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2 Global Economic Development Indian women carrying drinking water containers. Sam Panthaky/Stringer Learning Objectives * Understand the meanings of the term global economic development and the context for its emergence. * Appreciate the differences between poverty and inequality, and recognize the global extent of each. * Identify the central assumptions of modernization theory, and describe how development experts implemented this theory over time. * Consider the main drivers of the global debt crisis and the important features and consequences of the structural adjustment programs that followed. * Reflect on emerging trends regarding the theory and practice of global economic development. Perspectives in Action: Globalization: Winners and Losers 1. Discuss U.S. protectionism and its contradiction to free market trade ideology, according to Craig Calhoun. 2. Why are the "playing fields" of globalization naturally unequal? Provide examples. 3. Calhoun argues that some nations need globalization more than others. Speculate and build from his examples. The Sardar Sarovar dam straddles the Narmada River in the drought-prone state of Gujarat, India. It is among the largest of thousands of dams that dot the Indian landscape, and it is also among the most controversial. Begun in 1964 and largely completed by 2008, the dam has prompted mass protests, hunger strikes, lawsuits, legislative battles, and international scrutiny. Two award-winning documentaries describe the struggles of villagers displaced by the dam, and the leader of the anti-dam movement won the Right Livelihood Award (sometimes known as the "alternative Nobel Peace Prize") in 1989. The Indian Supreme Court decided the dam's fate when, in 2000, it ruled that Sardar Sarovar's sizeable benefits—drinking and irrigation water, cheap electricity, and thousands of jobs—outweighed the costs to the 70,000 people that would be relocated in advance of the dam's floodwaters. Yet the dam remains a political lightening rod. Some see it, and other development projects like it, as essential to the economic and social progress of India. Others despise the dam, arguing that any development project that disrupts the lives of tens of thousands of Indians cannot count as "good development," no matter how impressive the final tally of overall benefits might be. India isn't a special case. Large dams are an important part of the economic prosperity puzzle for many former colonies hoping to develop their economies. They light cities, help farmers grow cheap food, and spur economic growth. They're international in that they're typically built with loans from the global community. Jawaharlal Nehru (1889– 1964), India's first prime minister, called them "the new temples of India" and, like the leaders of other newly independent former colonies, he vigorously promoted their construction. When Nehru took office in 1947, there were fewer than 300 large dams in his country. By 1999 this number had grown to more than 4,000, with dozens more on the drawing board. Although India ranks just behind the United States and China in the number of large dams, it and China are not alone in their focus on dams. Between 1950 and 2000, two large dams a day were built, on average, around the world, with a majority sited in developing countries seeking greater prosperity (Wood, 2007). 2.1 Global Economic Development: Context and Definitions View of slums bordering high rise buildings in Rio de Janeiro, Brazil Robson Fernandjes/AGESTA/Associated Press The gap between the rich and the poor is evident in Rio de Janeiro, Brazil, where shantytowns border high-rise properties owned by wealthy citizens. Like many ambitious projects and programs meant to increase national prosperity, large dams help some and hurt others. Urban centers, industrial areas, and farmers with irrigation capacity are the big winners. The major losers are those living upstream—often poor farmers and fishermen—who evacuate ahead of flood waters. The United Nations World Commission on Dams estimates that 40 to 80 million people have been forced by their governments to relocate, typically far from their original homes, with little or no compensation (Richter et al., 2010). People living downstream are also negatively affected. Changes in river flows from large dams often disrupt aquatic ecosystems and prevent the beneficial flooding of farmland, which reduce fish catch and crop yields. A recent study led by hydrologist Brian Richter of the Nature Conservancy conservatively estimates that "472 million river-dependent people living downstream of large dams" have suffered as a result (Richter et al., 2010). This tendency for large development projects to distribute the costs and benefits of economic prosperity unequally highlights a paradox of many economic development efforts. In order to generate more economic growth and material benefits for their people, governments of developing countries often must embrace strategies that potentially increase the gap between rich and poor. To address poverty, in other words, may mean having to accept greater inequality, at least in the short run. Economic development initiatives are thus sometimes controversial, especially when the losers from development projects protest—something, for example, that is becoming increasingly common with large dams. Such controversies, and the larger questions they raise about the "fairest" or "best" ways of creating and spreading prosperity, make the study of global economic development both necessary and important. Large dams are but one instance of a host of planned investments, policies, and projects that together seek to improve the quality of life for billions of people living under conditions of hardship or deprivation. Taken together, these efforts are sometimes called global economic development. Practitioners of global economic development concentrate their efforts on what is alternatively called "the poor countries of the world," "the "periphery," the "Third World," the "global South," or "the developing world." These terms generally refer to the low- and middle-income countries that comprise 83.5% of the world's population (World Bank, 2011). Because so much of the world is low- or middle-income, economic development is global in scope. The Need for Global Economic Development The idea of global economic development as an intentional and planned activity is relatively new. It dates back to the end of World War II and a period of decolonialization, in which most of the European colonies, taking advantage of the post-war chaos, achieved political independence. India, the "crown jewel" of Britain's colonial empire, is perhaps the most notable example. Its independence in 1947 served notice that the days of colonial empire were ending. From the mid-1940s through the 1960s, decolonization swept the world, leaving in its wake a new map of developed, or rich countries and developing, or poorer, post-colonial countries. Damaged electrical wiring in India iStockphoto/Thinkstock Gaining independence did not solve all of the economic challenges faced by post-colonial countries. For example, developing regions continued to struggle with unreliable power, phone, and telegraph lines. As important as political independence was to these former colonies, it alone couldn't address underlying economic challenges created by the long period of colonial rule. By 1960, for example, most industrial capacity and employment were still concentrated in the United States, Europe, and the Soviet Union. By contrast, the economies of most of the developing world continued to focus on the production of raw materials such as fish, timber, mineral products, or agricultural crops (International Labor Organization, 1977). Many countries specialized in just one or two products, just as they did when they were colonies. While specialization in raw materials has some advantages, in general it made the economies of these countries especially vulnerable to sudden changes in price or demand for the few products they produced. Specialization also encouraged countries to increase the production of their products as a way of generating additional revenue. But when all countries did this, the net effect was often to depress the world price of their exports, a consequence of supply exceeding demand. From 1946 to 1966, for example, the real price of food exports like sugar or coffee fell on average more than 30%; the drop in non-food agricultural exports fell more than 50% (Grill and Yang, 1988; International Monetary Fund, 1994). This interplay of overproduction and falling prices made it challenging for most developing countries to build diverse, stable economies. Independence also did little to change the industrial infrastructure of developing countries, which was generally antiquated or incomplete. Electric power grids, for example, were notoriously unreliable with electricity service typically limited to selected portions of favored cities. The same was often true for communication technologies like phone and telegraph lines. Roads within a country frequently radiated from outlying areas to a main port city instead of connecting villages and small towns with one another. This pattern made sense for colonial powers looking to move minerals or crops from the countryside onto ships bound for Europe. It did little, though, to facilitate internal trade and integration once the colonial powers left. The gauge (or width) of railway lines between countries was often mismatched, the result of neighboring countries being governed by competing European powers with different railway standards. Regional trade was thus stymied. Finally, the engineering expertise necessary to maintain the power plants, fix the railways, and plan the roads was largely concentrated in the European colonialists themselves. At independence most of these technical experts left, taking their critical skills with them. Cold War Overtones and Global Economic Development If the newly independent countries of the world were to overcome these and other obstacles to building their economies, they would need help. They lacked funds to invest in major development projects. Their raw-material, export-oriented economies weren't capable of generating enough wealth fast enough to make a difference. What wealth was generated, moreover, was often offset by population growth. By the early 1950s, the United States and Europe, and the leaders of many developing countries, concluded that loans, grants, technical assistance, and special trading arrangements facilitated by the United States and Europe were necessary to move the developed world quickly toward prosperity. Global economic development as a field of study, a process, and a profession was born. President John F. Kennedy giving his inaugural address Joseph Schershel/Time & Life Pictures/Getty Images President John F. Kennedy raised concerns related to communism, as well as showed support for developing countries during his inaugural address given on January 20, 1961. The United States and Europe were willing to help for several reasons. One was humanitarian. Some developing countries were finding it difficult to feed their people. Average annual incomes in many regions were stagnant or dropping, producing misery and instability. It was difficult to turn a blind eye to these conditions. Another reason was economic. The developing world was a source of raw materials and a potential customer for everything from surplus farm products, to concrete for dams, to weapons. If their economies were to grow, businesses in the United States and Europe would have new customers. A third reason, though, was rooted in global politics. The 1950s were a time of increasing hostility and global competition between the United States and Western Europe on one side, and the Soviet Union and Eastern Europe on the other. This Cold War spilled over into competition for the allegiance of the newly independent developing countries. Many of these new countries leaned toward greater government control of the economy in ways that sometimes mirrored socialism in the Soviet Union. This alarmed the United States and Europe, which feared that economic similarities between the decolonized world and the Soviet Union would lead to a global political alliance among them as well. Global economic development thus became a tool for challenging the Soviet Union's influence in the developing world. These Cold War fears were on display in the 1950s and early 1960s. Consider, for example, President Kennedy's (1961) inaugural address, which combines humanitarianism with concerns about communism: To those new states whom we welcome to the ranks of the free, we pledge our word that one form of colonial control shall not have passed away merely to be replaced by a far more iron tyranny. We shall not always expect to find them supporting our view. But we shall always hope to find them strongly supporting their own freedom. . . . To those peoples in huts and villages of half the globe struggling to break the bonds of mass misery, we pledge our best efforts to help them help themselves, for whatever period is required—not because the communists may be doing it, not because we seek their votes, but because it is right. If a free society cannot help the many who are poor, it cannot save the few that are rich. To our sister republic south of our border, we offer a special pledge—to convert our good words into good deeds—to assist free men and free governments in casting off the chains of poverty. Global Economic Development: Overlapping Definitions Today, the notion of global economic development is largely free of these Cold War overtones. Instead, the primary emphasis of global economic development centers on improving the material well-being of developing countries, principally through strong economic growth. The World Bank, an intergovernmental organization that issues loans to developing countries for projects like large dams (see section 3.2), defines economic development as the "qualitative change and restructuring in a country's economy in connection with technological and social progress" (World Bank, 2004). For the World Bank, the main indicator of economic development is the increasing average income per person in a country, which reflects "an increase in economic productivity and average material wellbeing of a country's population" (World Bank, 2004). Under this definition, development projects like large dams would contribute to economic development if the monetary benefits they generate outweigh the cost of their construction and operation. When it comes to development, however, economic growth may not tell the whole story. Some development experts, such as Cambridge economist and Nobel Laureate Amartya Sen, argue that economic development must go beyond putting more money in the pockets of more people. Sen (1999, p. 150) writes that "In judging economic development, it is not adequate to look only at the growth of gross national product (GNP) or some other indicators of over-all economic expansion. We have to look also at the impact of democracy and political freedoms on the lives and capabilities of the citizens." The United Nations Development Program (UNDP) is the main development agency advancing this expanded view of economic development. For the UNDP, economic development cannot be just about creating more wealth. It must also "enlarge people's choices and enhance human capabilities (the range of things people can be and do) and freedoms, enabling them to live a long and healthy life, have access to knowledge and a decent standard of living, and participate in the life of their community and decisions affecting their lives" (United Nations Development Program, n.d.). From this perspective, economic growth counts as "development" when it fosters security, freedom, and personal growth. Economic growth that fails to advance these outcomes should be treated with suspicion. UNDP and Professor Sen's view of large dams might therefore differ from that of the World Bank, especially if these dams consistently undermine the security and freedom of large groups of people. Economic growth, the creation of material prosperity, and the enlargement of personal options and freedom are all desirable ends. If they come at the cost of the integrity of environmental systems that provide food and fuel and clean water to people, however, they don't count as development. This, at least, is the view of another agency of the United Nations—the United Nations Environment Program (UNEP)—which argues that true economic development must be environmentally sustainable. New agricultural technologies, for example, that increase farmers' crop yields while building up the soil would count as economic development in UNEP's eyes. In contrast, the spread of agricultural technologies that boost agricultural output but cause soil erosion wouldn't count as economic development, even if these technologies increased economic prosperity and fostered human development in the short run. If asked to pass judgment over large dams, UNEP would look beyond the immediate economic benefits of dams and explore the long-term environmental implications of such projects. The World Bank, UNDP, and UNEP embody three overlapping definitions of global economic development. Like the discussion of globalization in Chapter 1 (1.1), it isn't necessary to choose one definition over another. It's sufficient to recognize that different actors will use different definitions of economic development in different situations. It's also important to note that the three views share a commitment to enhancing human prosperity, though with different understandings of how to promote and measure this prosperity. The narrow economic definition of the World Bank understands that greater material wealth can bring greater comfort and security, especially for the poor. The broader focus on human development by UNDP reminds us that economic growth cannot be the goal of development per se, since some approaches to increasing economic output might limit freedom or undermine personal security. Some forms of indentured servitude, for example, might drive economic growth—but from UNDP's perspective, they'd never count as economic development. Finally, the ecological perspective of UNEP underscores the wisdom of economic growth that enhances, rather than degrades, the vitality of environmental systems that provide food, fuel, water, and other resources for the economy. John F. Kennedy's Inaugural Address On January 20, 1961, United States President John F. Kennedy was sworn into office. In this famous inaugural address Kennedy urges citizens to participate in public service and "ask not what your country can do for you—ask what you can do for your country." Critical Thinking Questions 1. What are the connections that President Kennedy makes throughout his speech concerning globalization and the abolishment of all human poverty, the "casting off the chains?" 2. Why is the liberty Kennedy describes global? What role does he see the United States having in rejecting one form of colonialism over another? 3. How does Kennedy approach the worldwide tensions mounting in response to global weaponry innovation? Are these innovations tied to economic power? 2.2 Global Challenges: Poverty and Inequality Practitioners of global economic development seek to reduce poverty and establish acceptable levels of inequality in order to enhance the quality of life in the developing world. This section provides a brief overview of key indicators for these concepts, together with some sense of the progress made and work yet to be done. Global Poverty Poverty is a term with multiple meanings. For some economists, poverty is about scarcity, about not having enough food to eat, clothes to wear, water to drink, or a place to live. Economists often speak of a "poverty line" expressed as some level of income. Those with income below this level cannot afford to purchase goods and services necessary for an acceptable quality of life in their country or region. They are thus deemed to be "in poverty." In the United States in 2011, for example, the government says that a family of four living on less than $22,350 a year is living in poverty. More than 15% of Americans fell into this category in 2010. Inhabitants of a slum in India. © Sebastian Wasek/agefotostock/SuperStock Those living in absolute poverty face life-threatening hunger and disease. When focusing on the developing world, economists often speak of absolute poverty, which is defined as a level of consumption insufficient to meet basic human needs. Poverty at this level is life threatening. It is characterized by chronic hunger and disease. People in absolute poverty usually have little power over their own lives. Their desperate need for food and other resources makes them easy to exploit by others. Their physical weakness can slow or prevent their climb out of poverty. They are often caught in a cycle of hunger, weakness, and exploitation from which they cannot escape on their own. Development sociologist Robert Chambers (1983) calls this the "deprivation trap," which flows from five factors: absolute poverty, physical weakness, isolation, vulnerability, and powerlessness. Simply focusing on raising incomes, says Chambers, may not always be the most effective way of lifting people out of this more complicated understanding of absolute poverty. Another wrinkle on the concept of poverty is what development economists and social psychologists call relative poverty. People above the prevailing poverty line may still feel impoverished if their level of consumption doesn't seem to measure up to others. The familiar idea of "keeping up with the Joneses" is all about relative poverty: We may feel fine with the house we live in or the car we drive until someone moves in across the street with material goods much nicer than our own. This notion explains how people in both developed and developing countries can sometimes feel poorer even as they become materially better off. It all depends, observes Cornell economist Robert Frank (2010), on who one is looking to as the standard for an acceptable level of consumption. Feelings of relative poverty appear to be strongest when inequality is pronounced and obvious. Under these conditions, it is easy to see other people living better than you, which in turn can generate unhappiness and a sense of deprivation. Measuring Poverty Through Purchasing Power Parity (PPP) These overlapping ideas about poverty make it difficult to conclusively measure the level of poverty in the developing world over time. Economists try, however, by using the concept of purchasing power parity (PPP). One PPP dollar is equal to a basket full of products that could be purchased in the United States with a dollar. Because the dollar can buy so much more in poor countries than in rich nations, estimates of poverty that use dollar figures without the PPP adjustment tend to exaggerate the extent of poverty. One U.S. dollar in India, for example, can take you some distance in a cab, but that same dollar won't even get you a glance from a New York City taxi driver. PPP allows economists to compare the incomes of people in different nations by adjusting for differences in the buying power of the currencies from each country (see Table 2.1). For development specialists, a key question is this: How many dollars' worth of U.S. goods and services a day does it take to avoid absolute poverty? Controversy swirls around this question, for deciding where to draw the line determines how dire global poverty appears to be, and how aggressive the global community should be in addressing it. Recognizing this problem, development specialists employ two absolute-poverty lines. One is $2 PPP per person per day. At this level, one is in absolute poverty if they consume goods and services that would cost $2/day or less in the United States. Other development experts set the poverty line at $1.25 PPP/day per person. The more generous poverty line of $2 PPP/day suggests that almost two billion of the world's seven billion people live in absolute poverty. A poverty line of $1.25 PPP/day—surely the deepest form of poverty on the planet—points to 1.4 billion women, children, and men in dire straits. Table 2.1: Global poverty: People living on less than $1.25 purchasing power parity per day (2005 ppp) 1990 1999 2005 Number of people at $1.25 PPP or below (in millions, 2005) Developing Regions 45.5 36.1 26.9 1,410 Northern Africa 4.5 4.4 2.6 5 Sub-Saharan Africa 57.5 58.3 50.9 383 Latin America and the Caribbean 11.3 10.9 8.2 46 Caribbean 28.8 25.4 25.8 10 Latin America 10.5 10.2 7.4 38 East Asia (China = 85% of population) 60.1 35.6 15.9 244 South Asia 49.5 42.2 38.6 601 South Asia excluding India 44.6 35.3 30.7 139 Southeastern Asia 39.2 35.3 18.9 105 Western Asia 2.2 4.1 5.8 12 Caucasus and Central Asia 6.3 22.3 19.2 14 Source: United Nations. (2011). Statistical annex: Millennium development goals, targets and indicators, 2011, at http://mdgs. un.org/unsd/mdg/Resources/Static/Data/2011%20Stat%20Annex.pdf Additional data compiled by author. For some, these are shocking numbers. There are, however, some encouraging trends. Figure 2.1, for example, shows that the most extreme form of poverty (at $1.25 PPP/day) dropped from about 40% of the population of the poor world in 1993 to a bit more than 25% in 2005 (United Nations, 2011b). This decrease, moreover, occurred while the overall population of the developing world was increasing. Much of this poverty reduction came from accelerated economic growth in China and India, whose economies more than doubled in size between 1993 and 2005, creating additional jobs and other economic opportunities for the poor (World Bank, 2011). Latin America also experienced impressive economic growth, which helped reduce absolute poverty in that region. Foreign aid programs also had some effect, independent of economic growth, especially for those poor who, for want of skills or because of geographic isolation, were less likely to benefit from economic growth. Figure 2.1: Declining absolute poverty Line chart shows the decline of extreme poverty levels, from 40% in 1993 to about 25% in 2005. Maury Aaseng. Figure based on information from the World Bank (2010) accessed at http://data.worldbank.org/data-catalog/world-development-indicators/wdi-2010 Percentage of the population in poor countries at $1.25 a day (PPP) or less, 1993- 2005. As the worst of poverty has declined worldwide, the geographic distribution of absolute poverty has shifted. While Table 2.2 illustrates the progress on reducing absolute poverty, it also points to the stubbornness of such poverty in regions like Sub-Saharan Africa. Poor infrastructure, unstable governments, and endemic conflict have made international investors wary of investing their money into most of Africa. Declining world prices for African raw materials and export crops have worsened the situation. Deep poverty also remains a major factor in South Asia (principally India), and little headway in reducing the proportion of the severely poor has been made in the Caribbean. Table 2.2: Global inequality % of global population (2009) $/person (2009 PPP) % of overall global income (2009) Low Income Countries 12.5% $1,199 0.7% Middle Income Countries 71% $6,357 27.4% High Income Countries 16.5% $36,473 71.9% World 100% (6.77 billion) $10,633 100% Source: The World Bank. (2011). The world development report 2011: Conflict, development, and security. Washington, DC: The World Bank, p. 345. Global Inequality Elderly African woman holding a new born baby Harry Hook/Stone/Getty Images Income inequality can have a serious impact on infant mortality and life expectancy. Inequality refers to the distribution of income and power. Inequality is frequently confused with poverty since the two so often coexist. For example, when visitors to the developing world see slums, or substandard housing, amidst opulent living conditions, they are struck by the stark contrast between ramshackle shacks and large mansions. They see the poverty (the slums) and the inequality (rich and poor living so close together) and confuse the two concepts. In fact, inequality can easily exist in the absence of poverty and is a concern in its own right. Consider the recent Occupy Wall Street (OWS) protests that began in the United States. Protesters objected to what they saw as an inappropriate concentration of wealth among the top 1% of Americans. Even if everyone in the United States now living below the poverty line were suddenly lifted out of poverty, OWS protesters would still have been troubled by persistent inequality. The extent of inequality among different nations becomes fully apparent when comparing the average income of low-, middle-, and high-income countries around the world. In 2008, for example, Switzerland boasted an average income per person of $64,327. In the United States it was $46,350, and in Spain it was $35,215. By contrast, average annual income in the poorest 20 countries was $755, or about 1% of the income of the top 15 richest nations (United Nations Development Program, 2010). As Table 2.1 illustrated, most of the world clusters around average annual incomes between $1,199 and $6,357 PPP per person. Only a relatively few on the planet (16.5%) enjoy income well beyond this cluster. Income inequality is realized in many ways: through differences in educational levels, health, longevity, and life opportunities. For example, in low-income countries, almost 12% of newborns die before the age of five. In middle-income countries the newborn death rate is 5%. In high-income countries, it is only 0.7%. A similar pattern follows for adult literacy: 63% in low-income countries, 91% in middle-income, in 98% high-income. The same progression holds true for life expectancy: 58 years for females in low-income countries, 71 years in middle-income countries, and 83 years in high-income countries (World Bank, 2011). Measuring Global Inequality Approximately two-thirds of measurable inequality on a global level stems from inequality between countries, with one-third originating from within countries (United Nations Development Program, 2005). Development specialists use two techniques to illuminate inequality within countries. One is the Gini index, which captures the degree of income inequality with zero signifying complete equality and 100 denoting complete inequality. Another approach is to compare the "income shares" in a country, which is the share of a country's total income that goes to different income groups within the country. Table 2.3 provides both kinds of data for selected high-, middle-, and low-income countries. These data show the portion of the overall income that goes to the poorest 10% and the richest 10%, and then shows the comparison in a ratio. For example, in the United States, which has the most unequal distribution of income of any industrialized country, the poorest 10% of the population receives 1.9% of all income in a given year, while the richest 10% receive 28.5% of all income in that same year. When compared, the richest 10% receive 15.9 times the income of the bottom 10% (United Nations Development Program, 2009). Table 2.3: Measuring global income: A sampling of inequality from around the world Poorest 10% Richest 10% Richest to Poorest Gini Index High Income Norway 3.9 23.4 6.1 25.8 Canada 2.6 24.8 9.4 32.6 United States 1.9 29.9 15.9 40.8 United Kingdom 2.1 28.5 13.8 36.0 Middle Income Chile 1.6 41.7 26.2 52.0 Mexico 1.8 37.9 21.0 48.1 Egypt 3.9 27.6 7.2 32.1 Turkey 1.9 33.2 17.4 43.2 Low Income South Africa 1.3 44.9 35.1 57.8 Viet Nam 3.1 29.8 9.7 37.8 China 2.4 31.4 13.2 41.5 India 3.6 31.1 8.6 36.8 Mozambique 2.1 39.2 18.5 47.1 Source: United Nations Development Program. (2009). Human development report 2009: Overcoming barriers: Human mobility and development. New York: Palgrave MacMillan, pp. 195–197. Indicators of Excessive Inequality Most experts acknowledge that some inequality is welcome and necessary. It rewards effort, talent, and innovation. Entrepreneurs with exciting new products should be allowed to profit from their ingenuity, they argue, as should students who study exceedingly hard and go on to become doctors or other valuable professionals. How do we know, then, when there is too much inequality? Development experts underscore six indicators of excessive inequality (United Nations Development Program, 2005). None is as exact as, say, a global poverty line of $1.25 (PPP)/ person per day, but taken together they offer clues for answering the question of "how much inequality is too much?" 1. A country may face too much inequality when that inequality interferes with economic growth. If people at the bottom of a society are unable to borrow to start businesses or invest in their education, for example, the overall vitality of the economy suffers. 2. When the concentration of income among the richest undermines government programs that will make a country stronger, there may be too much inequality. If rich people advance policies that subsidize industries that benefit them or support large landowners, for example, this can erode economic growth and the financial standing of the government. 3. There may be too much inequality when beneficial government policies are rejected because of inequality. Carbon taxes on gasoline in the United States or small charges on water consumption in the developing world make economic sense under many circumstances. But these ideas are quickly rejected because inequality makes it difficult for some segments of the population to bear these additional costs, as small as they might be. 4. When there is erosion of a mutual sense of trust and civic responsibility in a society, this could be the result of too much inequality. When the rich wall themselves off into gated communities, or when shared participation in arenas of community life like parks, local sports leagues, or school governance declines because of large economic gaps between people, the ability of communities to work together to solve problems suffers. 5. Too much inequality can drive spiraling consumerism and debt, both of which undermine the long-term economic health of a country. Pronounced inequality heightens feelings of relative poverty as people inevitably compare themselves to those above them, and seek to compensate through additional, often unsustainable, consumption. This dynamic occurs within countries and especially between rich and poor countries. 6. When a society's tolerance for inequality hardens, that too may be a sign of too much inequality. Pronounced inequality over time produces the sense that such inequality is natural and normal. If inequality matters for any of the first five reasons listed here, then it matters too if it creates a sense that it cannot, or should not, be challenged or changed. Inequality is a double-edged sword. Most conventional approaches to economic development increase inequality in the short run. They do this in many ways: by giving subsidies, tax breaks, and other incentives to the well-off to encourage them to build new factories or in other ways contribute to the economy; by investing in large construction projects (roads, dams, factories, ports) that tend to benefit the more affluent and powerful; and by shifting the tax burden to the poor to fund these initiatives. The hope is that these measures will lead to an explosion of economic growth, with new jobs for the poor that will then reduce inequality and misery. But the danger is by now probably clear. Too much inequality, or inequality tolerated for too long, can undermine the conditions necessary for sustained economic growth and an enduring sense of civic trust and cooperation necessary for solving national problems. Call for New Approaches to Global Economic Development Programs of global economic development have succeeded in reducing absolute poverty. They have been less successful in attacking inequality. Indeed, between 1990 and 2005, inequality increased in about two-thirds of countries of the world. At the same time, the gap between the top and bottom percent widened in about 70% of all countries (International Labor Organization, 2008). Today, the nearby "champagne glass" diagram of global inequality (see Figure 2.2), based on data from the middle of the last decade, actually understates the current level of inequality. Technological change and expanding world trade have boosted the economic performance of large developing nations like India and China, but these factors have benefited those in the highest income brackets. Global recession and reductions in government programs that benefit the middle class and poor have recently exacerbated this trend. Meanwhile, rising food and energy prices have hit the poor the hardest, and extreme weather events in many parts of the world have compounded their plight—unprecedented floods in Pakistan, weakening monsoons in India, and record-breaking drought in Africa (Pachauri, 2008). In many areas of the world, especially Africa, the plight of the poor appears to be worsening. Figure 2.2: Global inequality Diagram shows the distribution of income among the world population, which is divided into five separate population brackets. The diagram has the shape of a champagne glass, and the top population bracket holds 82% of the income and the two bottom population brackets hold about 3.3 percent of the total world income. Maury Aaseng. Figure based on information from Conley, D. (2008) You may ask yourself: An introduction to thinking like a sociologist. New York: W.W. Norton and Company, p. 392. Distribution of global income in 2006. This distribution has become more unequal since 2006. As a result, some development experts are now calling for new approaches to global economic development. William Easterly, a former development aid administrator and now professor of economics at New York University, has argued for development strategies that focus less on large projects and more on building strong democracy and well-functioning markets in the developing world. Without this basis, says Easterly (2007), additional wealth generated by global economic development will continue to flow to the well-off. Although Columbia professor and development economist Joseph Sachs (2006) has more faith in large development projects, he too agrees with Easterly that far more effort must be devoted to helping the poor to hold their political and business leaders accountable. More accountability, says Sachs, will lead to development programs that decrease inequality and build the foundation for long-term democracy and economic growth. Other experts raise similar concerns, especially as it appears that many of the poorest in the world have been largely bypassed by the last decade of economic growth and poverty alleviation (Collier, 2008). Together, these experts point to needed changes in how we might best think about measuring and advancing development. Before considering their claims in more detail, it is important to better understand how global economic development has been pursued. How Economic Inequality Harms Societies In this TED Talk, recorded at TED Global in 2011, Richard Wilkinson charts the hard data on economic inequality. Critical Thinking Questions 1. What does Richard Wilkinson mean when he states, "The average well-being of our societies is not dependent any longer on national income and economic growth?" What does he claim matters more? Explain. 2. What are some of the common issues that plague unequal societies, according to Wilkinson? 3. What is the human cost of unequal societies? Discuss Wilkinson's expressions of social dysfunction. 2.3 Development in Theory and Practice Over the past 60 years, ideas about how to best pursue global economic development have evolved in light of successes, disappointments, and surprises. Along the way, architects of the dominant approach to development have had to reexamine their assumptions and revisit the purpose and meaning of development. Modernization Theory Almost all economic development over the past 60 years has been guided and framed by a set of ideas and assumptions known as modernization theory. This theory springs from mostly American economists who, in the 1940s, saw the developing world mired in economic stagnation and stifling tradition (Rostow, 1971; Meier and Seers, 1985). They sought ways of initiating an "economic takeoff" in these countries that would transform poor nondemocratic countries into high-consumption, democratic societies much like the United States. To make this happen, these theorists imagined a process of first concentrating wealth in the hands of a select business class that would invest in factories, create jobs, and be richly rewarded in the process. Over time, as the economy grew and wealth accumulated, a small but growing middle class would emerge—one that was literate, educated, increasingly urban, and politically active. These development economists hoped that this middle class would gradually press their governments for the redistribution of wealth and other democratic reforms. These changes would reduce inequality, further expand the middle class, and allow democracy to flourish. The end result, as Figure 2.3 illustrates, would be economic prosperity, low inequality, a vibrant middle class, and strong democratic institutions—in other words, a "modern" society. These modernization theorists understood themselves as neutral and scientific, but they had their biases and blind spots, many of which mirrored the sentiments of the day. As a group, they had little practical experience in the countries they were writing about. They were more versed in European affairs. Many of them had helped, in fact, with programs to reconstruct Europe after the war. They quickly adopted, then, the colonial view that most people in the developing world were backward, uneducated, superstitious, and lazy. They tended to assume that life in agricultural villages, where most people lived, was stagnant and unchanging, with little entrepreneurial energy. These theorists sometimes highlighted religion as a major cause of this stagnation. They saw Asian religions like Hinduism and Buddhism as fostering a lack of initiative, for example. In truth, village life was typically dynamic and vital, as poor people drew on their considerable agricultural and mechanical skills to make a living under colonial rule. Modernization theorists rarely recognized this side of village life, however. They thus pressed for a "spark" to break the alleged stagnation and transform backward "traditional" societies into vibrant modern ones. Figure 2.3: The path to modernization Line chart illustrates the evolution of societies from a traditional society to a modern democratic society. The chart illustrates how early societies are highly unequal and undemocratic, and modern societies show high levels of democracy, low levels of inequality, and a large middle class. Maury Aaseng Under modernization theory, policymakers must initially increase inequality to achieve a vibrant middle class and democratic institutions. Inequality has not fallen as rapidly as modernization theory expected. Modernization theory quickly captured the thinking of policymakers and development elites in the developed and developing world. One reason was that it promised the elites of the developing world a straightforward, linear, and rapid process for catching up with the industrial world whose political control they had just escaped. Many of these elites had been educated in the United States or Europe where this linear view of progress was commonly taught. Another reason is this model had worked, albeit more slowly, in the United States, which transformed itself from a largely agrarian society to an industrial, urban one. A final reason was that new institutions of economic development created after World War II (such as the World Bank) were promoting loans and grants in support of this approach to development. Modernization in Two Steps Modernization theorists formulated a two-step process of transition, each with its own set of assumptions and requirements. In the first step, the government would draw resources from the bulk of the population living in the countryside (often through taxation) and focus them on a few urban areas targeted for industrialization. These resources, together with loans or grants from the international community, would be invested in the infrastructure of any growing economy: good roads, power plants, electricity lines, ports, and the like. The government would also provide resources to a small group of indigenous industrialists to encourage them to invest in new factories and other enterprises. Often the government would engage in its own investment, or partner with these industrialists, to begin rebuilding the manufacturing base of the economy. Construction workers on scaffolding. George Marks/Hulton Archive/Getty Images Modernization theorists view improved infrastructure and job creation as paths to increased wealth, and eventually, to a healthy economy. This first step was meant to establish new industrial capacity and new jobs for local workers. And these jobs, the theorists hoped, would be relatively good jobs with decent wages. These workers would spend some of the wages on products being manufactured in their country, creating additional jobs for others. With more workers in the system with more money, the government and business would begin to turn a profit. This money would then be reinvested into additional infrastructure and more factories, leading to more growth, more workers, more money in the system, and the beginnings of economic takeoff. In step two, modernization theorists turned their attention to the vast majority of populations farming in small villages far from the urban center. Modernization theorists imagined that increasingly well-off workers in the urban center would spend more of their money on food, thus increasing the demand (and price) for food from farmers. Farmers, with more money in their pockets, would begin purchasing goods produced in the urban center, thus accelerating even more the chain reaction of economic take-off in the first step of this process. But in this second step, farmers would also begin to demand tractors and harvesters that would allow them to farm more land with less labor. The urban industrial centers would respond by building more factories and employing more workers. These workers would then buy more food. This self-reinforcing process of production, employment, and growing consumer demand would produce a full-fledged, self-sustaining economic takeoff. As these two steps unfolded, modernization theorists expected, as was the case in the United States, a large population shift from farms to cities. They also anticipated rising education levels in the cities, and rising affluence among all. Proponents of this two-step transition acknowledged that inequality would increase, perhaps profoundly, in the first step of modernization. But they saw this as the only way of breaking what they perceived to be stagnation and backwardness in the countryside. They also accepted the need for the government to become directly involved in owning factories and regulating which industries would have access to scarce electricity and other resources. But such government intervention was thought to be a temporary condition that would fade once economic growth accelerated. Although it went against their support for free trade, the modernization theorists also accepted the need for developing nations to shelter their newly formed industries with heavy taxes on imports that might compete with their fledgling industries. These taxes on imports, called tariffs, protect new and not yet fully efficient industries from competition by more mature economies until they can expand and compete on their own. Finally, the end goal of modernization was not just economic prosperity but also democratic governance. Modernization theorists thus expected that the United States and other Western democracies would help a rising middle class peacefully challenge its leaders to embrace democratic reforms and some redistribution of income. Dependency Theory Portrait of Mao Zedong Courtesy Everett Collection Under the leadership of Mao Zedong, China embraced dependency theory, isolating itself from the global economy until the 1970s. Modernization theory had its detractors. Chief among them were advocates of the dependency theory of development. Dependency theory, the product of Latin American scholars, argues that the developing and developed world exist within a world system that systematically favors the developed countries. Indeed, dependency theory claims that the developed world enjoys a privileged economic position precisely because of the cheap resources it imports from developing nations. Dependency theorists point to several ways in which the developing world supports the developed. One way is by sending its smartest professionals and best students to the developed world to live and work, what some call "brain drain." Another is when the richest in the developing world choose to invest their money in the developed world, which supports the further economic development of already affluent areas. A third factor is the constant flow of cheap raw materials from the developing work to the developed—raw materials whose price tends to decline over time. The sum result, conclude dependency theorists, is accelerated economic growth in the developed countries and slow or no net economic growth in the developing world. These ideas resonated with many in the developing world. In practice, however, dependency theory had little impact on the direction of global development efforts. It seemed to suggest that the developing world should isolate itself from the developed world. This option struck most leaders of the newly independent countries as unrealistic. The only exception was China, which, after its 1949 revolution led by Mao Zedong (1893–1976), largely withdrew from the global economy until the 1970s. To distance themselves economically from the developing world, some developing countries sought to replace their imports of manufactured products with similar products produced domestically. This strategy of import substitution, attempted by many Latin American countries, never took root. The costs of replacing manufactured imports proved to be too high, and the subsidies necessary to support these import substitution industries frequently strained government budgets. Development in Practice The 1950s was the first full decade of planned economic development. During this decade, modernization theory reigned supreme. Even though most of the population of the poor countries lived in rural areas, where the most severe poverty existed, the vast majority of development efforts focused on a few urban-industrial cores (UICs), and in particular on the infrastructure meant to service new industry. In many countries, the electric power industry received the bulk of domestic and international funds. In India, for example, almost three-quarters of investment went into large dams, transmission lines, and other power plants, largely for electricity to the urban elite and new industrial centers. The poor were intentionally left out of the equation. Many, in fact, saw their fortunes worsen as farmland was flooded by dams, common forestland was claimed for mining, and taxes were raised on the poor to fund more development projects in the cities (Lipton, 1977). This pattern of economic development continued into the 1960s, though with some unexpected results. As the UICs expanded, people in search of work moved to the cities. City slums began to expand. Those who found employment in the new industries did not, however, typically receive a good wage, thus violating the first assumption of modernization theory. In the United States, which was the model for modernization theorists, wages were buoyed by emerging trade unions and other forms of worker activism. In the developing world, worker activism was typically met with strong, negative responses by government and industry alike. The flood of migrants into the cities also created a pool of workers willing to work for meager compensation. As wages stayed low and slums grew in the 1960s, food riots erupted in many cities of the developing world. Workers, unable to make enough money in their jobs to put food on the table, took to the streets. Alarmed governments responded by reducing the price of many basic foodstuffs through price controls. This quelled civil disturbance in the cities. But these "cheap food" policies made matters worse in the countryside. Price controls on food in the city meant that farmers received less for their products, not more—yet another violation of a central assumption of modernization theory—and thus were in no position to demand new agricultural tools from a their country's industrial sector. With little cash in their pocket, farmers were unable to innovate, and their crop yields stagnated. Many farmers were also forced to mortgage their land for loans to help them get by during years of poor harvest. When government-regulated food prices remained low, farmers were unable to repay these loans. They typically lost their land to the local moneylender and migrated to the city in search of work. Slums expanded rapidly, which forced policymakers in the developing world to devote even more resources to maintaining basic infrastructure in the cities. This further reduced the meager government support for rural development initiatives. Scholars of the day highlighted a growing "urban bias" to economic development, and noted that rural poverty and overall inequality was deepening and expanding throughout much of the developing world (Lipton, 1977). The Green Revolution Close up of farmer holding wheat grains. Cultura/Henry Arden/Getty Images The Green Revolution resulted in sharp increases in the production of wheat. Though consumers benefited from lower prices and greater access to food, it hurt poor people whose land was converted to commercial crop production. In the late 1960s, recurring food riots, the threat of famine, and economic stagnation in the countryside alarmed development planners. They redoubled their focus on the UICs. More money went into large projects and electric power. The original plan had not changed. But the agricultural sector was not completely ignored. With the help of the Ford Foundation and, later, the World Bank, agricultural scientists and development planners launched the Green Revolution, which greatly increased crop yields in India, Pakistan, and Latin America. The Green Revolution included several components: new varieties of rice and wheat that matured more quickly and produced more edible product; manufactured fertilizers tailored to these new crops; pesticides to limit loss of food to pests; irrigation for these drought intolerant plants; and tractors and other farm technologies to make it possible to farm larger areas. During the next 35 years, this revolution led to a doubling of food production, with a 6.8-fold increase in nitrogen fertilization, a 3.5-fold increase in phosphorous fertilization, a 1.7-fold increase in the amount of irrigated land, but only a 1.1-fold increase in land under cultivation (Tilman, 1999). Like large dams, the Green Revolution benefitted some and hurt others. Farmers with enough land and financial resources to adopt the Green Revolution package tended to do well, at least for a while, but farmers with small land holdings or meager financial reserves missed most of the direct benefits. The Green Revolution led to a striking increase in the production of rice and wheat, which benefitted urban consumers and consumers abroad to whom some of this food was exported. But as land previously devoted to local food crops for the poor was diverted to Green Revolution production, shortages of local foodstuffs sometimes arose, and a general increase in the price of these products was common. The poor often ended up paying more for food as a result. Additionally, farmers too small to take advantage of the technology were often forced to sell their land and move to the cities. The Green Revolution helped stave off famine in Asia and Latin America, but it proved largely ineffective in reversing rural poverty, growing inequality, and low urban wages. A Time of Reevaluation Despite some successes, by the early 1970s it was becoming clear that modernization theory was not working as its architects imagined. What little economic growth the poor world was enjoying was offset by population growth, which was in part a product of the vulnerability and poverty people were experiencing from modernization policies. Dispossessed farmers were migrating to the cities, and the slums were growing. For nations that invested in the Green Revolution, food production was up but so were food exports, expensive fertilizer imports, and often, hunger at home. Countries that missed the Green Revolution often were in worse shape. Governments by and large still controlled many investment decisions, which discouraged additional investment by domestic entrepreneurs and transnational corporations. Many industries, moreover, remained protected by high tariffs; no matter how poorly made or inefficient their products, these industries were guaranteed a market in their own country as the government continued to levy high taxes on competing imports. With little innovation, the poor were left to buy expensive, low-quality domestic-made products. Meanwhile, a small, slowly growing middle class was typically rebuffed whenever it sought to force even mild democratic reforms or redistribution of income. Travelers in the developing world during this period would sometimes hear older residents reminisce about the "better days" of colonial rule. Development experts began to rethink the earlier assumptions of modernization theory. Growing inequality, initially so important to the plan to stimulate economic growth, now appeared (in ways noted earlier in this chapter) to be interfering with such growth. Poor people with skills that could contribute to a growing economy were being marginalized. The buying power of the poor that could drive economic growth remained underdeveloped. In many countries, a sense of social trust and cooperation was eroding. As a result, major development organizations like the World Bank began to call for growth with redistribution. Proposals and plans surfaced for "basic needs" development projects to provide the poor with clean water, essential health care, and minimal literacy, all of which had been sidelined during the modernization focus on a few urban-industrial cores (Hoadley, 1981). Some scholars argued for redirecting resources to smaller cities to spread the pressure of rural migration (Richardson, 1981). There was even a resurgence of interest in new kinds of "appropriate technologies" that could drive small-scale industrial development in remote villages, ranging from windmills to small-scale looms to solar cookers and collectors (Schumacher, 1975). Group of 77 At the same time that development agencies and experts were reevaluating modernization theory, many leaders of the developing world were collaborating on new strategies of their own. The Group of 77, a coalition of developing countries formed in 1964, began vigorously promoting a "New International Economic Order," or NIEO. The Group of 77 acknowledged the profound inequality in their own countries and took some responsibility for it. But it argued that this internal inequality, and deepening poverty as well, was principally due to global economic patterns that locked the developing world into providing cheap raw materials to the developed countries. In many ways, they argued, the ground rules of colonialism had not changed. The poor world was still largely exporting cheap raw materials and its best talent to the rich world, and it was importing manufactured products whose relative prices continued to rise. Yes, the poor world was beginning to reindustrialize, but the largest markets for its products—the rich of the world—were generally closed to them. These conditions, argued the Group of 77, had to change (Iada, 1988). Country Case Study: Bangladesh and the Grameen Bank Mohammand Yunus giving a speech. Associated Press/Mario Fernandes Bangladeshi economist and founder of the Grameen Bank, Muhammad Yunus received the 2006 Nobel Prize for Economics. Bangladesh is a country of dubious distinction. It is one of the most densely populated countries on the planet, one of the poorest with an average per person income in 2009 of $1,580/year, and one of the most vulnerable to the whims of nature. The remarkably fertile land where the Ganges River meets the sea is superb for agriculture, but the near-sea-level elevation of this area makes it, and the hundreds of thousands who live in or near it, vulnerable to sometimes catastrophic storms and flooding. Bangladesh is also the birthplace of Mohammand Yunus (1940–), the 2006 Nobel Peace Prize winner and founder of the Grameen Bank, the vehicle for "micro-credit" for the poor of his country. Yunus laid the foundation for the bank in 1976, when he lent a nearby village woman $27 so that she might buy her own furniture-making supplies instead of paying a middleman exorbitant rates. From those humble beginnings came the Grameen (or "Peoples") Bank in Bangladesh, which by mid-2007 had lent more than $6 billion to over 7 million villagers. The loans go disproportionately to women, who typically use the money to begin or expand small village enterprises and care for their families. Other microcredit initiatives have followed in Grameen's footsteps including Kiva.org, which makes it possible for anyone with an Internet connection and PayPal account or credit card to make their own microloan to a poor person looking to better his or her life. As we reflect in this chapter on the history and practice of economic development, Bangladesh and the Grameen Bank offer us four lessons. The first and most important one, underscored by Frances and Anna Lappe (Lappe and Lappe, 2003), is that the most dynamic solutions to poverty and inequality often come from the developing world. Mainstream thinking about economic development often and unwittingly imagines the poor as passive, unimaginative victims waiting to be saved by elites, experts, and technology. This view, which has informed so much of economic development these past several decades, unnecessarily cuts us off from a rich source of insight and skills—the poor themselves. A second message is that to be successful, economic development cannot be thought of solely in economic terms. Microcredit is as much an exercise in political empowerment as it is an economic stimulus. Grameen was strongly opposed by the middlemen who saw their revenue shrink. It was vilified by powerful Islamic conservatives who believed that women should not be independent breadwinners. Even elements of the government itself threatened it, fearing that Grameen could morph into a village-based opposition movement. Bangladesh and Grameen remind us that effective global economic development is about empowerment. Lesson three—more of a caution, really—flows from the enthusiasm for microcredit following Dr. Yunus's Nobel Prize in 2006. Suddenly, it seemed that microcredit was the solution to everything involving global poverty and inequality, from hunger in Africa to regional trade imbalances to the global debt crisis. It isn't, but this reaction demonstrates how the history of economic development has often been one of looking for that single or small collection of "magic bullets" that will save the day. Skilled, insightful, committed architects of modernization theory certainly fell into that trap: they saw one step (the intense focus on the urban industrial core at the cost of the rural poor) as the magic bullet that would set in motion a self-reinforcing chain reaction of economic growth and prosperity. Lasting economic development that addresses poverty and inequality uses multiple tools, applied from different vantage points and at different times. A final observation comes from an interview with Dr. Yunus on 60 Minutes in May 1989, when Yunus's small experiment with a different kind of development was just picking up steam (Hewitt, 1989). When 60 Minutes correspondent Morley Safer asks about his education, Yunus chuckles and says that he had to unlearn everything he learned about economic development as a PhD student in the United States. When pressed, Yunus continues: "I was taught that the poor had no skills . . . that they were lazy. But look at them . . . they have amazing, beautiful skills . . . they want to work . . . they want to improve their lives." Later in the interview, after Safer has visited a large development project that flatout failed, he asks about this failure. After taking a few seconds to think it over, Yunus says, "The problem is that people have been left out of the equation; it's become about large projects, not people . . ." Critical Thinking Questions 1. Some would disagree with Yunus's closing statement that mainstream development strategies have left people out of the equation. They'd argue that without large projects like roads and power plants in Bangladesh, Grameen would never have succeeded. What should we make of this response? 2. Yunus is quick say that he had to "unlearn" the basics of modernization theory—especially its view of rural villagers—in order to be effective in Bangladesh. What does Yunus's experience suggest to us more generally as we encounter theories about global development, international affairs, and environmental change? 3. What do you see to be the strengths and weaknesses of the approach to global economic development presented by Kiva.org? Rising oil prices in the 1970s fueled the impatience of the developing world and the concerns of development experts. The Organization of Petroleum Exporting Countries (OPEC), a 12-member coalition of some of the world's largest oil producers, reduced its oil output in 1973 and sent world oil prices skyrocketing. The Arab members of OPEC were retaliating for Western support of Israel during the 1973 Arab-Israeli war, marking the first time oil was used as a weapon in international disputes. Much of the developed world quickly slipped into recession, and many oil-importing developing countries saw their economies stumble as well. On all fronts, then, the hopes and assumptions of modernization theory was suddenly open for questioning and readjustment. 2.4 The Debt Crisis Any hope of establishing coherent alternatives to the modernization-theory recipe for development was dashed by a global debt crisis in the 1980s. This crisis threatened the solvency of many developing countries and the stability of the global economic system. It was resolved, to some degree, through debt restructuring and forgiveness programs. The programs, called structural adjustment, required developing countries to change their government budgets and make their economies more inviting to business. The seeds of this crisis were planted by the OPEC oil embargo of 1973, which overnight led to a global shortage of oil and a spike in oil prices. OPEC nations enjoyed a surge in revenue and throughout much of the 1970s deposited much of this revenue in private commercial banks, many of them based in the United States. These banks included JP Morgan, Bank of America, Citicorp, and Wells Fargo. Since banks profit when they loan money to worthy borrowers at an interest rate higher than what they pay depositors, these private banks began seeking borrowers. For the first time in their history, their gaze turned to the governments of the developing world. Banks Make Loans to Developing Nations Sign at gas station reading, "sorry no gas today due to limited supply. Open for your other driving needs." Tom McHugh/Photo Researchers/Getty Images The global recession triggered by the 1973 oil crisis was one factor that prompted commercial banks to look to developing-world governments as potential customers. Two forces in the mid-1970s prompted commercial banks to consider developing-world governments as potential new customers. One was stagnant or declining profits for these banks in the first half of 1970. Banks needed new markets to boost profitability, and the developing world, which up to then had depended on developing country governments and international institutions like the World Bank for loans and grants, was an untapped possibility. A second force was the global recession triggered by the 1973 oil embargo. The traditional corporate customers of the large banks weren't borrowing, yet the banks were still receiving regular and large deposits from OPEC, which they needed to convert into revenue-generating loans. If corporations weren't inclined to borrow, these banks thought, perhaps developing country governments could be induced to fill the gap (Federal Deposit Insurance Corporation, 1997). The mid-1970s saw the beginnings of a period of aggressive marketing of loans to the developing-world governments. Journalist Anthony Sampson (1983) describes how commercial banks with little experience or knowledge about the developing world would work to out-compete each other for new business. According to Sampson, the rule during the 1970s was to make as many loans as possible and to structure them in ways that would encourage the poor countries to return for more. By all accounts, the banks were successful. From 1973 to 1982, economic output in developing countries roughly doubled. Export earnings, which developing countries use to repay their debt, grew by about a factor of three. Overall debt, however, rose five times, with many countries exceeding this level (World Resources Institute, 1988). Brazil, for example, had an automatic line of credit of $1.5 billion/month up to mid-1982, and other countries had similar borrowing privileges (Edwards, 1988). Most of this debt, moreover, was borrowed at a variable interest rate, not a fixed rate. In practice this meant that the interest rate on loans would fluctuate with the global interest rate. Poor countries chose a variable interest rate because the leaders of the world's largest single borrower, the United States government, were promising to reduce their country's borrowing. If the United States kept its promise, global interest rates would fall. Unfortunately for these indebted countries, the United States borrowed heavily in the early 1980s to finance a growing budget deficit. Interest rates skyrocketed, and developing countries had difficulty paying the interest on their debt, much less the principal. Events came to a head in August of 1982 when Mexico announced that it would be forced to use nearly half of its entire export earnings to service its debt, which it was unwilling to do. It requested a temporary moratorium on repayments. Other borrowers found themselves in an even worse situation. Argentina's debt service approached 83% of its export income, and Brazil's was 103%. For the largest 19 debtor countries, the average debtservice requirement was 31% of all export earnings (Porter and Sheppard, 1998). This idea of a moratorium on debt repayments spread, threatening to plunge the international banking system into crisis. Mexico's announcement of a moratorium in August was followed by Brazil's announcement in November, 1982. Venezuela joined in February of 1983, followed by Chile, Peru, Ecuador, Uruguay, and 20 other countries by the end of 1983. The major commercial banks were in a panic. Private financial institutions in 1982 owned 49% of all developing-country debt, and some of the most noted global commercial banks were heavily invested. In 1981, for instance, the debts owed to the nine largest U.S. banks by Mexico amounted to 50% of the total assets of these banks, with another 45% owed by Brazil and 20% by Argentina (Corbridge, 1993). Loans to these three countries alone exceeded these banks' assets by 15%. By the end of 1984, this amount had grown to 32% (Isbister, 2006). Structural Adjustment The global financial system was in crisis. To hold off the threat of collapse, commercial banks extended additional loans to developing countries so that they could continue making payments. This was a short-term solution at best. For their part, the developing countries were unwilling to walk away from their debts. Doing so could have cut them off from future development assistance, and might have led to trade embargos and other forms of economic retaliation by the developed world. They were increasingly unwilling, however, to honor the original terms of their loans given escalating interest rates. The solution to the crisis was a series of reforms, initiated by the United States and brokered by the International Monetary Fund (IMF), known as structural adjustment. These reforms were introduced in 1983 and were in full global force by 1990. Under structural adjustment, governments of developing countries would enjoy a combination of debt forgiveness, renegotiation of interest rates on existing loans, and new loans with extended payment periods and low interest rates. In exchange, governments of the poor world would "adjust" the structure of their domestic economies to make more funds available for debt repayment. In practice, this meant that these governments had to (1) reduce government spending; (2) increase their exports to increase their export earnings; and (3) liberalize their economies, which in practice meant loosening controls on business within their borders and reducing barriers to multinational investment in their economies. Most of the developing world—with the exception of China, which avoided the worst of the debt crisis—acceded to these conditions. To cut their spending, governments slashed social programs for the poor rather than cut other expenditures, such as military spending or infrastructure development. The poor, then, shouldered the burden of debt repayment when, in fact, they rarely benefitted from the initial borrowing. Governments also accelerated, where they could, the production of export products. Some farmers benefitted, but many poor also suffered as land dedicated to local foods shifted to export crops, leading to rising food prices in some parts of Africa and Asia (Ahmed and Lipton, 1997). People working at a call center in India. Zubin Schroff/Getty Images The rise of foreign direct investment has generated substantial investment flows in developing countries such as India and China. All told, poverty and inequality both appeared to grow as a result of structural adjustment. The impacts of these programs varied, however, around the world. Economics professor Nina Gera (2007) reports sharp increases in poverty and inequality in Pakistan from cuts in government spending driven by structural adjustment agreements. But economist Steve Onyeiwu and his colleagues (2009) find only limited negative effects of these agreements on poor villagers in Nigeria. After reviewing the literature on structural adjustment, development specialists Ismail Ahmed and Michael Lipton (1997, p. 27) conclude that "there is no systematic improvement or decline in the quantity, quality or sustainability of rural livelihoods as a result of [structural] adjustment measures. There are marked differences between countries and regions." The overall impacts of structural adjustment programs on the poor thus remain unclear, though there is abundant evidence that many poor around the globe suffered for past decisions in which they had no voice. Structural adjustment also forced developing countries to streamline or eliminate their regulation of commercial activity. The height of structural adjustment coincided, moreover, with the fall of the Soviet Union, which led many leaders of these nations to question the wisdom of sometimes heavy business regulation in their own countries. Many developing countries, with India and China at the forefront, saw greater commercial investment in their economies and high rates of economic growth. The rise of foreign direct investment (FDI), or investment from corporations based in other countries, was especially important. It brought factories, callcenters, financial services, and modern production facilities to much of the developing world. These investment flows have been impressive. From April 2000 to April 2011, for example, total FDI in India approach $200 billion (Government of India, 2011). In 2008, FDI to India amounted to 3.6 of total economic production in India that year. By contrast, foreign aid flows to India were more than ten times smaller. For many developing countries, in fact, FDI exceeds foreign aid by anywhere from 10 to 100 times (United Nations Development Program, 2010). In ways described in more detail in Chapter 9, the rise of FDI is contributing to a change in the balance of power around the world. Impact of the Debt Crisis The debt crisis produced three important outcomes. First, as Table 2.4 shows, most countries no longer devote a crushingly large portion of their export earnings to debt repayment. Some countries remain highly indebted (relative to their export earnings), but by most accounts the worst of the repayment crisis has passed. What remains lost, however, is a decade or more of opportunity to make good on the optimism and openness of experimentation that closed out the 1970s. A second outcome appears to be greater inequality and more absolute poverty around the world than would otherwise be the case. The world's poorest people never signed a single loan agreement and rarely saw the benefits of the loans that flowed to their countries. Yet in many instances they shouldered a disproportionate burden of repayment through a reduction of their social services and a rise in prices for local foods and other commodities. Table 2.4: The debt crisis and beyond: Debt service: Percent of export goods and services and income for selected countries 1995 2009 Ethiopia 18.5 3.1 Ghana 24.2 2.9 India 34.4 5.9 Kenya 25.3 5.0 Niger 17.1 4.5 Mozambique 34.5 1.6 Sierra Leone 63.6 2.2 Source: The World Bank. (2011). World development indicators 2011. Washington, DC: The World Bank, pp. 360–362. A final notable result of debt crisis was the restructuring of the ground rules of commerce throughout the poor world. After independence, most developing countries chose to tightly regulate industry. Some even moved to versions of socialism where the government owned many industries and dictated to others what could be produced and at what price. The justification for these actions was that free market systems couldn't be trusted to function in the long-run interest of the poor, since the poor had limited dollars with which to "vote" in the marketplace. But this heavy state control had a cost. Domestic products were often substandard and expensive, especially when national industries were sheltered from foreign competition by tariffs. Many sectors of the economy were heavily subsidized by the government, which diverted resources from better uses. Consumers tended to pay higher prices for inferior products, and the layers of bureaucracy associated with government control of the marketplace invited corruption. For better or for worse, structural adjustment wiped most of this off the table. Today, most economies across the developing world are less regulated—they are freer and more capitalist in form. Major multinational companies face greater ease of entry into these economies, and developed countries must allow imported products to compete on the same pricing playing field as domestic goods. In many countries, a new consumerism is emerging with important implications for global society that are described later in this text. In Depth: The UN Millennium Project Economist Jeffrey Sachs and U.N. Secretary Kofi Annan AP Images/Anthony Mitchell Economist Jeffrey Sachs, right, and UN Secretary-general Kofi Anan discuss the Millennium Development Goals as part of the 2005 launch of the Millennium Project, which plans to defeat the worst of world poverty by 2015. Although a smaller proportion of the world's population now lives in absolute poverty than ever before, the total number of deeply poor is greater than in 1960. Africa is especially afflicted. Pronounced global inequality still prevails, with some 15% of the world's population, largely in North America and Europe, responsible for 70% of global consumption. The developed countries of the world are still well short, moreover, of meeting their stated commitment to devote at least 0.7% of their resources to international aid. What do you do when the rich countries of the world consistently fail to follow through on their promises when it comes to economic assistance to the poor? How do you respond to the recent history of economic development, which has seen the economies of many of the poorest countries grow rapidly while leaving untouched many of the poorest? For Columbia University economics professor Jeffrey D. Sachs and former Secretary General of the United Nations Kofi Annan, the answer is to reject lofty goals, abstract commitments, and development theories that say you must initially ignore the poor to help them. Instead, you get down into the trenches, take names, start counting, work hard, and hold people (and nations) accountable. That means applauding those who follow through on their commitments, and shaming those who do not. That, in a nutshell, is what the United Nations Millennium Project, and its "Millennium Development Goals" (MDGs), is all about (World Bank, 2010). After commissioning the Project in 2002 to develop a concrete action plan to address the worst of global poverty, Kofi Annan took that plan from Sachs in 2005 and began lining up commitments from all of the countries of the rich world, and many of the poor, to reach these goals by 2015. At that time the global economy was firing on all cylinders, and many of the goals seemed easily attainable. Commitments were easy to obtain. Now, at a time of economic slowdown, the work is more difficult, and progress on some of the goals is behind schedule. But public figures like Sachs, Annan, former President Bill Clinton, rock star Bono, and political elites and grassroots activists from around the world aren't letting up. Meeting the MDGs by 2015 has become a rallying point for many in the antipoverty movement. They recognize that globalization and economic growth has lifted many out of poverty. But a billion or more people have been sidestepped by this economic growth, and it is for them especially that the MDGs are framed. The MDGs themselves are deceptively ordinary: * Eradicate extreme poverty and hunger * Achieve universal primary education * Promote gender equality and empower women * Reduce child mortality * Improve maternal health * Combat HIV/AIDS, malaria, and other diseases * Ensure environmental sustainability * Develop a global partnership for development What makes them different is the way they are defined. Each comes with a set of specific indicators that gives them teeth: no hiding behind abstract, feel-good statements of intent. This specificity is joined to something unavailable to earlier would-be reformers of the economic- development system—the transparency that comes with the rise of the Web, social media, and the exploding availability of data. For the first time in development history, information is rapidly going public about the successes and failures of national and international attempts to help the poor. Does information + public commitments + tangible, difficult, but doable goals + star power + the willingness and ability to point out failures to walk the talk = Success for those in absolute poverty? That's the question behind the MDGs, and when you drill down, it's one of the more interesting initiatives on the development scene today. Critical Thinking Questions 1. Explore the MDG website. Pay particular attention to the discussion of progress on the eight MDG goals. What is your assessment of this progress, and what more, in your view, needs to be done? 2. As an economist, Joseph Sachs is quick to acknowledge that rapid economic growth over the past decade (before the global recession) has helped eradicate absolute poverty. Sachs argues, however, that this growth, and the jobs and other opportunities it created, bypassed a significant portion of the world's poor. This, for Sachs, is the principle rationale for the MDGs. If you were poor, living in an economy with rapid economic growth, what factors might prevent you from benefitting from this growth? Do the MDGs, in your view, fully address these factors? 3. Visit www.one.org, which enjoys the support of U2's Bono. Watch a few of the videos. What do you see to be the pros and cons of celebrities becoming so centrally involved in social issues like world hunger and global inequality? 2.5 Next Steps in World Development Practitioners of global economic development continue to focus on economic growth as the primary way of improving the quality of life in the developing world. Despite past disappointments, modernization theory remains their primary guide. New ways of thinking about development are emerging, however, that could reshape the field in the years to come. One trend worth watching is the growing interest by development experts and developing countries in happiness. Social psychologists know what makes us happy: fulfilling relationships, a supportive network of friends, low crime, limited traffic congestion, economic security, and satisfying work, among other factors. For all of its benefits, economic growth can sometimes undermine these components of happiness. Perhaps, then, development efforts should privilege some kinds of economic growth over others with the goal of enhancing happiness, rather than material wealth per se. Measuring Happiness Measuring happiness in consistent, systematic ways is a problem, however. Experts gauge happiness by what people say makes them happy, and this can change from person to person, or over time in society. Happiness is also more difficult to measure than conventional indicators of development, such as average income per person. Assessing the effectiveness of development projects using some kind of subjective happiness index would be complicated. Nevertheless, some development experts are pushing forward with "happiness indicators" that could redefine the practice and goals of global economic development. Man standing in open field with arms raised. iStockphoto/Thinkstock Clean air and open space are two indicators of happiness used in planning global economic development. The most well-known of these is the "gross national happiness index" first proposed by the government of Bhutan in 1972 to assess its development progress. Since then, happiness, not economic growth, has been the benchmark against which Bhutan has measured its development progress. Major development organizations are joining in. The United Nations Development Program now includes national indicators of happiness in its annual report on human development. The World Bank is supporting research workshops to explore how happiness could be consistently measured within countries. The idea of using indicators of happiness to plan development efforts is taking root in the United States as well. In Seattle, for example, a 2011 "happiness initiative" led by community leaders and supported by the city government developed indicators of happiness for that city that will inform future government decisions. Studies show that clean air and water, safe food, and sufficient open space for relaxing are important components of happiness. It's not surprising, then, that environmental issues arise as another important challenge to current approaches to development. Most of these challenges come under the heading of "sustainable development," which is defined as development that meets the needs of people today without undermining the livelihood of future generations. Sustainable development advocates argue that economic development must be framed in ways that increase human prosperity while shrinking the ecological footprint (see section 7.1) of individual consumption. Sustainable development, then, might emphasize renewable energy and energy efficiency. Or it could lead to programs and policies that privilege ways of living that steer clear of growing consumerism. Using sustainability as a core measure of "good" development would, like a focus on happiness, shift current development efforts away from its primary focus on economic growth. A final notable trend is the growing restlessness of the developing world. In ways reminiscent of the Group of 77's push for a New International Economic Order on the eve of the global debt crisis, many developing countries are pressing for new global economic arrangements. Nowhere is this more apparent than in on-going negotiations over a global climate change treaty. At the last major climate summit, in Copenhagen in 2009, the developing world, led by India, China, Brazil, and South Africa (known as the BASIC coalition, as described in section 9.3), insisted upon a major increase in foreign aid from the developed world as a precondition for moving forward on climate negotiations. They argued that current threats to the world's climate arise from the burning of fossil fuels by the developed world—combustion that allowed the developed world to grow and prosper. The developing world is now being asked to curtail its fossil fuel use at a per-person level well below that of the developed world. It is only fair, they concluded, that that the developed world help with additional financial and technological assistance. BASIC and its allies pressed for development assistance in the range of $400–$600 billion a year. The developed world resisted for several reasons, including the overall cost and worry that this money wouldn't be spent in climate-friendly ways. U.S. President Obama flew to Copenhagen and brokered a deal for $100 billion a year in aid, but this offer was rejected. After years of negotiation leading up to the Copenhagen negotiations, the climate talks broke down. Solving the climate problem likely means tough global negotiations over foreign aid, ongoing debt forgiveness, and technology transfer. Indeed, as author Tom Athanasiou (2009) notes, the most important decisions about global economic development over the next decade will come from debates about climate change: about who is responsible, who pays, and how processes of global economic development must evolve. Chapter Summary Economic development has been a concern for the developed and developing world since the 1940s, when the first of the colonized countries gained independence. In the face of deep poverty and inequality, both within poor countries and around the world, development planners pursued a set of strategies meant to lift the poor out of poverty and create democratic governance. This work fell under a set of ideas known as modernization theory. Modernization theory sought to foster economic take-off and greater democracy in the developing world, but it met with limited success. Several decades of development unfolded, each with their respective emphasis, until the end of the 1970s when faith in modernization theory began to falter and new approaches emerged. The global debt crisis of the 1980s swept aside this exploration of new approaches. The crisis was resolved through a set of reforms known as structural adjustment that led some developingcountry governments to radically reduce their spending on the poor. Today, some countries enjoy rapid economic growth, largely the result of economic reforms spurred by structural adjustment and increased foreign direct investment. Other countries have been less fortunate. Additionally, many poor across the developing world have been sidestepped by the benefits of economic growth. The United Nations Millennium Project, which sets eight goals for ending poverty and fostering prosperity by 2015, focuses on these poor. The Millennium Project bears watching, as do three trends: a growing focus on happiness in development planning, a continued concern for sustainable development, and the impacts of climate-change negotiations on the nature and degree of foreign aid and technology transfer. Chapter Highlights * Global economic development emerged after World War II in response to the poverty of newly independent former colonies. The Cold War was also an important factor. * There is significant global poverty and inequality; global poverty has declined, but inequality has not. * Modernization theory, with its focus on urban-industrial cores and its hope for economic take-off, dominates development thinking. Modernization theory is challenged by dependency theory, but development strategies informed by dependency theory have not been widely adopted. * The global debt crisis, and structural adjustment programs that followed, derailed a period of questioning and experimentation with development ideas in the 1970s. They also increased poverty and inequality in some regions. * The rise of foreign direct investment in developing countries in the 1980s and 1990s, coupled with the loosening or end of government regulations on business, has led to impressive economic growth in many developing countries, which has had a significant positive effect on poverty. * Ideas about the best way to pursue global economic development continue to evolve. Some trends to watch include a growing interest in happiness as an important outcome of development, continuing concerns about sustainable development, and growing restlessness by the developing world. Key Terms Click on each key term to see the definition. absolute poverty Poverty at a level below which one cannot maintain adequate health, and even life. Cold War The political tension and military rivalry that existed between the Soviet Union and its client states, and the U.S.-led Western powers from 1945 to 1990. debt crisis A two-pronged crisis in the 1980s, during which poor countries were unable to service their debts and global commercial banks were vulnerable to moratoriums on debt repayment. decolonialization The process, after World War II, of European colonies establishing their political independence. decolonized world A term used to refer to the newly independent poor countries. Other terms include the Third World, the developing world, or the Global South. dependency theory A theory of global poverty and wealth that views rich countries or regions as dependent on poor countries or regions for educated workers, investment funds, and a flow of cheap raw materials. From this perspective, poor countries or regions suffer from close contact with rich countries or regions. developed countries One of many terms (among them "the rich world," "First World," "the global north," or "rich countries") that refer to the most affluent countries of the world. developing countries One of many terms (among them "the poor world," "Third World," "the global south," or "poor countries") that refer to previously colonized countries that gained their independence from Europe after World War II. fixed rate Interest rates on loans that remain fixed over time. These interest rates are typically higher than variable rates at the time of assuming a loan, but they protect the borrower from financial shock should interest rates rise unexpectedly. foreign direct investment (FDI) Investment in a country by a business or corporation based in another country. Gini index An indicator of inequality in a society, with zero designating complete equality and 100 designating complete inequality. global economic development A host of planned investments, policies, and projects that together seek to improve the quality of life of the billions of people living under conditions of hardship or deprivation. Green Revolution A development program in the 1960s that transferred high-yielding rice and wheat varieties, and supporting technology, to many poor countries in response to food riots and the threat of famine. growth with redistribution An organizing theme in economic development programs in the 1970s, which came in response to growing inequality and stagnant economic growth throughout the developing world. Group of 77 A coalition of developing country governments formed in 1964 to represent the interests of the developing world. inequality A term referring to the distribution of wealth, income, or power. Conditions of inequality are characterized by the relative concentration of wealth, income, or power in small groups or limited segments of society. import substitution A trade and development policy that advocated replacing imports with the same products manufactured domestically. Millennium Project Initiated in 2002 by the United Nations, this project identifies eight goals, to be achieved by 2015, for ending or greatly reducing global poverty and inequality. modernization theory The framing theory for contemporary programs of economic development; "modernization" points to both economic prosperity and a democratic society. New International Economic Order A proposal advanced by the Group of 77 that would stabilize prices for poor-country exports, open the markets of the rich world to poor country goods, and reform mechanisms of aid. OPEC (Organization of Petroleum Exporting Countries) A coalition of oil-producing countries from both the Arab and non-Arab world formed in the 1960s to coordinate oil production. poverty For economists, a condition of material deprivation; for political scientists, a condition of powerlessness and vulnerability. The two definitions often overlap in actual practice (i.e., people in poverty are frequently powerless and materially deprived). purchasing power parity (PPP) A statistical technique for comparing income and buying power across countries with different exchange rates and product prices. relative poverty Poverty that is felt when comparing one's level of consumption against another. slums A heavily or densely population urban area characterized by substandard housing, lack of sanitation and public services, and squalor. structural adjustment The principal global policy response to the global debt crisis, initiated by the United States and implemented by the International Monetary Fund. In exchange for relief from or modification of debt, governments of the poor countries agreed to structural changes in their economies and government budgets. Urban-Industrial Core (UIC) Under modernization theory, typically a single urban area or large city that enjoys the major initial focus of investment and other economic development efforts. variable interest rate Interest rates on loans that vary with the prevailing interest rate. Variable interest rates are lower than fixed interest rates. They are attractive if one expects interest rates to remain stable or generally decline over the life of the loan. Critical Thinking and Discussion Questions 1. What is global economic development, and why did it develop? How does it positively and negatively affect the targeted countries? 2. Why did developing countries struggle with infrastructure and economic stability during decolonization? Why/how did colonial powers contribute to these issues? 3. What are the differences between poverty, absolute poverty, and relative poverty? How do economists define an acceptable level of poverty? Do you agree that certain levels of poverty are acceptable? 4. What is the modernization theory, and how effective has it been since its inception in the mid-20th century? What did the theorists neglect to take into account? Has the theory achieved its mission? 5. What caused the food riots of the mid-20th century? How did the Green Revolution address the problem? Were there unintended consequences? Self-Assessment Quiz The following quiz is for your own review and will not affect your grade.