is to
say always, and especially in
developing countries, then the
invisible hand works most
imperfectly.
Joseph Stiglitz Interview conducted after
receiving Nobel prize in economics. (2001)
"I believe very strongly that economics can make a very
large difference...for the better in the world," His recent
focus, he pointed out, has been on "the disparity
between the haves and the have-nots," particularly on
the plight of the world's poorest people. He made clear
his intention to pursue those concerns vigorously.
"Much of our global economic system is characterized
by a lot of inequities," he said. "The global trading
regime is one which has been devised mostly by the
[industrialized] North for the benefit of the North. It
seems to me that one of the very important elements in
the agenda going forward has to be to try to redress
those inequities."
Crisis of Washington Consensus (1)
• In the contemporary period, development has
been highly uneven across regions and
countries
– undermined the credibility of the Washington
Consensus
• Growth patterns
– In East Asia, high rates of growth
– In Latin America, GDP per capita grew more slowly
over the 1990s than between 1950-80
– In sub-Saharan Africa, modest improvement in
some parts, decline in others
Crisis of Washington Consensus (2)
• Trade patterns
– Economies that exported manufactured goods fared
better than those that relied on exports of primary
products
• Lack of market access for agricultural products in key
markets due to persistent protectionism
• Finance and Investment
– Finance and investment flows have increased
significantly to many developing economies, BUT
• 95% went to only 26 out of 166 developing nations
• Sub-Saharan Africa largely bypassed
Crisis of Washington Consensus (3)
• Debt patterns
– Problem of indebtedness increased over 1990s
• Total debt stock of net-debtor developing countries
doubled
• Ratio of debt-service payments to exports increased
from 19.6% (1991) to 22.3% (1999)
• For heavily indebted countries, debt levels were
equivalent to 103% of GDP between 1995-2000
– Heavily Indebted Poor Countries initiative (1996)
• Objective: to reduce debt to “sustainable” levels
• Not designed to eliminate debt
Crisis of Washington Consensus (4)
• Debt patterns (cont.)
– Multilateral Debt Relief Initiative (2005)
• Group of 7 (G7) countries accepted that the multilateral debt
of many poor countries should be cancelled
• Poverty and Inequality
– Global reduction of people living in poverty in 1990s is
almost entirely accounted for by East Asia, especially
China
– Population living below $1 per day poverty line has
increased significantly in most parts of the world
Crisis of Washington Consensus (5)
• The observed patterns of development in the
1990s has undermined the credibility of the
Washington Consensus
– Attempts to explain the problems divided
between
• Those who emphasized internal, or domestic, factors
• Those who emphasized structural factors associated
with globalization
Crisis of Washington Consensus (6)
• Post-Washington Consensus (PWC)
– Emphasizes the role of state intervention in
economies in order to compensate for market
failures and imperfections
– All aspects of society needed to be incorporated
• Greater emphasis on democratic governance
– Focuses on sustainable & equitable development
– Advocated reforms of IFIs and “global governance”
of development
– BUT emphasis still on domestic reform
Crisis of Washington Consensus (7)
• Rise of “human development” approach
– UNDP introduces Human Development Index in
Human Development Report (1990)
– Poverty Strategy Reduction Papers
• Emphasized local ownership in global poverty reduction
strategies
– Millennium Development Goals
• Incorporates elements of WC and PWC
• Rich-country interpretation of key issues for a rich-country
audience
• No critique of structural issues at the global level
• The implied focus of efforts/policies is domestic reform
Crisis of Washington Consensus (8)
• Rise of “human development” approach
– Millennium Development Goals (cont.)
• Progress has been very uneven with sharp differences
between countries
– Most of sub-Saharan Africa remains a long way from meeting
the targets
• Financial crises of the late-2000s are likely to have set
back progress
Wide consensus on 4 observation
– Average living conditions have improved more in
the last 50 years than in the previous 50 in most
of the world
– The number of people living in extreme poverty
fell on a scale in China between 1981 and 2005
– Expansion of capitalism has been accompanied by
a rise in inequality between countries
– Income distribution has become more unequal
within countries since the 1980s
World Income Distribution (1)
“Twin peaks”
– 70% of world’s population GDP per capita below PPP$7,500
– 14% of world’s population GDP per capita above PPP$26,000
World Income Distribution (2)
•
China’s Share of Global GDP
increased rapidly but that of
India grew more slowly while
South Africa’s declined in the
period 1980-2010
Growth & Geographical Distribution
• Growth rate of world GDP per capita has
declined
– Large variations between regions
• Stagnation in income levels in sub-Saharan Africa, Latin
America, former Soviet-republics
• Western Europe and North America grew faster than
other regions
• China and India have grown very fast from a very low
base
• Average income in the South is only about
15% of that of the North in PPP terms
Inequality (1)
• The choice of several different plausible
measures and samples can affect the conclusion
we make about the trend of world income
distribution
• 3 core measures of inequality
– Concept 1: average incomes between countries
(unweighted)
– Concept 2: average incomes between countries
(weighted by population)
– Concept 3: global income distribution
Inequality (2)
Inequality (3)
• Key observations
– Falling income inequality between countries a
function of China’s fast growth since 1980s, not a
generalized tendency of the world system
– Unweighted between-country income distribution
(Concept 1) has been widening
– Inequality within China and India has increased
substantially in recent decades
– Inequality
within
all
English-speaking
industrialized
economies
has
increased
substantially by most measures
Inequality (4)
• Factors that affect measurement/observation
– How income figures are converted into a common
number (market exchange rate or PPP)
– The source of conversion factors
– Sample of countries employed in calculations
– The time period of measurement
– Choice of statistic for calculation
Poverty (1)
• Global poverty can be measured by summing the
total number of people living below a standard
international poverty line
– Main source of data is the World Bank
• There has been substantial reduction (about 25%)
in the number of people living in extreme poverty
between 1981 and 2005
– Many people still live on between PPP$1.25 and
PPP$2.50 a day (3.1 billion or 32% of population of
developing world in 2005)
Poverty (2)
• “Health Warnings” of using World Bank data
on poverty numbers
– Large margin of error
• Headcount is very sensitive to:
– the precise level of the international poverty lines
– the reliability of household surveys of income and
expenditure
• Surveys for China and India, accounting for over a third
of world’s population, are not very reliable
• Undercounting of agricultural, informal and black
market activities
Poverty (3)
• “Health Warnings” (cont.)
– Downward bias
• World Bank’s International Extreme Poverty Line
underestimates the income or expenditure needed by
individuals/household
– Cost of living for an “average” consumption vs. costs of living
to buy enough calories and other necessities vs. cost of living
to enjoy a certain life expectancy
• Statistical illusion due to changes in average
consumption patterns as average incomes rise
• The underestimation in World Bank data of the number
of people living in poverty could be upwards of 25%
Inequality (1)
• In China and India, economic growth has been
accompanied by substantial increase in income
inequality
– Has led to a decline in social trust and a rise in crime
and political conflict
• In US and UK, substantial increase in income
inequality in last 25 years
– Taxation policies
– Increasing cost of education & decline in social
mobility
Inequality (2)
• The case of Scandinavia suggests that a
relatively equal income distribution is
compatible with
– relatively high economic growth
– high labour productivity
– entrepreneurial incentives
Inequality (3)
• The case of Japan demonstrates that the turn
towards new-liberal economics has
contributed towards undermining:
– a system of welfare-oriented capitalism
– relatively equal distribution of income and wealth
– good public services
– good education
– health services for the poor
Explaining the (Neoliberal) Globalization
Consensus
• Who Gains? Principal beneficiaries become
key advocates: business community
dominates public debate
– Finances political parties
– Controls substantial sections of the media
• Why does the (neoliberal) globalization
discourse have so much appeal ?
– The business community in the West that benefits
from “open” economies supports its continued
promotion
• Supports studies
• Fund political parties
• Drives and influences the nature of policy discourse
Conclusion (1)
• The global development agenda is largely
considered to have failed in its aspirations
– For large parts of the world’s population, globalization
has not led to substantial improvements in their
material or social conditions
• The rise of China’s economy challenges
– An unequivocal embrace of “globalization” as the
surest path to growth and development
– The notion that there is, or can be, an overarching
framework for development informing a “global”
development agenda
Conclusion (2)
• There is still little consensus on:
– What development actually is
• What are we referring to
• What are we aspiring to achieve
• How would we recognize it if we saw it
– How development might be achieved
Conclusion (3)
• We need to question the argument that
globalization and new-liberal policies will lead
to better economic outcomes for all
• We need to more closely scrutinize the
evidence/statistics that are produced (how are
they constructed? what are the underlying
assumptions?)
• Economics profession needs to give more
consideration to ethical principles