POSC Unit 4

International Development

democracy

promotor of universal suffrage and political equality

capitalism

creator of competition and economic inequality

welfare state

state plays a role in protecting socioeconomic wellbeing of all its citizens

Liberal (Residualist) Regimes

• citizens are dependent on their own earnings

• only basic security nets are provided by the state

• creates higher inequality

• examples: U.S., U.K., Australia

Conservative (Christian-Democratic) Regimes

• builds on post-war economic and social structures

• some groups may not be considered for programs

• makes some distinction between occupational groups

• example: continental Europe

Social Democracy (Egalitarian) Regimes

• high taxation for all social services

• progressive taxing

• doesn’t discriminate in service provision

• e.g. Scandinavian countries

Organized labor vs. Business

the welfare state can be defined as a function of unions and left-leaning parties that represent worker interests; more unions means more welfare vs. more business interests means less welfare

Strength of organized labor

1. size

2. cohesiveness

3. degree of incorporation into state apparatus

free market

maximizes individual freedom and minimizes role of the government in the economy

social democracy

balances capitalist markets and private property with intervention to help economic inequality

state-led development

balances capitalist markets with state-led strategy that coordinates private sector investment. gives preferential status to some industries deemed essential for development

command economy

heavy government intervention to steer the economy and redistribute wealth

Import Substitution Industrialization (ISI)

substituting foreign manufactured goods for domestically produced goods

Stages of ISI

1. easy ISI

2. Secondary ISI

Easy ISI

creating simple consumer goods domestically (beer, shoes, apparel)

Secondary ISI

creating durable goods, intermediate inputs, and capital goods using government planning, investment policies to promote these industries, and tariffs

ISI Policy goals

1. develop domestic production

2. disincentivize imports

3. infant industry protection through tariffs

4. employment and skill acquisition

Infant Industry Argument

newly created industries can’t efficiently compete against established firms in their sector, so the government can shield them by being protectionist to reach economies of scale and skill

Singer-Prebisch Theory

economic explanation of Dependency Theory that claims:

• trade has few benefits to developing countries

• periphery countries terms of trade deteriorates as primary commodity prices fall and manufactured good prices rise

• developing nations must then sell their commodity goods at a lower global market price to sustainably buy pricier manufactured goods from advanced economies

Causes of the Latin American Debt Crisis

1. borrowed heavily in the 70s and 80s

2. relied on foreign capital, made economies volatile to market shocks

3. three market shocks: increased interest rates in U.S., global recession (decrease in exports), rise in oil prices (1979)

IMF Conditionality

in exchange for loans, countries make neo-liberal reforms

• macro-economic stabilization to reduce budget deficit (short-term)

• structural adjustment (long-term) to liberalize trade, FDI, privatization, and de-regulation

lasting impact of LATAM Debt Crisis

decreased capital controls; allowed banks and firms to borrow in international markets and increased the importance of non-bank capital flows

Asian Tigers

Singapore, Hong Kong, Taiwan, South Korea

EOI Stages

1. light industry

2. heavy industry

3. skill-and Research and Development-intensive industries

Export Oriented Industrialization

an economic and trade policy where a country seeks rapid economic development by manufacturing goods primarily for sale on international markets rather than just the domestic market

EOI Policy Goals

1. reducing the cost of investing in target industries

2. create incentives for exporting

3. infant industry protection through tariffs

4. promotion of acquisition of skill

neo-liberal explanation for Asian Tigers’ Developmental Growth

East Asia’s economic growth was not due to the government’s policies but embracing the international market

1. select import liberalization

2. stable macroeconomic environment (low inflation, conservative fiscal policies)

dictatorship explanation for Asian Tigers’ economic growth

growth happened when most of the countries’ governments were authoritarian (labor repression needed to implement large-scale changes)

Causes of Asian Financial Crisis

• hot money

• Asian bank intermediaries, borrowed short-term international loans

• roll-over risk

• moral hazard

hot money

Investors shift funds out of capital-rich economies with low interest rates (such as the United States) into growing economies or banking institutions that offer higher-yielding short-term certificates of deposit (CDs), bonds, or money market instruments.

roll-over risk

international investors could decide to stop rolling over short-term loans

moral hazard

banks believed the government could bail them out so they make riskier investments

Asian Bretton Woods II

1. accumulate foreign reserves - Asian demand for USD, current account surplus

2. Chiang Mai Initiative - regional cooperation

Chiang Mai Initiative (CMI)

• no reliance on IMF

• bilateral swap agreements to provide liquidity

Capital Flow Cycle

recurring, wave-like movement of financial capital—such as portfolio investments, bank loans, and foreign direct investment—between global financial centers and emerging or periphery economies

Two-Phase Cycle of Capital Flows

1. financial capital flows into the periphery, strengthens currencies, inflates asset prices

2. investors sell periphery assets in favor of dollar-dominated ones, deflating asset prices and raising interest rates

U.S. Monetary Policy and Capital Flows

• U.S. interest rates increase: capital flows into EME’s in search of higher returns

• U.S. rates decrease: capital outflows from EME’s