quiz

POL 190 Globalization and Development Development Policies Combinations of economic policies have been used by state officials to foster growth and economic change. Most state leaders see an interest in fostering economic growth, but this is a challenge that may not be completely within the control of the leaders of developing countries. In addition, the policy measures that they take may not actually lead to the desired outcome. Development policy has been a central element in addressing the gap (in wealth, income, industry, technology, health/education, life expectancy, etc) between states. There are two broad approaches: the market/neoliberal/laissez faire, and the state-led/interventionist approaches. Note the way that these ‘schools of thought’ provide different explanations for the problems facing developing countries and opposed strategies:

Policy Type Market/Neo-liberal development policy

State-led/Interventionist development policy

Does Economic policy matter? Yes

Yes

What causes development? Free markets Strong states/high-quality state interventions

What causes underdevelopment?

Too much state involvement Weak or poor/low-quality state intervention

Main policy recommendation Reduce the state’s economic role Build the state’s economic capabilities

Cases that confirm the recommended policy approach

UK, US South Korea, Singapore, Japan

Test case: Why has China been successful?

After 1979, opening to the market has led to economic success

After 1979, strong state remains active in managing China’s

economy

Test Case: Why has sub- Saharan African been

unsuccessful?

Too much state intervention, corruption

Weak states, low capacity for decision making or provision

good public policy

Economic policy has shifted away from the state-led approach towards the market approach since the 1970s. Developing countries have made this shift in economic policy through two processes:

 Being pushed/coerced by other states, global corporations and international organizations

 Leaders made the decision to ‘shrink’ the state for domestic political reasons Over the last 40 years, economic policy and differences in economic growth/wealth have also been profoundly shaped by a larger process: ‘globalization’. ‘Globalization’: Basic Features

 Increased Trade: States gradually eliminated barriers to trade

 Increased Global Investment Flows: States eliminated barriers to investment and speculation. Firms became globally mobile/diversified

 The increased power of the global corporations. Businesses organize production around global supply and manufacturing chains

 Economic and social problems become ‘globalized’: environment, labor, product standards, financial risk, etc

How? Historical Process of Contemporary Globalization: 1970s-2000s The modern global economy is a product of deliberate state policy actions (and is not a ‘natural’ or inevitable outcome of market forces)

POL 190 Globalization and Development 2

 Introduction of the floating currency/exchange rate system in 1970s: states have largely abandoned efforts to control the value of currencies which are now left up to global investors

 Elimination of barriers to investment and financial transactions: 1970s-2000s: global financial flows become greater than global trade flows by early 1980s

 Since the 1970s, investment decisions by global corporations have been based on a global supply of labor and differences in regulations: lower wages and lower regulations have attracted higher levels of investment and industry

 Since 1970s, reduction in transportation costs (impact on export/import of goods), and communication costs (impact on services) have accelerated global trade. These reductions have been sped up by state investment in infrastructure across the globe

 Globalization also pushes towards the elimination of alternative economic models, and towards the adoption of relatively uniform economic policies in developed and developing countries after 1980s. Outcome: globalization (should) lead to Convergence

Impact of Globalization

 Industrial Relocation/De-industrialization: global shift in industrial process. From high cost/wage older industrialized regions to low-cost, low regulation regions of the world

 Accelerated economic growth, intensified resource use/demand

 Integration of global markets

 Rising inequality within countries and across regions Problems created by globalization

 Increased risks of global economic breakdown

 Global economy is open to technological breakdown, terrorism, human error.

 Increased inequality between and within states

 Increased concentration of wealth and power in the hands of corporations

 Intensifies conflict between workers

 Leads to global unemployment and underemployment because of lower wages.

 Negative impact on the environment

Basic Questions for the Future of Globalization

o Can the negative consequences by avoided or corrected? o Is there a role for the state/politics? Does globalization weaken/erode democracy? o Is globalization a ‘race to the bottom’ (wages, standards etc undermined by economic integration

with China, while global firms maximize profits)? o Will social policies (e.g. those in welfare states) become obsolete? o Are international economic organizations the way to ‘govern’ globalization, or will they always be

just promoters of globalization? o Is globalization sustainable? What will be the environmental and resource cost of expanded

global production and consumption?

POL 190 Globalization and Development 3

5 EXAMPLE CASES: The three largest ‘emerging markets’ in the era of globalization (China, India, Brazil) have been important engines driving the expansion of production, and have been the largest targets of global investment. Has this experience been the result of similar/common policies? What might slow the further expansion of these economies? Has globalization led to problems/challenges in those countries? China Economy and Economic Policy setting pre-1978

 Communist Era: (1949-1978): Heavy industry, mixed collective and small scale agriculture; central planning; experimental phases in development

Globalization era: post 1978

 ‘Special economic zones’: experimental regions opened to global trade

 Opening to foreign investors, MNCs

 Emphasis on export manufacturing

 Managed/artificial exchange rate Results

 Rapid economic reform; entry to WTO in 1999

 High growth (10+% over 25 years), massive foreign investment, rising role in global manufacturing, trade, R&D; Capital surplus

 Growth of middle class, wealthy elite

 Increasing inequality: collapse of basic socialist era safety net

 Regional inequality: urbanization, migration

 Dependence on resources (oil, food etc); dependence on external markets

 Labor conditions: minimal change

 Social and environmental consequences of manufacturing growth

 Demographics: aging population, future contraction of workforce India Basic Economic Policy: pre 1991

 High inequality: caste and class

 Industry/high technology vs. agriculture sectors

 Rapid population growth, urbanization

 Urban-rural, and regional differences

 State intervention as policy tradition: ‘permit raj’, ISI policies Globalization and India after 1991

 Slow liberalization, reduced regulation of markets, trade after 1991

 Trade barriers reduced, foreign investment increased, rising role in global manufacturing, and services

 Rise of powerful global-scale firms: Infosys, Arcelor/Mittal, Tata Results

 Uneven growth: high-tech vs. traditional economy

 Expanded privatization of state-owned assets

 Continuation of state controls, regulations

 Limited integration of domestic market

 High inequality, poverty. Slows growth

 Demographics: growing population, complexity/diversity

POL 190 Globalization and Development 4

Brazil Political Economy in Brazil pre 1990

 State-led industrialization (ISI policies)

 High inequality: individuals, regional

 High growth, industrialization in 1960s

 High inflation, ‘lost decade after 1970s Brazil and Globalization since 1990

 Transition to neoliberal policies/ globalization since 1990s

 Political process complicates process

 Role of the IMF: enforce new policies Impact/Results:

 Reduced inflation, expanded foreign investment,

 Slow overall growth: return of dependence on agricultural exports

 Rising unemployment

 High/rising inequality, poverty restricts domestic growth

 Efforts to expand social spending/safety net Oil/Mineral Exporters: Globalization has expanded the demand of raw materials and energy sources. Has this had a positive or negative impact of this the producing/exporting countries? What have been the similarities between raw material/energy exporters? Nigeria Economic Policy setting

 In colonial era: little industry, Nigerian elite employed in government. Agricultural exporter in 1960, early oil development.

 1970s: Oil= 80% of state revenue. Agriculture declines: Nigeria becomes net food importer. Oil revenue contributes to corruption

 Debt crisis in 70s-80s: neoliberal policies adopted. Little positive impact Impact of Globalization, rising demand for oil

 Expanded dependence on oil exports: volatile oil prices, revenue, exchange rate

 Regional inequality, high poverty, unemployment

 High debt: impact on state finances, provision of social services

 Corruption: local and national

 Weak agriculture and non-oil sectors of the economy Russia Economic Policy since 1991 1990s: transition to a capitalist economy (elimination of the communist economic system)

 Privatization, “shock therapy” transition after 1991. Immediate result: economic decline, collapse of industry

 Rise of corruption, business mafias (“oligarchs”): loss of state autonomy

 Inability to enforce tax collection: loss of state capacity, rising internal debt

 Population decline, social/health crisis

 Economic crisis of 1997: high debt; reduced growth/investment Impact of globalization/rising demand for oil: Transition to Oil economy since 2001

 High oil prices, growing global demand for oil/gas. High dependence on oil revenue high growth, investment

 Volatile oil prices: impact on revenue, overvalued exchange rate

 Conflict over control of oil: state re-centralization of economic power

 Limited expansion of industry