3/3 Political Economy

international development north-south divide

• Most of the humanity lives in global south

• North-south gap in wealth between industrialized regions (North) and the rest of the world (South)

  • Little agreement on causes or implications of poverty in Global South, or solutions

  • There is agreement that much of global South is poor, some of it extremely poor

    • About one billion people live in abject poverty, without access to basic nutrition or health care

    • Concentrated in Africa, less so in South Asia than historically

• Lack basic human needs

  • Food, shelter, basic infrastructure, equality

    • Leads to lack of security

    • These wars often add to the lack of basic infrastructure

  • Examples:

    • China taking old computers from US and melting it for the precious metals. When this happens the solder releases toxic chemicals

clear path to international development

• No clear-cut path to development

• The West’s path not duplicative

• Varying successes and failures over the last 70 years

  • South Korea is a miracle - aided by US during Cold War. It was strategic national security interest

• Top-down approach not working

  • Driven largely by needs and concerns of developed nations

    • Bilateral and multilateral aid

  • Most funding comes from corporation through foreign direct investment

• Aid should focus on poverty alleviation, education, and infrastructure development

global public goods

• a tension between the two uses of aid just mentioned—GPGs and country priorities—might soon become much more acute owing to recent and rather dramatic changes in the global context in which aid is provided.

•  public good is something that confers benefits on people without restriction or exhaustion, like a street light. A GPG is a public good whose benefits transcend national boundaries, like climate change mitigation

most important GPGs

• The most significant GPGs, in terms of their importance for development

  • Infectious disease surveillance, control, and eradication;

  • sustainable management of transboundary natural resources, such as the atmosphere

  • the production of knowledge for development

ODA - official development assistance

Flows of official financing administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25 percent

issues to be tackled in international development

• The two major tools that need to be brought to bear in tackling any of the major issues facing the international community 

  • the technical capacity to design solution

  • The money to pay for them

Millennium declaration

• Millennium declaration - US - It falls far short of meeting the needs of recipient countries, fails to tap into the vast U.S. capacity for providing aid, does not fulfill Washington's many promises to fund development adequately, and is a small fraction of what Americans believe the U.S. actually provides

world bank history

• Created at Bretton Woods

• 1944-1974

  • Started out with small loans - Wanted to create confidence in the bank’s role

  • Most of the world still controlled by colonial powers

  • Strict criteria to borrow

  • First loan to France

  • 1944-1974

    • Marshall plan 1947

      • Shift to non-European countries

    • Loans required to focus on income earning infrastructure

  • 1974

    • Short period of increase in loan amounts

    • Followed by the 80s period of “loan servicing”

      • Structural adjustments

        • Countries took out more money than they could pay

        • Conditions on the new loans required a country to lower its debt

        • Result: rise in poor health, nutrition, and education standards in the developing world

      • Inclusion of other actors

        • Lead role in environmental issues

          • Ozone depletion, deforestation, sustainable development, etc

Millennium development goals

• Created at United Nations

  • Eradicated of extreme poverty and hunger

  • Universal education

  • Gender equality

  • Reduce child mortality

  • Improve maternal health

  • Combat HIV/AIDS, Malaria, and other dangerous diseases

  • Ensure environmental sustainability

  • Develop a global partnership for development

• The World Bank has not made any great strides in these areas - only some in roads

purpose of WB

• Two stated goals

  • End extreme poverty

  • Promote shared prosperity by fostering economic growth of people in developing world

WB organization/structure

• President

  • Typically a US citizen

  • Obama broke this tradition with someone from South Korea

• Vice presidents (29)

• Board of directors (25+ president)

  • Unless a tie occurs, president has no vote

• Members (189 countries)

• Voting process

  • Number of votes based on GDP

  • US has 15.9% of the vote

4 sectors of the WB

• IBRD - International Bank for reconstruction and development

  • Easy access to loans, good repayment history, usually for emergencies, like a gold card

• IFC - International Finance Corporation

  • Private sector investment in developing countries, given to corporations to build up economic presence

• IDA - International Development Agency

  • Focus on poorest countries

• MIGA - Multilateral Investment Guarantee Agency

  • Supports FDI that protect corporations investment in countries

How WB operates

poverty reduction strategies, development marketplace rewards, global partnerships and initiatives, training, country assistance strategies, and open data initiative

International Bank for Reconstruction and Development (IBRD) goals

• International Bank for Reconstruction and Development (IBRD) goals

  • 1. Eradicate extreme poverty and hunger.

  • 2. Achieve universal primary education.

  • 3. Promote gender equality and empower women.

  • 4. Reduce child mortality.

  • 5. Improve maternal health.

  • 6. Combat HIV/AIDS, malaria, and other diseases.

  • 7. Ensure environmental sustainability.

  • 8. Develop a global partnership for development.

WB controversial because

• the World Bank has been criticized for its part in promoting the Washington Consensus through its close participation with the IMF in lending only to programs that were heavily conditioned. For example, according to 50 Years Is Enough, the World Bank's policies are "indistinguishable" from the IMF's in that they often go to "austerity plans that 'reform' economic policies by suffocating the poor and inviting corporate exploitation

•  The World Bank is often accused of ignoring the environmental and social impact of projects it supports

barriers to WB

• Bank’s governance

• Heavy reliance on external, special-purpose funding

• Process is geared towards large loan finance operations

• Bank is perceived as a serious, engaged partner only when in the lead and in control

Bank led partnership: three key challenges

• Oceans, climate-smart agriculture, and reducing greenhouse emissions from cities

• decisive action needs to be taken now to strengthen international cooperation on global public goods important for development

• The use of aid for global public goods must be reflected explicitly in a new and broader aid policy narrative or we run the risk of losing public and political support for aid. 

five reasons why Africa needs better growth patterns

• Five reasons why Africa needs better growth patterns

  • Growth remains volatile, despite a strong process of capital accumulation and new trade partners

  • Recent GDP growth has not increased well-being

  • The continent needs to generate more quality jobs for its large labor force

  • Further alleviating poverty requires reducing income inequality

  • If business continues as usual, structural transformation may be hard to sustain

what is foreign aid

• Financial or material assistance given by one country to another

• Aims to support

  • Economic development

  • Humanitarian needs (military aid counts here)

• Typically from developed from developing countries

• Infrastructure but usually the focus in FDI (build roads and the economies of developing countries would drastically improve)

types of foreign aid

• Bilateral - one country to another

• Multilateral - handled by organizations UN/World Bank

• Humanitarian - emergency relief disasters, wars, hurricanes

• Development - long-term growth projects

pros and cons of foreign aid

• Advantages

  • Reduces poverty

  • Improves healthcare and education

  • Supports infrastructure development

  • Helps during emergencies

• Disadvantages

  • Can create dependency 

  • May be misused by governments

  • Sometimes tied to political interests

  • Not always effective long-term

foreign aid nightmare

• According to Brown, medicine that would prevent half of all malaria deaths costs only 12 cents

• All talk no traction

  • Top down strategies have complex information problems

• Poverty starts at home

  • Democracy and free markets are not an overnight solution

    • Bottom up evolution of the rules of the game is needed

• Fixing world poverty is a utopian goal; be realistic

  • Routine childhood immunization

  • Better incentives for aid agencies

WB and foreign aid in Sub-Saharan Africa

• Production of more exports (usually primary materials);

• Privatization of industries (including necessities such as water and healthcare)

• Cut back on social spending and imposition of user fees (universities, hospitals, etc.);

• Reduced financial regulations;

• Embarking on market based pricing (which tends to raise the cost of basic goods and services); and

• Imposition of higher interest rates and trade liberalization.

lapses in the SAP program though - structural adjustment program

what is FDI

• Investment by a company or individual in another country

• Involves ownership or control of businesses

• Examples

  • Building factories

  • Opening subsidiaries

  • Giving money to help build infrastructure that allows companies to run (electricity, sewage, water, transportation)

types of FDI

• Green field - building new operations

• Mergers and acquisition - buying existing companies

• Horizontal - purchase same business abroad (if you own steel company, buy other steel production companies across the country) 

• Vertical - different stages of production (if you own steel, you buy coal and to end production)

pros and cons of FDI

• Advantages

  • Creates jobs

  • Transfers technology and skills

  • Boosts economic growth (economies are organisms, so the employees are spending money and it comes back to grow economy overtime)

  • Increase tax returns (new employees can be taxed, government can spend more money)

• Disadvantages

  • Profits may leave the county (from developed countries)

  • Can harm local businesses

  • Environmental concerns (different standards from developed countries that end up polluting the developing countries)

  • Economic dependence on foreign firms (choices in country are not controlled by domestic country)

real world examples of foreign aid and FDI

• Foreign aid

  • Disaster funding

  • Education in developing countries

• FDI

  • Car companies building plants overseas

  • Teach companies opening global offices

• Impact on developing countries

  • Both can

    • Stimulate growth

    • Improve infrastructure

  • Key difference

    • Aid - support

    • FDI - business investment

defining FDI

• Foreign direct investment (FDI) is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. 

• An investment into a foreign firm is considered an FDI if it establishes a lasting interest. A lasting interest is established when an investor obtains at least 10% of the voting power in a firm.

key factor in FDI

• The key to foreign direct investment is the element of control. Control represents the intent to actively manage and influence a foreign firm’s operations. This is the major differentiating factor between FDI and a passive foreign portfolio investment

FDI in China’s economic development

• FDI tends to promote the improvement in allocative efficiency, while having a negative impact on productive efficiency. 

• FDI does promote overall productivity growth, this tends to be a matter of cumulative causation rather than one of single-direction causation

• Economic impact of FDI tends to be more favourable in the inward-looking, capital-deepening pattern of development (the ‘Shanghai model’) than that in the export-oriented, labour-intensive pattern (the ‘Guangdong model’)

shanghia v guahgdong models

• the Shanghai-Jiangsu region, with a better technological capability, has appeared  to be in a better position than Guangdong in reaping the new market opportunities in the 1990s

• the ‘Shanghai model’ does work better than the ‘Guangdong model’ in promoting local and national economic development

conclusion of FDI in China

• First, it is found that FDI tends to promote the improvement in allocative efficiency, while having a negative impact on productive efficiency. Second, insofar as FDI does promote overall productivity growth, this tends to be a matter of cumulative causation rather than one of single-direction causation. Third, in the context of a comparative analysis of two distinctive regional models, it is found that the economic impact of FDI tends to be more favourable in the inward-looking, capital-deepening pattern of development (the ‘Shanghai model’) than that in the export-oriented, labour-intensive pattern (the ‘Guangdong model’).