lecture 16 International Development II

Course Logistics and Academic Deadlines

• Exam Two Specifications:

  • Date: Scheduled for Monday, October 26 ($10/26$).

  • Curriculum Coverage: Covers all material spanning Chapters 7 through 10 ($\text{Chapters } 7-10$).

  • Assessment Structure: Identical in format to Exam One, consisting of:

  • Multiple choice questions.

  • Fill-in-the-blank questions.

  • Short answer questions.

• Assignment Deadlines:

  • Policy Memo Assignment: The second group of policy memos is due on Friday, October 30 ($10/30$).

  • Submission Platform: Submissions must be uploaded directly via Canvas.

• Instructional Staff Office Hours:

  • Professor Johnson:

  • Days & Times: Tuesday and Wednesday from $2:00\text{ PM}$ to $3:30\text{ PM}$.

  • Office Location: BAT 4.124.

  • Teaching Assistant Gauen:

  • Days & Times: Monday from $2:00\text{ PM}$ to $5:00\text{ PM}$.

  • Office Location: BAT 1.118.

  • Intended Use: Designated for students seeking clarification or guidance regarding exam material and memo preparation.

Global Economic Disparities: Measures and Distributions of Wealth

• Overview of Global Wealth Stratification:

  • The study of International Political Economy (IPE) focuses centrally on why certain sovereign states generate high national wealth while others remain impoverished.

  • Disparities in gross domestic product (GDP) per capita reveal extreme divergence in productive output, living standards, and capital accumulation across geographic regions.

• Global Per Capita GDP Distribution (2019 World Bank Data):

  • $\le \$1,314$ (Lowest Tier): Dominated by Sub-Saharan Africa (e.g., Niger, Chad, Central African Republic, Democratic Republic of the Congo, Mozambique, Madagascar, Ethiopia, Sudan) and select parts of Central/South Asia (e.g., Afghanistan, Tajikistan).

  • $\$1,315 - \$3,828$ (Lower-Middle Tier): Includes large portions of South and Southeast Asia (e.g., India, Pakistan, Bangladesh, Myanmar, Cambodia, Laos) and parts of Africa (e.g., Nigeria, Ghana, Kenya, Tanzania, Mauritania, Senegal, Cameroon, Angola, Zambia).

  • $\$3,829 - \$8,053$ (Middle Tier): Encompasses parts of Latin America (e.g., Bolivia, Paraguay, Colombia, Ecuador, Peru, Guatemala, El Salvador), North Africa (e.g., Egypt, Algeria, Libya, Morocco, Tunisia), and parts of Central Asia/Eastern Europe (e.g., Ukraine).

  • $\$8,054 - \$19,220$ (Upper-Middle Tier): Includes emerging markets and upper-middle income states such as China, Russia, Mexico, Brazil, Argentina, Chile, Turkey, Kazakhstan, and Malaysia.

  • $\ge \$19,221$ (High-Income Tier): Encompasses advanced industrial democracies and resource-rich states including the United States, Canada, Western European nations, Australia, New Zealand, Japan, South Korea, Saudi Arabia, Oman, and the United Arab Emirates.

• Economies with the Lowest GDP Per Capita (in USD):

  • South Sudan: $\$313$

  • Yemen: $\$415$

  • Burundi: $\$486$

  • Central African Republic: $\$599$

  • Madagascar: $\$616$

  • Malawi: $\$622$

  • Mozambique: $\$690$

  • Sudan: $\$712$

  • Somalia: $\$763$

  • DR Congo: $\$772$

  • Niger: $\$789$

  • The Gambia: $\$890$

  • Liberia: $\$904$

  • Sierra Leone: $\$980$

  • Ethiopia: $\$994$

  • Lesotho: $\$1,001$

  • Mali: $\$1,014$

  • Rwanda: $\$1,043$

  • Myanmar: $\$1,097$

  • Burkina Faso: $\$1,115$

• Economies with the Highest GDP Per Capita (in USD):

  • Liechtenstein: $\$231,713$

  • Luxembourg: $\$146,818$

  • Ireland: $\$129,132$

  • Switzerland: $\$111,047$

  • Iceland: $\$98,150$

  • Singapore: $\$94,481$

  • Norway: $\$91,884$

  • United States: $\$89,599$

  • Denmark: $\$76,581$

  • Netherlands: $\$73,174$

  • Qatar: $\$71,441$

  • Australia: $\$65,946$

  • San Marino: $\$65,269$

  • Sweden: $\$62,036$

  • Austria: $\$61,694$

  • Belgium: $\$60,418$

  • Israel: $\$60,009$

  • Germany: $\$59,925$

  • United Kingdom: $\$56,661$

  • Finland: $\$56,084$

Foundational Barriers to Economic Development

• Domestic Obstacles to Development:

  • Geography: Adverse physical conditions such as landlocked territory, tropical disease burdens, poor soil quality, and unfavorable climate conditions hinder infrastructure construction and agricultural yields.

  • Government Policy: Deficient economic management, including macroeconomic instability, failure to protect property rights, rent-seeking, and distortionary subsidies.

  • Domestic Institutions: Weak, autocratic, or corrupt political systems that fail to provide essential public goods (e.g., roads, electricity, healthcare, rule of law) and discourage investment.

• International Obstacles to Development:

  • Colonialism: Historical exploitation of natural resources, structural reliance on extractive institutions, disruption of indigenous governance, and the imposition of arbitrary national borders.

  • International Trade Structure: Unfavorable terms of trade for primary commodity producers relative to manufactured goods exporters (Prebisch-Singer thesis dynamic), leaving less developed countries (LDCs) vulnerable to price volatility.

  • International Institutions: Structural bias favoring wealthy, industrialized nations within global governance organizations (such as the IMF, World Bank, and GATT/WTO), limiting policy autonomy for developing states.

Import Substituting Industrialization (ISI)

• Conceptual Framework and Origins:

  • Emerged predominantly during the 1930s as a structural response to the Great Depression and the collapse of international trading networks.

  • Grounded in the premise that participation in the open global economy inherently disadvantages primary-commodity-exporting developing countries due to persistent deterioration in terms of trade.

  • The core goal was to replace imported manufactured goods with domestically produced alternatives to achieve industrial self-sufficiency.

• Primary Policy Instruments of ISI:

  • High Trade Barriers: The erection of steep tariffs, import quotas, and stringent licensing requirements designed to protect infant domestic industries from foreign competition.

  • State Fiscal Incentives: Selective tax credits, concessionary public loans, and direct fiscal subsidies granted to favored industrial manufacturers.

  • Public Provision of Industrial Inputs: State ownership or heavy subsidization of core public utilities, infrastructure, and heavy industrial services (transportation, energy, steel, telecommunications).

• Adoption and Implementation Across LDCs:

  • Widely adopted across Latin America, Africa, Asia, and the Caribbean.

  • Key implementing states included India, Brazil, Mexico, Argentina, and Chile.

• Structural Failures and Economic Costs of ISI:

  • Industrial Inefficiency: Shielded from international competition, protected domestic manufacturers lacked market incentives to innovate, control production costs, or improve quality, producing substandard, overpriced consumer goods.

  • Sovereign Debt and Balance of Payments Crises: Because industries were inward-looking and uncompetitive globally, countries failed to generate foreign currency via exports, leaving governments unable to service foreign-denominated sovereign debts.

  • Agricultural and Rural Impoverishment: ISI policies artificially overvalued domestic exchange rates (to import capital machinery cheaply) and placed price caps on domestic food supplies to appease urban workers, severely undercutting rural farmers and inducing deep agricultural poverty.

Export-Oriented Industrialization (EOI) and the East Asian Tigers

• Conceptual Framework and Objectives:

  • Developed in direct contrast to inward-looking ISI policies, originating prominently in the 1960s.

  • Relies on integration into global trade by incentivizing domestic manufacturers to produce high-volume consumer goods tailored specifically for export markets, especially wealthy foreign consumers in the United States and Western Europe.

• Policy Instruments of EOI:

  • Targeted Financial Subsidies and Tax Breaks: Corporate tax relief and cheap state-directed credit provided conditionally on meeting competitive export volume quotas.

  • Exchange Rate Intervention: Deliberate weakening (depreciation/undervaluation) of the domestic currency against major currencies (such as the US dollar) to make exported manufactured products cheaper and more competitive overseas.

  • State Coordination: Government agencies actively directing industrial policy toward strategically advantageous manufacturing sectors.

• The Four Asian Tigers:

  • Comprises four dynamic, export-focused economies in East Asia:

  • South Korea

  • Taiwan

  • Singapore

  • Hong Kong

  • Experienced unprecedented, sustained double-digit gross domestic growth rates across several decades.

  • South Korean Export Growth Example: South Korea expanded its total export volume from $\$385\text{ million}$ in 1970 to $\$15\text{ billion}$ in 1979 ($15,000\text{ million}$, representing an approximate $39\text{-fold}$ increase in under a decade).

• Catch-Up Growth Dynamics Relative to Japan and the United States (1970–2017):

  • Japan: Started near $60\%$ of US per capita GDP at purchasing power parity (PPP) in 1970, peaked at approximately $85\%$ in the early 1990s, and subsequently declined to around $65\%$ by 2017.

  • Singapore: Accelerated from below $30\%$ of US per capita GDP in 1970, surpassing Japan by the mid-1980s, surpassing US levels ($100\%$) around 2005, and exceeding $130\%$ of US per capita GDP by 2017.

  • Hong Kong: Began at approximately $35\%$ of US per capita GDP in 1970, surpassed Japan in the early 1990s, reached parity with the United States in the late 2000s, and leveled off between $90\%$ and $95\%$ through 2017.

  • Taiwan: Advanced steadily from approximately $20\%$ in 1970 to surpass Japan around 2010, settling at roughly $75\%$ of US levels by 2017.

  • South Korea: Progressed from approximately $10\%$ in 1970 to roughly $60\%$ by 2017, nearly converging with Japanese output levels.

The Washington Consensus and Neoliberal Policy Prescriptions

• Shift Toward Trade and Market Liberalization:

  • The striking economic success of EOI economies contrasted with the collapse of ISI across Latin America, compelling policymakers and international financial institutions toward globalization, trade openness, and outward-oriented policies.

  • Developing nations experiencing balance of payments and sovereign debt defaults in the 1980s turned to the International Monetary Fund (IMF) and the World Bank for emergency structural adjustment assistance.

• Pillars of the Washington Consensus:

  • Trade Liberalization: Elimination of protective import tariffs, non-tariff barriers, and quotas, exposing domestic markets to international market competition.

  • Privatization: Divestiture of state-owned enterprises (SOEs) and public utilities into private investor hands to improve operational efficiency and curb state fiscal drains.

  • Fiscal Discipline and Lower Government Spending: Severe reduction in state budget deficits, cuts to domestic consumption subsidies, and downsizing of public administration.

  • Openness to Foreign Direct Investment (FDI): Dismantling capital controls and restrictions on foreign corporate ownership to encourage overseas investment and technology transfer.

Developing Country Coalitions: The Non-Aligned Movement and the Group of 77

• Countering Institutional Bias in the International System:

  • Developing countries sought political and institutional collective action to alter the rules and governance structures of multilateral institutions that were historically dominated by Western industrialized states.

• The Non-Aligned Movement (NAM):

  • Initiated by leaders of developing nations in 1961 (formalized during the Belgrade Conference).

  • Convened regular summit meetings every few years to formulate unified diplomatic strategies.

  • Foundational Principles:

  • Avoidance of formal military alliances with either Cold War superpower bloc (the United States or the Soviet Union).

  • Uncompromising opposition to imperialism, colonialism, neo-colonialism, foreign aggression, and military intervention.

  • Original 1961 Conference Attendee States:

  • Europe: Yugoslavia, Cyprus.

  • Latin America & Caribbean: Cuba.

  • Middle East & North Africa: Algeria, Egypt, Iraq, Lebanon, Morocco, Saudi Arabia, Syria, Tunisia, Yemen.

  • Sub-Saharan Africa: Congo, Ethiopia, Ghana, Guinea, Mali, Somalia, Sudan.

  • South, Southeast, & East Asia: Afghanistan, Cambodia, India, Indonesia, Myanmar, Nepal, Sri Lanka.

• The Group of 77 (G-77) and the New International Economic Order (NIEO):

  • Established in 1964 as a broad institutional coalition of developing states within the United Nations framework.

  • Although founded by $77$ states, membership subsequently expanded to include $135$ developing nations.

  • The New International Economic Order (NIEO): A declaration endorsed by the G-77 in the UN in the 1970s aimed at restructuring the global economic architecture.

  • Key Demands of the NIEO:

  • National Sovereignty Over Foreign Investment: Restricting the rights and regulatory protections of foreign investors and multinational corporations operating within LDC jurisdictions.

  • Preferential Trade Arrangements: Systematically revising multilateral trade rules to favor primary commodity and manufactured exports originating in LDCs.

  • Multilateral Governance Reform: Expanding the voting power, representation, and institutional influence of developing nations within global financial institutions (IMF and World Bank).

Commodity Cartels: The OPEC Experience and Resource Constraints

• Mechanics of Commodity Cartels:

  • An economic coalition formed by producer countries to restrict output, establish production quotas, and artificially inflate international market prices for raw commodities.

• The Organization of the Petroleum Exporting Countries (OPEC):

  • Established in 1960 to coordinate petroleum production among oil-rich developing states.

  • Founding Members (1960): Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.

• Current OPEC Membership Distribution:

  • Middle East: Iran, Iraq, Kuwait, Qatar, Saudi Arabia, United Arab Emirates.

  • Africa: Algeria, Angola, Libya, Nigeria.

  • South America: Ecuador, Venezuela.

• The 1973 Oil Crisis and Price Shock:

  • In October 1973, Arab members of OPEC instituted an oil export embargo targeting the United States and other Western allies during the Yom Kippur War.

  • The cartel successfully coordinated production cuts, which quadrupled the global price of crude oil almost overnight.

  • Prior to 1973, inflation-adjusted West Texas Intermediate (WTI) crude prices held stable around $\$2\text{ per barrel}$.

  • Following the embargo, prices spiked above $\$4\text{ per barrel}$, climbing further through the 1979 Iranian Revolution to peak above $\$10\text{ per barrel}$ around 1980, before experiencing downward volatility through the late 1980s and 1990s.

• Domestic Consequences in Developed Economies:

  • Severe shortages induced panic buying, widespread rationing, and extended vehicle queues at domestic retail stations (such as Standard and Chevron stations).

  • Triggered widespread stagflation—simultaneous high inflation and stagnant economic growth—across consumer economies.

• Failure to Replicate the OPEC Model in Other Commodities:

  • LDCs attempted to construct cartels for other primary exports, including copper, coffee, iron ore, and bananas, but these attempts failed.

  • Key Structural Obstacles Preventing Other Cartels:

  • Availability of Substitutes: While oil possessed no viable, short-term substitute for transportation or energy, consumers of copper, coffee, iron, or bananas easily shifted consumption to alternative materials, synthetic substitutes, or alternative food staples.

  • Supplier Concentration: Petroleum production was concentrated within a small, geographically proximate group of dominant producers; other commodities suffered from diffuse global supply, enabling non-cartel producers to defect or undercut prices.

  • Political and Cultural Cohesion: OPEC members (particularly the core Arab Gulf producers) shared deep religious, linguistic, ideological, and geopolitical alignments that supported enforcement; producers of other commodities lacked shared interests or political unity.

Foreign Aid in International Development: Public Perception, Reality, and Geopolitics

• Role and Skepticism Surrounding Foreign Aid:

  • Development theory frequently posits that concessional financial and technical aid from advanced industrial nations can finance capital infrastructure, bridge savings gaps, and lift LDCs out of poverty traps.

  • Grounds for Aid Skepticism:

  • Aggregate official assistance flows represent an extremely minor fraction of advanced economies' budgets and are insufficient to drive systemic macroeconomic transformation.

  • Popular domestic political support for sustained foreign development spending remains low within donor nations.

  • Aid allocations are often directed toward narrow geopolitical, strategic, or military alliances rather than poverty-reduction programs.

  • Recipient regimes frequently misallocate, expropriate, or waste development capital, reinforcing domestic patronage networks without generating productive local industry.

• Historical US Public Opinion on Foreign Aid Spending (1960–2016):

  • 1960 to Early 1970s: Approximately $30\%$ to $35\%$ of surveyed Americans expressed the view that the US government spent "too much" on foreign assistance.

  • The 1973–1974 Inflection Point: Amid the domestic 1973 oil shock, economic recession, and geopolitical turmoil, public sentiment rose sharply to roughly $75\%$.

  • 1975 to 2016 Trends: Public sentiment that aid spending was excessive hovered consistently between $50\%$ and $75\%$ over the next four decades, hitting cyclical peaks near $75\%$ in the mid-1980s and mid-1990s, with troughs around $50\%$ to $60\%$ in the late 1990s and early 2010s.

• Perception Versus Reality in US Foreign Assistance:

  • Actual Budget Allocation: Foreign aid constitutes approximately $1\%$ of the total US federal budget.

  • Public Perception: According to the Kaiser Family Foundation Survey of Americans on the US Role in Global Health (conducted February 2–12, 2012), the American public on average estimates that foreign assistance accounts for $27\%$ of the federal budget.

  • This discrepancy demonstrates an average $27\text{-fold}$ overestimation of US foreign assistance expenditures by the public.

• Political Challenges to Foreign Aid Infrastructure:

  • Foreign assistance agencies face political opposition and fiscal retrenchment in donor capitals.

  • USAID Controversy (February 2025): Public demonstrations and policy disputes emerged following executive initiatives led by Donald Trump and Elon Musk (directing the Department of Government Efficiency) aimed at shuttering the United States Agency for International Development (USAID), creating uncertainty over the continuity of global humanitarian, public health, and development funding.