ch 10 LDC and NICS

LDC

less developed country- States that have not made progress in development

NIC

newly industrializing country- States that have made progress toward becoming advanced

industrial countries

imperialism

a system in which a state extends its political power over territory outside its borders (builds an empire)

economic and other motives

colonialism

a system in which an imperial state has a very high level of control over many aspects of territory outside its borders, including politics, commerce, and society

dynamic between core and periphery

European core was more technologically advanced.

 European states needed political control over peripheral areas to

ensure access to markets (goal)

consequences of imperialism

 Local organizational institutions replaced with states

 Divide-and-conquer strategies often empowered ethnic minorities

 New national borders did not follow existing cultural or political

borders, reducing legitimacy (and increasing problems later)

net effect of imperialism

Post-colonial states were often weak after independence

dependent development

Colonies were governed to supply resources to empire

The colonies were not designed to be self-sufficient

All trade funneled through empire

after imperialism, challenges to state capacity:

Independence movements in many colonies ended imperialism in

the mid-twentieth century.

 New government’s claims to legitimacy often rested on successful

independence, not tradition or rational-legal institutions

 Little political agreement beyond the desire for independence

 International donors to poor countries can demand concessions in

exchange for aid

strategies to promote growth- import substitution

Reduce imports to develop local production

Raise barriers to imports

State support for key industries to ensure existence and development

Goal is to develop internal production and market

 Problem: industry does not develop

 People buy foreign manufactured goods

 Local firms can’t compete with imports (no innovation)

 Economy stays tied to farming and mining

export-oriented industrialization

Invest capital in specific sectors and firms that will export

State selects key sectors and supports targeted industrialization (including possibly subsidies)

Requires substantial capital investment

Drawbacks:

 Requires capital controls (to ensure high savings rates and availability of capital)

 Depends on access to foreign markets (external dependence)

 Can lead to corruption (industry networks)

structural adjustment

Reduce regulation and trust market forces

Firms should invest and compete based on real prices.

 But, in most cases there is too much state intervention

 Governments set prices or block competition

 Firms invest in distorted markets (created by state)

 States need to liberalize, and adopt free market practices

 ‘Reduce regulation and trust market forces’

 Widespread use after 1980s – mixed results

 Sometimes made condition of aid and loans (IMF & World Bank)

 “Washington Consensus”, or neo-liberalism became standard, but

reforms often unpopular (significant programmatic cuts)

what matters for economic development?

More than just economic factors are important

 Markets require working political institutions a fully functioning state (legitimate)

2 basic institutional spheres are critical

state and social institution

state institutions

problems with corruption and rent seeking

State corruption viewed as a central/critical weakness

 Central governments respond to special interests.

 “Temporary” help to firms is never temporary – firms become dependent on state support

 State officials take bribes for services/support

 Corruption makes it more difficult to start or expand businesses

 Ambitious people work for state, not firms (best people not involved

in private sector)

Possible solutions

 Democracy (easier said than done!)

 Leaders compete by running on their records, not by buying support

 More than just elections -- need free press, fair elections, transparency

 Active local role for foreign aid and NGOs

social institutions

high levels of social mistrust

Democratic institutions require a social consensus built on trust

 Growth in trust and legitimacy requires public investment

 Social mistrust hinders tax collection, makes investment cost prohibitive

 Protection of property rights

 Divided societies make enforcement difficult and inequality makes property rights unpopular

Possible solutions:

 Start small, with reforms at local levels.

 Public investment in close-knit communities, rural development

 National projects that mix ethnic groups together

 Militaries, educational systems

 Direct support for civil society

 Development of independent newspapers and media

 Opposition political parties with a national base