Developing Countries and Globalization

Lecture 20

The Logic of Economic Development

• Economic Development:– Raising Per Capita Incomes– Improving Quality of Life

• Development Necessarily Causes Structural Change.

– Growing Demand for Labor Pulls Workers Away from Agriculture into Industry.

– “Traditional” Labor Intensive Methods of Production are Replaced by “Modern” Capital-Intensive Methods

• Incomes Rise as Employment Opportunities and Productivity Expand

Source: World Bank, World Development Report 1995

Investment is the Key to Economic Growth

• Investment: the Purchase of Machines that Produce Other Goods.

• Without Investment:– No Expansion of

Employment– No Productivity Gains– No Economic Growth

• With Investment:– Employment Grows– Productivity Grows– The Economy Grows

Source: Dani Rodrik 1999.

Economic Growth and Incomes

• Investment Drives Economic Growth

• Economic Growth Drives Income Growth

Source: World Bank, World Development Report 1995

Saving is the Key to Investment

• Savings: That Portion of National Income Not Consumed.

• Societies must Save In Order To Invest.

• Low-Income Countries Don’t Save Much– As a Percentage of Their

Incomes.

– In Absolute Terms.

Savings Rates in 1989 (Percentage of GDP)

East Asia 34.7

Latin America 22.5

Sub-Saharan Africa

12.4

OECD 22.2

Source: World Bank

Summarizing…

• Economic Growth is the Key to Economic Development

• Investment is the Key To Economic Growth

• Savings is the Key to Investment

• Developing Countries Lack Large Pools of Savings, and Thus Can’t Investment Enough to Spur Development.

The International Economy and Economic Development

• Do MNCs Facilitate or Frustrate Economic Development?

• Does International Trade Facilitate or Frustrate Economic Development?

• Theoretical Answers and Real-World Experience Suggests…

MNCs and Developing Countries• Transfer Savings from Rich to Low-Income

Countries.– More Investment Than Otherwise Possible

• Transfer Technology from Rich to Low-Income Countries– More Productivity Gains Than Otherwise Possible

• Provide Access to International Marketing Networks– More Export Opportunities Than Otherwise Possible

• Higher Growth, More Jobs, Higher Wages Than Otherwise Possible.

Trade and Investment

• Investment Requires the Installation of Machines that Produce other Goods—Capital Goods.

• Developing Countries Do Not Produce Capital Goods, and Must Import Them

• To Pay For Imported Capital Goods, Developing Countries Must Export.

• Development Dependent Upon International Trade

Balance of Payments

• Current Account Deficits as they Import Capital Goods.

• Capital Account Surplus as they Import Financial Capital to Pay for Capital Goods.

International Trade and Wages

• Factor-Price Equalization Says:

• Developing Country Wages Should Rise as they Open Up To International Trade.

Source: World Bank, World Development Report 1995

Who Has Been Open To Trade and Investment?

• Governments in Africa and Latin America Adopted “Import Substitution Industrialization” Development Strategies.– Closed To Imports– Exported Very Little

– Limited MNC Presence • The East Asian NICs (South Korea, Taiwan, Singapore,

Hong Kong, Malaysia, Indonesia, Thailand) Adopted “Export-Oriented” Development Strategies.– Controlled Imports– Exported a Lot– Welcomed MNCs

Implications of Different Development Strategies

• Should Expect to See Very Little Wage Growth in Africa and Latin America During the Latter Part of 20th Century.

• Should Expect To See Rising Wages in East Asia During the Latter Part of 20th Century.

Source: World Bank, World Development Report 1995

Summarizing

• Theory and Evidence Suggest Real Benefits to Developing Countries that Participate in “Globalization.”

• In Theory, Provides Financial Capital and Capital Goods Needed for Development

• In Practice, those Developing Countries that Have Been Most Integrated into the International Economy Have Realized the Largest Income Gains.

Qualifications?

• Opening to the International Economy Brings Vulnerabilities.– Financial Crises, Brazil 1998, Asia 1997, Mexico 1994– “Terms of Trade Shocks”

• Not Every Country Will Be Growing at Every Moment.– Need to Focus on Long Term Rather than Short Term

Developments– Need to Focus on Broad Patterns Rather than Specific

Cases that Are Clear Exceptions.

I’m Not Pangloss• Many People in Developing Societies Remain Very, Very

Poor– Globalization Has Not Made them Wealthy by Western

Standards.• Working Conditions in Most Developing Countries are Not

to Western Standards.– Child Labor, Long Hours, Low Pay, Health Hazards

• MNCs and Local Firms Take Advantage of Conditions.• The Real Question is, What is the Alternative?

– The Only Developing Countries that Have Improved Have Integrated into the Global Economy.

– None of the Countries that Stood Aside Have Improved.