Week 7

Question 1

Explain the 5 parts of the history of thinking

Answer 1

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)

Question 2

Explain the modernization theory and when it was supported

Answer 2

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.

Question 3

What did Acemoglu to verify the modernization development strategy?

Answer 3

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.

Question 4

Make a critique concerning the modernization theory

Answer 4

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.

Question 5

Which theory does replace the modernization theory ?

Answer 5

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.

Question 6

What motivates the dependency theory ?

Answer 6

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.

Question 7

What critics can we say to the dependency theory ?

Answer 7

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.

Question 8

What recommandations do the dependency theory ?

Answer 8

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.

Question 9

Explain the policy reform (aka neoliberalism)

Answer 9

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.

Question 10

Today what is the main development strategy ?

Answer 10

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.

Question 11

According to the institutionnalism what determines good institutions ?

Answer 11

if you are rich you are more able to sustain good institution and then democracy (low expropriation risk)

Question 12

What critique can we do against the institutionnalism ?

Answer 12

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.

Question 13

With which theory does the model of import substitution does work/ is consistent ?

Answer 13

Structuralism : focusing on import-substitutions was applied in Mexico and Brazil.

Question 14

With which theory does the model of export orientation does work/ is consistent ?

Answer 14

Neoliberalism, focused on exports has been seen in Korea and Taiwan.

Question 15

Why Mexico is a good example for import substitution ?

Answer 15

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.

Question 16

What happened in 1980s in Mexico ?

Answer 16

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.

Question 17

What happened after the WW2 ? Which theory was put in place ?

Answer 17

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.

Question 18

After the world war 2, what was the situation with the factors ? who controlled the government ?

Answer 18

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.

Question 19

What were the political implication of a government controlled by landowners ? (after WW2)

Answer 19

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.

Question 20

Which author studied how changing trade could affect political alliances ? Explain his theory

Answer 20

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)

Question 21

How did Rigowski further his theory of political effects of trade ?

Answer 21

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.

Question 22

We have seen in theory how Import-substitution industrialization (ISI) is supposed to work, but what are the empirical results?

Answer 22

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.

Question 23

What are the 2 problems with the import-substitution industrialization ?

Answer 23

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.

Question 24

Which countries are the asian tigers ?

Answer 24

Hong Kong, Singapore, South Korea, Taiwan, Indonesia, Malaysia and Thailand

Question 25

Which strategy did the asian tigers followed ?

Answer 25

They followed an export oriented strategy focused on the selling of manufactured goods on the international market, and selected import liberalization.

Question 26

What happened for the asian tigers with the export oriented strategy ?

Answer 26

What happened was the opposite of ISI, these countries ran current account surpluses, saw a very high per capita income growth, growing industrialization, and a shift from agricultural to manufacturing exports.

Question 27

What is the key distinction of the export-oriented industries from the import-substitution industrialization?

Answer 27

We can see that for the Asian Tigers, the key distinction from the ISI strategy (which they were also following until 1955) was when they decided to become export-oriented industries (EOI).

Question 28

What is the consequence of the spread of neoliberalism ?

Answer 28

With the spread of neoliberalism, we saw a rise in institutional reforms. These were characterized by structural adjustments of trade and domestic policies from 1980s onwards in most developing countries.

Question 29

What can we say about the politics of reforms concerning the export-oriented industries?

Answer 29

These politics of reforms were strongly opposed by import-competing factors. But in a context of crisis, there was a realignment on these reforms. As seen earlier, PTAs were a way out of domestic conflicts of interests.

Question 30

What is the Washington consensus ?

Answer 30

The so-called Washington Consensus between the two big institutions which are the IMF and the World Bank.
“the approach to development that seems to have worked most reliably … suggests a reappraisal of the respective roles for the markets and the state.” (World Bank, 1991)
Their position is that growth is good for the poor. A claim that was retaken by Dollar and Kraay in 2004.

Question 31

Which element changed little by little the role of the IMF ?

Answer 31

What can also be seen is the evolution of IMF conditionality, changing little by little the role of the IMF. Since the 1990s, there has been an increase in conditions set by the IMF in order to receive a money.

Question 32

What are the critics on the IMF ?

Answer 32

• The IMF has been critiqued to have a one-size-fits-all type of aid program.
• Taiwan and South Korea received preferential treatment from the US, which led to a very different access to the world market. They were liberal in the sense that they exported, but were protectionist as they limited imports. There was government interventionism which was heavy, they pushed capital in competitive sectors in order to export.
• The WB and IMF are not as apolitical as it seems.
• EOI strategies led to their own problems.

Question 33

What can we say about the loans provided by IMF ?

Answer 33

The graoh show the increasing amount of the conditions that were posing !
Now half of the conditions include conditions that goes way beyond of what IMF should do.

Question 34

Which author study how the IMF and their conditions required are economically and politically motivated ?

Answer 34

In his 2004 study, Dreher et Al. made the hypothesis that UN Security Council members are more likely to receive IMF loans. To verify that, they looked at the data of 197 countries since 1951. The dependent variable is if a IMF loan has been given or not, and the independent variable is UNSC membership.
The results show that non-members are less likely to receive an IMF loan, and therefore reasserts the claim that the IMF is not apolitical.

Question 35

What are the problems of the EOI ?

Answer 35

One of the main problems that emerges from an EOI strategy is that it will lead to uneven benefits. Countries that followed this development plan see persistent poverty, and high inequality within countries that just keeps growing, and across countries.
This also leads to a higher risk of crises: The Asian Financial Crisis (1990s) is an example for that, and a few years later the same happened for the Emerging market crises (2000 onwards).

Question 36

What are the key factors in development strategy ?

Answer 36

We have now seen that the key factors in development strategy are institutions, sustainable policies, a mix between liberalization and regulation, that trade and the trading system play an important role, and that endowments (factors, technology, education) often give an explanation on the domestic political effects of trade.