Lecture 5: Paradigms in Development Thinking: State/Market

Question 1

What is the timeline of development strategies?

Answer 1

getting the planning right –> getting the prices right –> getting the institutions right –> getting the incentives right.

Question 2

What did the wave of decolonisation in Africa / Asia?

Answer 2

lead to optimism about development prospects for ‘new’ Third World countries

Question 3

Question about the development prospects

Answer 3

who should be in the drivers’ seat of economic development

Question 4

Why was there more trust in the state than in the market in Third World countries

Answer 4

1. Exploitation of ex-colonies associated with unchecked global capitalism
2. The market does not exist in Third World countries

Question 5

Two strategies for growth

Answer 5

• balanced growth strategy
• unbalanced growth strategy

Question 6

Balanced growth strategy

Answer 6

Key idea: ‘underdeveloped’ economies caught in poverty trap. Economy-wide investment (‘Big Push’) to overcome coordination/trust problem

Question 7

Unbalanced growth strategy

Answer 7

Key idea: industries with strong (forward and backward) linkages can kick-start the economy. Focus here lies on ‘intermediate’ industries

Question 8

import substitution

Answer 8

Countries put up trade protection (tariff walls)

Question 9

infant industry argument

Answer 9

emerging industries need temporary protection from world market competition in order to ‘grow up’

Question 10

ideological argument import substitution

Answer 10

developing countries need to break out of core-periphery relation = dependency theory

Question 11

how do you get the planning wrong

Answer 11

rent-seeking and debt crisis

Question 12

example getting the planning wrong

Answer 12

‘Infant industries’ fail to grow up, as they become dependent on state Support. State-owned enterprises (SOEs) turn into rent-seeking machines for elite

Question 13

rent-seeking

Answer 13

personal enrichment by claiming share of wealth created by others rather than by generating new wealth (‘predatory’ vs ‘productive’ income).

Question 14

how does a debt-crisis form

Answer 14

Keeping up inefficient industries drains government resources, which leads to deep budget deficits. Countries take on debt or print money to fill gaps

Question 15

key ingredients market-oriented reforms

Answer 15

• Privatisation = SOEs for sale
• Liberalisation = trade barriers down; no price controls
• Austerity = government budget in balance

Question 16

privatisation

Answer 16

state owned enterprises for sale

Question 17

liberalisation

Answer 17

trade barriers down and no price control

Question 18

austerity

Answer 18

government budget in balance, example is cutbacks on (social) spending, including the removal of food and fuel subsidies

Question 19

recipe restoring growth

Answer 19

put the market back in driver’s seat

Question 20

how do you put the market back in the driver’s seat

Answer 20

State should retreat from economic domain and ‘hands-off’ from prices. Prices for goods and services should be re-aligned to world market rates  exposure to global competitive pressure

Question 21

washington consensus

Answer 21

implementation of fairly standard reform package

Question 22

roles in washington consensus

Answer 22

Prominent role for the International Monetary Funds (IMF) and World Bank to ‘guide’ developing countries towards market reforms

Question 23

phase 1 washington consensus

Answer 23

Stabilisation of economy (short-run), also called ‘shock therapy’

Question 24

phase 2 washington consensus

Answer 24

Structural adjustment of economy (medium/long-run). This involves more complex reforms (deregulation of banks, tax reform)

Question 25

success washington consensus?

Answer 25

Mixed success --> structural adjustment programmes (SAPs) criticized for high social cost (urban poor disproportionally affected; health and education standards fall).

Question 26

asian tigers

Answer 26

Singapore, Hong Kong, Taiwan & South Korea

Question 27

switch from import substitution to export promotion because?

Answer 27

efficient production requires capture of foreign markets (national market too small)

Question 28

crony capitalism

Answer 28

Privatisation of SOEs created class of (politically connected) oligarchs

Question 29

institutions

Answer 29

rules of the game, either formal or informal, that regulate behaviour in society

Question 30

recipe for disaster (institutions)

Answer 30

Economic liberalisation in an institutional vacuum is a recipe for disaster

Question 31

what does neo-liberal market model need?

Answer 31

checks and balances

Question 32

why does neo-liberal market need checks and balances?

Answer 32

to protect interests of vulnerable sections of population and prevent power abuse by elite

Question 33

role for the state in the neo-liberal market model

Answer 33

no direct interference with economy, but provider of ‘enabling’ institutional environment - Focus shift to “good governance”, including “rule of law”

Question 34

role imf/world bank in good governance

Answer 34

conditionality of loans/grants broadens to performance of country on set of governance criteria. Poor [good] governance is sanctioned [rewarded] by other donors as well