Globalisation, aid dependency and resource curse

Question 1

What is the resource curse?

Answer 1

The claim that natural resource wealth tends to adversely affect a country’s governance

Question 2

What are the three harmful effects of petroleum on politics/governments (resource aid)?

Answer 2

-Makes authoritarian regimes more durable
-Increases certain types of corruption
-Helps trigger violent conflicts in low and middle income countries

Question 3

What is the paradox of plenty in regards to the resource curse?

Answer 3

-Countries with abundant resources and potential revenues fail to reach full potential
-Countries with abundant resources tend to be more authoritarian, prone to conflict, and less economically stable

Question 4

Who coined the term ‘resource curse’ for the first time?

Answer 4

R. Auty 1993

Question 5

Are resources necessarily bad? What are some examples of successful resource management?

Answer 5

No - it is about managing them.

For example, Norway, Canada and Australia have managed their resources without falling into the ‘resource curse’

Question 6

What are additional factors that natural resource wealth is contingent on (affect the effect of the resource curse)?

Answer 6

-Institutions and governance
-Countries with accountable gov’ts benefit boom
-Countries that are not string democracies before starting exporting natural resources are less likely to become democracies

Question 7

What are the 4 categories of explanations for the resource curse?

Answer 7

-Revenue volatility
-Dutch disease
-Procyclicality
-Inhibited development of institutions

Question 8

What is revenue volatility in regards to the resource curse?

Answer 8

Variation in rates of extraction, payments to states (taxes) and the actual price of natural resources on global markets all mean that natural resource revenue is volatile revenue.

Revenue volatility = not great to model economy around (volatility in gov’t spending, long term economic planning difficult…)

Question 9

What is the Dutch disease in regards to the resource curse?

Answer 9

The negative impact of a sudden increase in natural resource exports on other sectors of the economy

Question 10

What is procyclability in regards to the resource curse?

Answer 10

Resource economies have exacerbated trends (high highs and low lows)

Question 11

How does the resource curse link to the inhibited development of institutions?

Answer 11

A large single-point source of revenue is more prone to elite capture (elites take all money from it). Elites may pursue rent-seizing (create new regulations to get access to resources).

HOWEVER

Resource revenue can be managed outside the normal budget process (e.g. Norwegian sovereign wealth fund, in nationalised oil companies like Petrobras…)

Question 12

What does greater oil wealth lead to for autocratic governments?

Answer 12

Greater regime stability.

Higher levels of oil wealth = more stable autocratic governments = less likely to transition to democracy (e.g. Gulf States)

The rentier effect is enables incumbent autocratic regimes to maintain their power.

Question 13

What is the finance curse?

Answer 13

It is when countries with oversized financial sectors suffer some of the same problems as those with oversized resource sectors.

Question 14

How do finance and resource based economies relate in regards to economic success feeding through into true human development?

Answer 14

They cluster together on graphs for GNI minus HDI, indicating that both are doing similarly poorly.

Question 15

What are the economic issues of a large financial sector?

Answer 15

-Crowding out of other sectors like manufacturing, agriculture, and other services
-Dutch disease (negative effect on other sectors)
-Brain drain (lucrative financial sector sucks out the most skilled people out of government or public sector into the private)
-Prevalence of tax evasion and costs of bailouts

Question 16

What are the political issues of a large financial sector?

Answer 16

-Aggressive lobbying, corruption and white collar crime (fraud, money laundering…) prevalent
-Offshore secrecy

Question 17

What is globalisation?

Answer 17

World shrinkage - distances getting smaller, things moving closer and the widening, deepening and speeding up of global interconnection.

Question 18

What are the dimensions of globalisation?

Answer 18

Political - global governance, IGOs, int’l social movements (BLM)

Cultural - global ideational trends, pop culture, identities

Ecological - population growth, global reduction in biodiversity, globalisation of food

Economic - internationalisation of trade, increasing power of TNCs, enhanced role of international economic institutions

Question 19

What is economic globalisation? How is it measured?

Answer 19

The int’l movement of goods, services, capital, technology, information, and jobs across countries and borders.

Can be measured with FDI, cross border investment flows, exports/imports…

Question 20

What are two major causes economic globalisation?

Answer 20

Technological advancement - IT and communication technology enabled important shift in economic globalisation in 20thC

Policy - the agendas of gov’ts, corporations (TNCs) and IGOs have driven economic globalisation. Mostly driven post WW2 with UN charter, Bretton Woods institutions, and WTO.

Not entirely new though - e.g. Silk Road linking European and Asian economies, or Charter companies bringing goods to and from Europe to India, Africa and SE Asia

Question 21

What was the first era of globalisation?

Answer 21

Early to mid 19thC.

Industrialisation, colonialism, migration to new world and European dominated global trade.

Question 22

What was the second era of globalisation?

Answer 22

Late 19th to early 20th C.

Further industrialisation, steamships, telegraphs, colonial expansion, MNCs, global governance institutions (LoNations), global price convergence, global capital market integration (foreign asset growth) and diversification of migration patterns.

Question 23

What was the third era of globalisation?

Answer 23

Late 20thC to present.

Digital revolution (internet), globalisation of production/supply chains, emerging economies outside of ‘West’, diverse migration patterns, important IGOs (UN, WTO, IMF…) and intensified cultural globalisation.

Question 24

How do countries develop?

Answer 24

-Industrialisation. Move from primary sector (agriculture, resources…) to manufacturing (secondary) and then to service/tertiary/quaternary. Leads to economic growth, productivity growth…

-Human capital. Inhabitants live longer and healthier lives, more educated, more rights and freedoms.

There is a strong development between industrialisation and human capital (greater human capital = greater productivity, attracts investment…)

Question 25

From the constructivist perspective, what are the two ideologies which dominate Globalisation?

Answer 25

Neoliberalism - economic liberalism, free market capitalism (privatisation, deregulation, free trade, austerity), pioneered by Thatcher, Reagan, Friedman and Hayek.

Washington Consensus - free market policy recommendations aimed at developing counties (IMF, World Bank, US treasury…)

Basically, free market economics and liberalism dominate globalisation.

Question 26

What is the positive case for globalisation?

Answer 26

The positive case for globalisation is most associated with liberalism in IR.

-Fewer people, per capita, in extreme poverty across all continents (from above 75% in 1800 to below 10% today)
-More efficient use of countries’ economic resources (human capital, natural resources…)
-Export markets developed for developing countries
-Enabled foreign investment and technology transfer (spread across globe after Industrial Revolution in England)
-Global value chains
-Cultural exchange

Question 27

What is the negative case for globalisation?

Answer 27

-Critical theory perspective: most powerful states incentivised to create a global system of unequal economic exchange?
-Globalisation benefits the Global North whilst limiting the development of developing countries in the Global South according to Chang’s idea of kicking away the ladder
-Dependency theory between core and periphery (Frank’s model?) with resources flowing from periphery to core because of the legacy of colonialism, modern trade policies and pressure for IGOs
-IGOs, especially Bretton Woods institution, limit the policy space of developing countries (e.g. IMF pushing countries to privatise their public sector to get necessary loans, WTO enforcing liberalisation and competition in developing countries = their industries cannot compete (e.g. Pakistani fishing communities destroyed by foreign competition))
-IGOs, especially associated with the Washington Consensus, enforced the ‘Golden Straitjacket’

Question 28

What is the ‘Golden Straitjacket’ in regards to IGOs?

Answer 28

It is the one size fits all strategy that IGOs push on developing countries…

It involves the…
-Privatisation of state owned enterprises
-Maintenance of low inflation (positive)
-Reduction in size of the gov’t
-Balancing of gov’t budget
-Liberalisation of trade
-Deregulation of foreign investment
-Deregulation of capital markets
-Reduction in corruption (objectively positive)

Question 29

What is developmentalist (alternative to globalisation)?

Answer 29

Developing countries can’t develop if they leave things entirely to the market

Historically, there have been schools of though advocating for this… Mercantilism, German Historical School

There have also been historical examples of gov’t-led successful economic development: Japan, Korea, Singapore, Brazil and China

Question 30

What are the rationales for state intervention (developmentalism)?

Answer 30

Risk and uncertainty - gov’t has best ability to take risk

Market failures - markets will produce suboptimal externalities (e.g. env’t damage)

Innovation - process requires public coordination, planning…

Wider reasons - redistribution of wealth across population, law and order, stimulate economic demand…

Question 31

What are the rationales for less state intervention (anti-developmentalism)?

Answer 31

Gov’ts are ridden with rent-seeking, cronyism and corruption (especially in less developed economies), and Gov’ts fail, and if there is no private sector there is no competition driving innovation.

The Austrian School and Neoclassical School oppose state intervention.

Question 32

What are the two key constraints to globalisation that we study?

Answer 32

Aid dependency and the resource curse

Question 33

What does aid do to help developing countries?

Answer 33

Ultimately, it is there to help overcome a lack of domestic resources.

It empowers poor people in the world, and reduces poverty and inequality (or at least attempts to)

Question 34

What is aid dependency?

Answer 34

The reliance of a country on external assistance

Question 35

What is the capabilities approach to aid?

Answer 35

-Don’t focus on material wealth or utility
-Focus on human capabilities: the substantive freedoms people have to choose and pursue the lives they value
-Capabilities such as: education, health, employment, social participation, political freedoms, cultural opportunities, etc…
-Emphasises individuals’ agency: ability to make meaningful choices and actions

Question 36

What proportion of the money flowing into LDCs is estimated to be foreign aid?

Answer 36

2/3s

Question 37

What are the types of aid?

Answer 37

-Financial assistance (grants, loans, debt relief…)

-Technical support (expertise knowledge transfer, training, capability building…)

-Humanitarian aid (emergency relief, food aid, shelter, medical assistance) often to address immediate needs and alleviate suffering

-Development projects (infrastructure projects, social programs education initiatives, health inventions… promote long term economic growth and poverty reduction)

Question 38

What are common misconceptions about aid?

Answer 38

-Population less like to save, invest, produce or even work (lazy)
-Governments less likely to implement pro-growth policies
-Governments less likely to mobilise tax revenues

Question 39

On balance is aid more beneficial or detrimental?

Answer 39

Beneficial - positive effect in most countries on accelerating growth, development, and poverty reduction. Bottom up aid can be most beneficial, especially when it supports recipient-led policies, processes and considers their preferences.

Question 40

What are the three main consequences of aid dependency?

Answer 40

Loss of policy space
-Donors may insist on recipient countries implementing the donors’ policy priorities (e.g. privatisation)
-Indirectly, countries are busy engaging with donors and they fail to develop their own alternative policies
-Aid may distort government spending towards a particular sector

Undermining accountability and responsiveness to citizens’ priorities
-Tax-funded public services nurture a special relationship between citizens and governments
-Relationship with aid-giver focused on over citizens?
-Less pressure for budgets to be transparent and accountability

Undermining predictability of gov’t spending
-Aid flows are volatile
-Aid can be higher than domestic tax revenue
-Pledges > actual aid
-Lack of transparency by donors
-Undermines long-term sustainable spending

Question 41

What is ‘substandard aid’?

Answer 41

-Proportion of aid doesn’t go to poorest countries
-Aid double counted as debt relief
-Tied aid (extra costs for recipient of having to purchase from donor country)
-Overpriced/unwanted technical assistance
-Aid failing to support country leadership
-Aid never leaving donor country (e.g. refugee or student costs counting as aid)
-Aid spent on too much administration

Question 42

What is ‘real aid’?

Answer 42

-Targets the poorest
-Counted only once as development assistance
-Tied to purchases from donor country, but costing no more than local purchases
-Wanted and fairly priced technical assistance
-Supports country leadership
-Spent in developing country (not in donor country)
-Administered efficiently

Question 43

What are some aid success stories?

Answer 43

-European states’ (Marshall plan) and Japan’s recovery post-WWII

-Botswana, Korea, and Taiwan were highly aid-dependent in the 1960s and 1970s. Botswana cut aid/expenditure from 60% to 6% between 1975-1995.

Question 44

Why did the aid success stories succeed?

Answer 44

-Strong leadership & clear policies for national development: centralised strategic planning + protection of local industries
-Aid investment in infrastructure: roads, education, market infrastructure (domestic savings and investing, forex earnings via exports e.g. Botswana negotiated a good revenue sharing deal from diamond exports in the 1960s)
-All countries determined own strategies with relatively little interference
-Reduced dependence gradually over 15-25 yrs until infrastructure + higher tax and savings were in place

Question 45

What does the IMF intend to do? What are the benefits?

Answer 45

Maintain international financial stability - incentivising countries to stay capitalist.

The IMF has recently turned its attention to combatting poverty (e.g. IMF working with Haiti post-earthquake to get it to emerging status by 2030)

Question 46

What are the negatives of the IMF?

Answer 46

Golden straitjacket approach - enforces privatisation in return for loans (enables private sector to be bought up by foreign profit-driven TNCs - self-serving) and forces cut backs on government spending and austerity. IMF enforced cut back on government expenditure after 2008 Greek Debt crisis causing widespread civil unrest.

Question 47

What does the World Bank intend to do? What are the benefits?

Answer 47

Finance economic development - provides loan if they agree to economic repayment and economic growth. Disincentivises move away from neoliberalism.

Recently been financing education (GPE set up in 2002 and $35bn invested) and renewable energy initiatives in India and the DRC.

Question 48

What are the negatives of the World Bank?

Answer 48

Bad reputation in the 70s and 80s for financing projects that were either environmentally damaging or costly so that countries were unable to pay back their loans (now in debt).

Question 49

What does the WTO intend to do? What are the benefits?

Answer 49

Uses free trade and advocacy of trade liberalisation policies (no tariffs or subsidies) as a way to promote greater involvement in int’l trade to (in theory) enable developing regions to become more active players in world trade.

Question 50

What are the negatives of the WTO?

Answer 50

Failed to stop rich countries like the USA and EU from subsidising their own food producers and developing protectionist policies (hypocritical).

Furthermore, it enables potentially exploitative trade relations to be formed, or environmentally damaging trade to grow.

The WTO pressured the liberalisation of Pakistan’s fishing waters - this enabled big trawlers to take over Pakistan’s fishing waters - local fishing communities could not compete and they economically collapsed.

Question 51

What’s an example of a time which the West really pitched in on aid?

Answer 51

After the 2004 Indian Ocean Tsunami - Uk public donated loads and US military had a strong humanitarian response