Lecture 5: Paradigms in Development Thinking: State/Market Flashcards
What is the timeline of development strategies?
getting the planning right –> getting the prices right –> getting the institutions right –> getting the incentives right.
What did the wave of decolonisation in Africa / Asia?
lead to optimism about development prospects for ‘new’ Third World countries
Question about the development prospects
who should be in the drivers’ seat of economic development
Why was there more trust in the state than in the market in Third World countries
- Exploitation of ex-colonies associated with unchecked global capitalism
- The market does not exist in Third World countries
Two strategies for growth
- balanced growth strategy
- unbalanced growth strategy
Balanced growth strategy
Key idea: ‘underdeveloped’ economies caught in poverty trap. Economy-wide investment (‘Big Push’) to overcome coordination/trust problem
Unbalanced growth strategy
Key idea: industries with strong (forward and backward) linkages can kick-start the economy. Focus here lies on ‘intermediate’ industries
import substitution
Countries put up trade protection (tariff walls)
infant industry argument
emerging industries need temporary protection from world market competition in order to ‘grow up’
ideological argument import substitution
developing countries need to break out of core-periphery relation = dependency theory
how do you get the planning wrong
rent-seeking and debt crisis
example getting the planning wrong
‘Infant industries’ fail to grow up, as they become dependent on state Support. State-owned enterprises (SOEs) turn into rent-seeking machines for elite
rent-seeking
personal enrichment by claiming share of wealth created by others rather than by generating new wealth (‘predatory’ vs ‘productive’ income).
how does a debt-crisis form
Keeping up inefficient industries drains government resources, which leads to deep budget deficits. Countries take on debt or print money to fill gaps
key ingredients market-oriented reforms
- Privatisation = SOEs for sale
- Liberalisation = trade barriers down; no price controls
- Austerity = government budget in balance
privatisation
state owned enterprises for sale
liberalisation
trade barriers down and no price control
austerity
government budget in balance, example is cutbacks on (social) spending, including the removal of food and fuel subsidies
recipe restoring growth
put the market back in driver’s seat
how do you put the market back in the driver’s seat
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
washington consensus
implementation of fairly standard reform package
roles in washington consensus
Prominent role for the International Monetary Funds (IMF) and World Bank to ‘guide’ developing countries towards market reforms
phase 1 washington consensus
Stabilisation of economy (short-run), also called ‘shock therapy’
phase 2 washington consensus
Structural adjustment of economy (medium/long-run). This involves more complex reforms (deregulation of banks, tax reform)
success washington consensus?
Mixed success –> structural adjustment programmes (SAPs) criticized for high social cost (urban poor disproportionally affected; health and education standards fall).
asian tigers
Singapore, Hong Kong, Taiwan & South Korea
switch from import substitution to export promotion because?
efficient production requires capture of foreign markets (national market too small)
crony capitalism
Privatisation of SOEs created class of (politically connected) oligarchs
institutions
rules of the game, either formal or informal, that regulate behaviour in society
recipe for disaster (institutions)
Economic liberalisation in an institutional vacuum is a recipe for disaster
what does neo-liberal market model need?
checks and balances
why does neo-liberal market need checks and balances?
to protect interests of vulnerable sections of population and prevent power abuse by elite
role for the state in the neo-liberal market model
no direct interference with economy, but provider of ‘enabling’ institutional environment - Focus shift to “good governance”, including “rule of law”
role imf/world bank in good governance
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
