development and institutions

Development and InstitutionsCommerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.-- Adam Smith, Wealth of Nations

Is Dependency Theory just a complaint?

• Provides explanation for poverty of the south but not a good prescription

• NIEO failed• Bowing out of the international neo-liberal

economy won’t work• Have any strategies to promote development

actually worked?

Testing Dependency Theory

• Dependency perspectives have evolved• There has been an impressive rise of former poor

countries of the South in Latin America and in Asia.

• ISI worked in some places, as we shall see• Countries could develop WITH Dependency!• Dependent Development• Negotiations between governments, firms, and

MNCs

A modification of Dependency Theory: Dependent Development

• Sometimes the surplus is invested in the host country---location of plants, services

• This can stimulate domestic industry and business

• The result: “Dependent Development”• So maybe stagnation is not inevitable

Why did Asia develop?

If dependent development is possible, why do MNCs invest in some countries and not others?

• The answer might be government policies and institutions

Why institutions are needed to spur development

• Poor countries can’t afford to wait while natural market forces work their beneficial effects.– Market forces take too long– Produce unbalanced economies– Vulnerable to price shocks– Vulnerable to manipulation by strong trading

partners

Poor Countries can be seen as “late developers” ….adding to our terminology• Liberal and modified Liberal Theory

– Developing countries– Less Developed Countries (LDCs)– Emerging markets– Late Developers– Newly Industrializing Economies (NIEs)– “dependent development”• Dependency theory• Underdeveloped Countries• Periphery

• Neutral?– The “South”– Third World

Requirement for development: A developmental State

• Example of Soviet Union• Compatible with Keynes• Compatible with embedded liberalism• Historical experience• Gerschenkron’s contribution

If You’re Early, use the market! (?)

If You’re Late, Use the State!

• Development Banks• The STATE– Czarist Russia and Soviet Union

The advantages of backwardness

• Need for rapid development• British example• British investment in a “developing” country:

the U.S.• Technology diffusion• Late developers got the newest technology• Why I call this perspective “modified

Liberalism”

It pays to be late

• Latecomers grow faster• Access to state-of-the-art technology• Quick move to heavy industry• Development is possible through contact with

the International Economy

Leapfrogging: Access to the Latest Technology

Latecomers grow faster…

They move quickly to competitive industries

Development is possible through contact with the international economy

The more integration, the more growth

SUMMARY OF ALL DEVELOPMENT THEORIES

Accumulation of Capital is the Key to development

• Theories differ on the BEST way• Trade? • Aid?• Technology transfer?• State mobilization of capital?• ISI?• Growth of a middle class?• Dependent Development?

And the explanations are…..

• Liberal claim…….• Marxists and dependency theorists

maintain….• Economic Nationalists demand……• And Modified Liberals (Institutionalists)

believe……

Who is right?

• Maybe it depends on the conditions under which a country tries to develop

• And countries have to learn to play their cards right

What did Asia do right?

Growing share of World GDP

Japan

The Role of American hegemony

The Asian “Tigers”

• South Korea, Singapore, Taiwan, China, India• Moved out of “periphery status”• High growth Rates and relative income

equality

Asia-US GDP Growth

Decline in poverty rate

Liberal explanation

Attracting foreign investment

The Product cycle?

Taiwan: A case study

Single-payer health care

Taiwan has ridden the crest of the product cycle…..

How did Taiwan do it?

• Colonial legacy• Japan was a different colonial power than

Britain, France, and Belgium• Japan contributed to Taiwan’s economic

development

Role of the State

• KMT conviscated Japanese assets after WW II• No middle class—the state did not emerge

from within Taiwanese society• An authoritarian, non-democratic state….• ….That guided the growth of the economy– To attract foreign investment– Only resource was disciplined labor force– Investment in R&D

U.S. Aid and Hegemony

• US need to build up strong capitalist countries to counter communism

• USAID allied with the small business elite• US forced switch from ISI to Export orientation

Land Reform

Export orientation

FDI

Investment in High Technology

Japanese participation in the Taiwanese economy

Labor Repression

Results: Weathering the Asian Fiancial Crisis

The other “Tigers” have gone through a similar process

Korea

Singapore

Late Developers as a test of theory

…..as a test of dependency theory

• Troublesome because– Dependent on the world economy (terms of trade

worked in their favor– Developed with massive amounts of Cold War aid• Aid was used wisely• Military burden carried by American taxpayers

Why Wallerstein and Galtung would not like the “tigers”

• Their theories are static and the “Tigers” developed dynamically

• They developed with very little income inequality

• Their colonial legacies helped development

But why Gerschenkron would like them…….

• They conform most to his theory of “modified liberalism”

• They show that timing and technology are everything

Do the NIE’s conform to theories of “dependent development?”

• Yes These countries developed in a “dependent” relationship

• They showed that foreign investment can contribute to development

Why Foreign Investment worked…

• It was not in extractive industries• It did not come in until the economies were

strong enough to use their technologies• Foreign investment was restricted

What will all of this economic development do to repressive

governments?• Can new information technologies lead to

more freedom?

But what about liberal theory?

• Undermines generalizations of liberal theory• These countries had strong, repressive,

developmental states

What about the role of culture? “Asian values?”

• Did Asian “culture” make a difference?• Does Asian culture undermine the Western

laissez-faire approach to economic policy• Willingness to sacrifice?• Commitment to community instead of the

individual• Authoritarian culture?

What is true is…….

Has Liberalization and Globalization overtaken State-led development

in the 21st century? Have strong markets led to Democracy and have the NIEs reached the stage of

a mass-consumption society?

Political Liberalization

Taiwan’s interdependence with China

Interdependence

Political Interdependence?

From export-led growth to Domestic Demand and Mass-Consumption Society: Convenience-store

culture

From Mass Consumption Society to relative decline?

• Somewhat declining growth rates• Slow population growth• Outflow of investment