Week 7 Flashcards
(36 cards)
Explain the 5 parts of the history of thinking
1950s: Modernization theory (internal)
1960/70s: Dependency theory (external)
1980s/90s: Neoliberalism/Washington Consensus (internal)
Late 1990s: Globalization, contagion, crisis (external)
2000s: New institutionalism (internal)
Explain the modernization theory and when it was supported
The modernization development strategy (1950s) is mostly attached to two names: Lipset (1959) and Rostow (1960). Their point is that development has to be an endogenous process, characterized by a few steps supposedly following each other:
o “Take-off” (preconditions = external demand for row material that a particular country produces)
o Industrialization
o Urbanization (increased social mobility)
o Education
o Development and Democracy
Their idea of development is to catch up on industrialized countries by imitation, that this process can be accelerated by trade, FDI’s and foreign aid.
What did Acemoglu to verify the modernization development strategy?
Acemoglu developped a graph with: the measure of democracy and the log GDP per capita. He observed a positive correlation. Consequently we can assume that the theory is right.
Make a critique concerning the modernization theory
One main critique to the modernization theory is that it immediately assumes that after industrialization, there is democracy, without taking into account the specific political aspects in each country.
Which theory does replace the modernization theory ?
Przeworski and Limongi show that it is easier to sustain a democracy if you are richer. They argue that democracy is not an endogenous process following development. By classifying countries by income level, they evaluated the probabilities of regime changes. According to the graph they create, we can conclude that development/higher GDP does not necessarily lead to democracy, but that it helps sustaining it.
What motivates the dependency theory ?
As modernization seemed not to always be working (Argentina’s decline between 1900-1950 is an example), a new development strategy emerged as a response: Dependency also called structuralism. This theory is mostly embodied by O’Donnell (1973) and Cardoso and Faletto (1979).
For them, the main barrier to development are external constraints, namely the declining terms of trade, meaning that the prices of exports decrease, while the price of imports increases. This leads to always less consumer power, and disables development. The absence of technology transfers also handicaps poorer countries, as well as the international division of labor, causing less developed countries to produce mostly simple goods as opposed to high-tech goods in developed countries.
What critics can we say to the dependency theory ?
The commodities-boom of the 2000s contradicts this theory. Nevertheless, the political outcome of this theory is that it separates the world into two groups: northern countries (core-countries) and southern countries (the periphery). The north countries exploit the southern ones by keeping them dependent. This is paired with the rise of authoritarianism in order to suppress labor.
What recommandations do the dependency theory ?
The recommendations to get out of this system is to become protectionist, and substitute imports from the industrialized world. Nevertheless, when Cardoso became president in 1995, he did the exact opposite of what he recommended, in one of the country’s largest firm denationalization process. This is because the wind had shifted to another development strategy.
Explain the policy reform (aka neoliberalism)
One of the main names attached to this theory is Williamson (1989). This strategy was highly supported by the IMF and the WB. He argues that the problem were policy failures induced by government interventionism, leading therefore to imbalances and then stagnation, or crisis.
The recommendation Williamson gives to get out of this situation is policy discipline focusing on macroeconomic adjustment, liberalization, privatization, and deregulation.
Today what is the main development strategy ?
Today institutionalism is the main development strategy. It digs deeper than the neoliberal policy approach. They focus on institutional quality and property rights as the main determinants of good policy.
They recommend institutional reforms, transparency and “good governance”. If the recommandations are not followed then we should see policy and market failures.
According to the institutionnalism what determines good institutions ?
if you are rich you are more able to sustain good institution and then democracy (low expropriation risk)
What critique can we do against the institutionnalism ?
The assumption : if you are rich you are more able to sustain good institution and then democracy (low expropriation risk) does not represent the positive correlation between the GDP and the average expropriation risk.
With which theory does the model of import substitution does work/ is consistent ?
Structuralism : focusing on import-substitutions was applied in Mexico and Brazil.
With which theory does the model of export orientation does work/ is consistent ?
Neoliberalism, focused on exports has been seen in Korea and Taiwan.
Why Mexico is a good example for import substitution ?
Mexico is a good example of both models. Until 1980 there was a heavy level of interventionism, with capital allocation via state-banks, and up to 1200 state-owned enterprises. There was also ahigh degree of protectionism: imports had to be approved by the government, and were taxed for at 25%, sometimes even 100%. Mexico had at that time no GATT membership.
What happened in 1980s in Mexico ?
In the 1980s, Mexico fell into a crisis in which the government could not repay its debts. This lead to liberalization, the privatization of state-owned firms, and therefore the inflow of FDIs. Mexico then became a GATT member (1987), and later a NAFTA member (1992), confirming its strategy of integration in the world economy.
What happened after the WW2 ? Which theory was put in place ?
After world-war II, we saw a massive rise of protectionism in Latin-American countries. Dependency theory was the development strategy to put in place.
After the world war 2, what was the situation with the factors ? who controlled the government ?
If we analyze factor endowments at that time, we can see that the most abundant factor was land (export-oriented agriculture). The scarce factors were capital and labor (so import-competing manufacturing). Before the world-wars, landowners controlled the governments. Around WWII arose the urban middle class , workers in new industries aligning with industrialists.
What were the political implication of a government controlled by landowners ? (after WW2)
The political implications of this situation were political alliances between labor and industrialists sometimes also with the military, to oppose landowners. Perón in Argentina is an example of that, Vargas in Brazil too.
Which author studied how changing trade could affect political alliances ? Explain his theory
Rogowski tried to answer the question of how changing trade could affect political alliances. He came up with a classification of countries by factor endowments, to show how abundant factors unite against scarce factors on the political level.
(draw his model land-labor ration vs advanced-developing countries)
How did Rigowski further his theory of political effects of trade ?
Rogowski then furthered his study according to his results to show the relative political power of the different groups classified by factor-endowments. What he found were that alliances emerged along two different cleavages: a class cleavage, or an urban-rural cleavage. When trade increases, the abundant factor is strong, while the scarce factor is defensive. But when trade decreases, scarce factor is in demand and gains power, while the abundant factor loses its strong economic and political position.
We have seen in theory how Import-substitution industrialization (ISI) is supposed to work, but what are the empirical results?
The economy is oriented to domestic market and not the world market. The major economic actors are the national private firms (1930-55) and then state owned entreprise, transnational corporation and national private firms (1955-68). The examples are Mexico and Brazil.
What are the 2 problems with the import-substitution industrialization ?
Fiscal deficit: One problem of Import-substitution strategies is that it leads to unprofitable state-owned firms, leading sometimes to crisis, as it happened in Mexico in the 1980s. As the firms were state-owned, instead of going bankrupt, the government supported them. Public services below market prices and the expansion of civil servant employment all lead to the increase of the debt.
Current account deficits: Less was exported than imported, and therefore the exchange rate was overvalued due to the borrowing of money. The negative trade balance lead to increasing uncertainty, keeping investors from investing.
Which countries are the asian tigers ?
Hong Kong, Singapore, South Korea, Taiwan, Indonesia, Malaysia and Thailand
