PATHWAYS TO DEVELOPMENT

DEPENDENCY THEORY

The DEPENDENCY THEORY states that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former.

Poor states are impoverished and rich ones enriched by the way poor states are integrated into the "world system.”

It also states that certain types of political and economic relations (especially colonialism and International Trade model for development) between countries and regions of the world have created arrangements that both control and limit the extent to which regions can develop.

NEOCOLONIALISM is the idea that MDCs still control their former colonies (or other LDCs) through the economic pressures of the global market they have created

Both the Dependency Theory and neocolonialism add up to high levels of poverty and underdevelopment in countries (thus LDCs).

MILLENIUM DEVELOPMENT GOALSAdopted by world leaders in the year 2000 and set to be

achieved by 2015, the UN developed the Millennium Development Goals (MDGs) provide eight concrete

benchmarks for tackling extreme poverty:

1. eradicate extreme poverty and hunger 2. achieve universal primary education 3. promote gender equality and empower women4. reduce child mortality5. improve maternal health 6. combat HIV / AIDS, malaria and other diseases7. ensure environmental sustainability8. develop a global partnership for development.

DEVELOPMENT

In order to close the gap between rich and poor countries, LDCs must develop.

This means increasing the per capita GDP and then using wealth to improve social and economic conditions.

The difficulty comes in finding policies that promote development and then finding the funds to pay for the development.

SELF-SUFFICIENCY MODEL FOR

DEVELOPMENT

Countries will choose one of two models to promote development.For most of the 20th century the SELF-SUFFICIENCY MODEL (aka balanced growth) was the most popular.

THE MODEL THE DRAWBACKSSpread investment equally over all sectors in all regions. [Growth is modest but fair as residents everywhere share in benefits. Reducing overall poverty takes precedence over creating a wealthy upper class.]

Isolate domestic business from international competition.[Allows domestic businesses to become profitable without the adverse impacts of global market]

Set barriers (tariffs on imports, import quotas, requiring import licenses) to limit the import of foreign goods. [Improves domestic economy by forcing people to buy local]

Restrict domestic businesses from exporting to foreign states. [Forces all sectors of the economy to focus on goods that improve local quality of life.]

India tried this approach (see chapter)

System protects inefficient businesses. [Because businesses can sell all their inventory at fixed prices, there is no incentive to improve quality, lower costs, reduce prices or increase production, and without international competition, companies do not need to follow technological advances.]

System creates massive bureaucracy. [Running the system requires a complex administration and fosters corruption– it becomes more lucrative to be an official than a businessman and the system creates a black market trade.]

DEVELOPMENT THROUGH

INTERNATIONAL TRADE MODEL

The second model for development is the international trade model. In it a country:

--develops by expanding a distinct local industry for global export.

--focuses on BASIC INDUSTRIES (basic industries manufacture a good for export and bring money into a community from the sale of the good. A non-basic industry is one that supports a basic industry but does not bring in outside money.)

--attempts to find a COMPARATIVE ADVANTAGE (ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers).

The wealth generated from exporting can then be reinvested in other, internal development.

Therefore, the model banks on THE TRICKLE DOWN EFFECT (the theory that increased wealth for one class/industry/sector will benefit other classes/industries/sectors as the wealthy direct money to others through the purchase of goods and services, the expansion of business, and the reinvestment of profits in the community

DEVELOPMENT THROUGH

INTERNATIONAL TRADE MODEL

ROSTOW’S DEVELOPMENT MODEL

THE DRAWBACKS

Rostow’s model for international trade is a five step approach:

THE TRADITIONAL SOCIETY An undeveloped society in which the majority of people are involved in subsistence agriculture and the majority of wealth is allocated to “non-productive” activities like religion and the military. Also called a SUBSISTENCE ECONOMY

PRECONDITIONS FOR TAKEOFFAn elite group initiates innovative economic activities and the country invests in new technologies and infrastructure (transportation, power, public safety and water systems).

THE TAKEOFFRapid growth in limited number of activities. Takeoff industries become productive while other sectors stagnate.

DRIVE TO MATURITYDue to inflow of wealth, Modern technology diffuses to other industries/sectors which also experience growth as workers become skilled/specialized.

AGE OF MASS CONSUMPTIONEconomy shifts from HEAVY INDUSTRY (industrial goods like steel, energy, industrial machinery) to consumer goods

INCREASED DEPENDENCE ON MDCs [By focusing on export goods countries often have to scale back on production of necessities for their own population (food, clothes, etc.). The LDC must then use the profits from the export goods to buy consumer goods from MDCs instead of reinvesting them.]

UNEVEN RESOURCE DISTRIBUTION [Sometimes chosen export good does not rise in price or falls in price and cannot offset the cost of the needed imports.]

MARKET DECLINE [World market for low-cost consumer goods has declined since MDCs have a limited population/market growth.]

THE EXAMPLES

THE FOUR ASIAN DRAGONS [South Korea, Singapore, Taiwan and Hong Kong all adopted approach with great success focusing on clothing/electronics]

OIL-RICH ARABIAN PENINSULA STATES [Saudi Arabia, Kuwait, Bahrain, Oman and the UAE succeeded by focusing on oil.]

AND THE WINNER IS…

In the late 1900s, most countries embraced the international trade approach.

Many longtime advocates of the self-sufficiency method (like India) even switched their systems and dismantled their trade

protections.

Between 1990 and 2005 countries oriented toward international trade saw GDP increases of over 4% per year.

WORLD TRADE

ORGANIZATIONIn 1995, countries representing 97% of world trade founded the WTO to promote the international trade model.

The WTO reduces international trade barriers in two ways:

--negotiating reduction/elimination international trade restrictions (subsidies for exports, quotas for imports, tariffs) on manufactured goods

--enforcing agreements between states and international laws

The WTO is a highly controversial organization.

Critics say it is anti-democratic, favors wealthy corporations over the common man and compromises state sovereignty.

FOREIGN DIRECT INVESTMENT

The international trade model requires countries to invest in take-off industries in other countries.Investment by a company in the economy of a foreign country is called FOREIGN DIRECT INVESTMENT (FDI).

FDI does not flow equally… in 2007, only ¼ went from an MDC to an LDC, whereas ¾ went from an MDC to another MDC.

FDI is also not evenly distributed between LDCs… in 2007 >1/3 went to China, 1/3 to all other Asian states, 1/5 to Latina America, 1/10 to Africa.

The major source of FDI are TRANSNATIONAL CORPORATIONS (a company that operates in countries other than just the one where its headquarters are located (over half are headquartered in the US and Europe).

LOANS TOFINANCE

DEVELOPMENTLDCs do not have the money to develop their own take-of industries, so they often obtain money from MDCs.

That money comes in two form: FDI and loans from banks/international organizations.

The World Bank and the International Monetary Fund (IMF) are the two biggest lenders. Read up on them.

LDCs borrow money from them to build new infrastructure, and that new infrastructure encourages domestic business to expand and attracts FDI.

Many loans fail (faulty engineering, bilked funds, failure to attract investment).

Many LDCs are unable to repay loans and debt begins to exceed income.

STRUCTURAL ADJUSTMENT PROGRAMS

The inability to repay loans causes a chain reaction of problems. So, before granting debt relief, the IMF and World Bank will require a country to undergo a STRUCTURAL RELIEF PROGAM (an economic reform):

--spend within budget--direct benefits to poor as well as welthy--invest in education/health (not military)--invest resources where profits will be greatest--encourage private sector--reform government

THE DRAWBACKS TO SAPs

Critics say SAPs increase poverty by focusing on cutting government spending, therefore:--cuts in healthcare, education, social services (jobs)--higher unemployment--less support for the needy

Hey… check out this Economist

article on corruption and development.

AN ALTERNATE TO ROSTOW’S

MODELFAIR TRADE is a variation of the international trade model where products are made and traded in a manner that protect workers and businesses in LDCs.

Standards are set by Fair Trade Organizations International (FLO) and certified in the US by TransFair USA.

PRODUCER STANDARDS WORKER STANDARDS

In LDCs, producers form worker-owned, democratically run cooperatives

Cooperatives allow farmers to get loans, reduce costs and maintain high/fair prices

Cooperatives benefit farmers, not absentee corporate owners

Fair Trade Organizations return a higher percentage of the sale price to the farmers by bypassing middlemen.

At least 1/3 of sale price is returned to the producer in the LDC, the rest to the wholesaler and retailer.

Employers must pay workers fair wages, allow unions and comply with environmental and safety standards

60-70% of fair trade workers are women

Cooperatives reinvest profits into their own communities