CPE+South

**Political Economy: South** By Annie Gillman, 11/29/30 //Comp Questions:// · Some scholars see geography as among the most important explanations for differences in per capita income among countries, whereas others argue that different factors are paramount. Present these arguments and discuss their strengths and weaknesses. · Is geography destiny? Assess the arguments regarding the impact of geography on the potential for a country to improve the per capita capacity to produce material wealth. (Be sure to discuss more than one author.) · Various scholars have argued that a shortcoming regarding geography, institutions or policy choice is the principal explanation for the persistence of poverty in some parts of the world. Summarize and assess these arguments. · Scholars have proffered a number of explanations for why some countries have not kept pace with others in increasing mean per capita income. Assess the strengths and weaknesses of three major explanations for the cross-national unevenness of economic performance. Which do you find most convincing? Why? · Some scholars argue that geography is the single most important factor explaining poverty. Others stress institutional failure. Still others point to bad policy choices. Briefly discuss these schools and provide your assessment of the strengths and weaknesses of each. Which do you find the most convincing? Why? · Assess the strengths and weaknesses of two or more of the major paradigms that scholars use to explain processes and outcomes in the field of international "development." · Various authors have identified geography, institutions and policy as the principal variable determining whether a country will succeed in advancing itself economically. Assess the strengths and weaknesses of each argument. · Do all countries have the potential to become affluent, or just some? Assess this question through an analysis of arguments that rely on geography, institutions and policy choices (e.g., re trade, price stability and fiscal policy) to explain economic affluence. Authors to draw on: Dani Rodrik (book--One Economics, Many Recipes); William Easterly (book--The Elusive Question for Growth); Amartya Sen (article--Development: Which Way Now? ); Andrew Mellinger, Jeffrey Sachs, and John Gallup (article--Climate, Coastal Proximity, and Development); Peter Blair Henry, Conrad Miller (working paper--Institutions vs. Policies: A Tale of Two Islands); Paul Collier (book that I presented in class--The Bottom Billion); Jared Diamond (Guns, Germs and Steel—book that Eddy presented in class) · ** Framing Ideas: ** o A fundamental question of development economics: Why are some countries poor (developing) and other countries are rich (developed)? o Moreover, developing countries have varied in economic performance over the past 40 years. While some countries had tended to converge with developed countries, demonstrating high growth rates (much of Asia, and particularly China), others have only grown at modest rates, maintaining the income gap between rich and poor (much of Latin America), or experienced stagnant growth that has widened the gap (much of Africa). Why have some countries done better than others? Development economists offer different answers. · ** Important Background for Current Policy Debates: ** o In the 1980s and into the ‘90s, there was some degree of consensus among mainstream development economists that a certain set of policies, promoted by multilateral development institutions, would lead to sustained economic growth that could lessen the gap between developing and developed countries in terms of per capita GDP. Packaged into a list referred to as the Washington Consensus by John Williamson in 1990, the policy prescription generally liberalized trade (but not necessarily liberalization of capital markets), tightened monetary policy, competitive exchange rates, restrained fiscal policy, privatization and deregulation. (Steve noted that this list was generated by looking at which Latin American countries had born out the 80s debt crisis well and why). o In comparing the levels of adherence to the Washington Consensus model to the empirical performance of different developing countries, sense that development economics did a questionable job in their prescriptions. Many countries which adhered strictly to these policies (Latin America), experienced modest or slow growth, while countries that diverged from some of these recommendations (Asia) did much better. Twenty years later, this has led development economists to reconsider what leads to better economic performance. o Looking back over approximately 40 years of advice by development economists in general, and by development programs promoted and implemented by multilateral organizations (like the IMF, World Bank, etc), the authors we read had different ideas about how well economists did in prescribing means of augmenting growth, and if they failed, why. § Sen—mainstream development economics had the right idea. Capital accumulation does correspond with higher growth rates among countries from 1960-1980 (China has a lot of capital, Uganda has very little). Industrialization turned out to be a decent idea as well, as growing countries from 1960-1980 had the highest share of industries in GDP (again, China Pakistan Sri Lanka), and some state planning can be helpful. Also, highest performers engage in “labor-using” economic growth. The problem is in how the “dependent variable” is defined. Economic growth should not be the goal of development, but rather a means to an end (and sometimes not a very good means). Development should be seen in terms of expanding entitlements (what you get concretely for what you have—i.e. having more money and somewhere to spend it) that in turn leads to expanded capabilities for people (what you are able to do—ability to pursue your full human potential). Per capita income is correlated with, but not the same as, development. § Rodrik—general neoclassical economics is right in its “higher-order” economic principles. You need property rights, sound money, fiscal solvency, and market-oriented incentives. The problem is that economists didn’t understand that the way you get at the goals of neoclassical economics can vary, and that’s okay. The end was correct, the means has to be flexible, as varied institutional arrangements, and unorthodox policies, can lead to the desired outcomes. § Easterly--Also, a lot policies, promoted or delivered by the international community, failed in stimulating the expected growth because they were top-down, imposed, and unresponsive to local level. Among the main failed policy prescriptions and aid packages: · Capital fundamentalism: This is the idea that the more capital you put into an economy, the better it will grow (labor is in constant supply, so productivity depends on capital). This draws from Marx/Weber idea that the biggest hurdle is capital accumulation—once you have that, the ball rolls by itself. However, big inputs of capital into low-income countries did not stimulate growth. (Remember Sen notes, however, that the top performers from 1960-80 did tend to have the highest share of capital accumulation) · Education: The key is human capital. But people get educated and there are no jobs. · Population growth: Cash for condoms. In fact, growth, not condoms, prevents population explosion, and on the whole population growth may help economic growth · Offering loans, forgiving of debts: This creates perverse incentives to keep borrowing. · In current debate, three key explanations advanced to explain differences in economic performance by developing countries: geography, policies, and institutions. · ** Geography argument (mostly Mellinger, Sachs, Gallup; Collier; Diamond): ** The basic idea is that geography matters most for determining different economic growth trajectories. Coastal temperate countries have GDP densities 18 times greater than those of non-coastal non-temperate (Mellinger). Different geographies lead to “technological convergence” (Diamond). Lack of access to coast is one of the “traps” of the bottom billion (Collier). o The key geographical features that development economists have highlighted are: tropical climate, soil quality, and lack coastal access. o Note: geography has in the past been used to explain differences in race, culture, etc. that were said to impact development (i.e. idea that too hot to work in the tropics—folks become lazy). These new age geography buffs distinguish themselves from the old—culture, race, etc have nothing to do w/ differences. o Geography can impact economies directly, mainly through: § Health: infectious diseases flourish in tropical areas. Exacerbated by the fact that these diseases are not of interest to richer countries (hence, underinvestment in research to find cures) as not a problem in temperate zones. § Agriculture: tropical areas tend to have worse soil, not as productive for agriculture (Mellinger, Diamond); available crops suitable for agriculture vary, and differences in elevation may allow for more diversified crop production (Diamond) § Access to transportation: in landlocked countries (particularly those with bad neighbors, Collier would add), there are high transportation costs that wipe out export possibilities. o Geography can also impact economies indirectly through: § Pace and diffusion out new technologies (Mellinger, this seems to be Diamond’s main argument) § Fostering different institutional arrangements (Rodrik) o The geography argument has been criticized for being deterministic and pessimistic. Does geography, which can’t be changed, condemn some countries to poverty? Also, Rodrik argues that both history and geography are just “a convenient source of exogenous variation to identify the role played by //institutions//.” o Scholars who advocate this explanation, however, emphasize that interventions to support developing countries must be targeted to address this handicap, such as: § Focus on malaria and other infectious diseases that impact poor countries (Sachs) § Focus on helping countries overcome their coastal handicap for exportation (Collier) · ** Institutions argument (Mostly Rodrik): ** Other development economist and political scientists point to basic institutions (legal systems, property rights, etc) as the key variable that determines economic performance. o In some cases, scholars point to colonial history as critical in initial establishment of institutions (Were you colonized by a constitutional monarchy or a king? Was the legal code common law or civil law?) that then lead to different development paths (Mentioned and disputed in Henry and Miller). This idea about institutions has been criticized as being too deterministic. o Rodrik distinguishes between reforms to ignite growth and sustain it. To ignite growth, you have to figure out which “restraints” are creating the most “distortions” in your economy. Institutional reform is key to sustaining growth. o For Rodrik, key to growth is “getting prices right,” which then creates the right incentives for the private sector in developing countries to invest. “We find time and again that investment decisions, agricultural production, and exports turn out to be quite sensitive to price incentives.” But incentives only work correctly (i.e. don’t generate perverse results) if you get the institutions right. Rodrik thinks getting institutions right leads to better policies. For example, when he talks about industrial policy, he’s most concerned with establishing an institutional framework whereby there is sufficient dialogue among private and public sector (b/c governments can’t choose winners, thereby figuring out which industries will succeed involves exchange of info) but not too close (because potential rents can lead to corruption, so private sector can’t be in bed with the public sector). o Kinds of institutions that matter most according to Rodrik: § Property Rights: Entrepreneurs are only incentivized to innovate and accumulate if they have some //control// over what is thereby produced (note this doesn’t mean they need ownership). § Regulatory Institutions: You need these institutions to deal w/ problems such as moral hazard, externalities, anticompetitive behavior, etc. Basically, non-market mechanisms needed to regulate goods, services, labor, assets and financial markets. § Institutions for macroeconomic stability: There is a great deal of instability in market economies—need some sort of monetary and fiscal policies to deal with this instability. Main actor here is the central bank (lender of last resort). § Institutions for social insurance: With modern market society, people lose other safety nets, such as kinship networks, etc. Need to provide some insurance against unemployment, sickness, etc. § Institutions for conflict resolution: There are social divisions in every society. Need institutions by which competing interests can work things out (legislatures, etc). o Rodrik also describes participatory democracy as a kind of “metainstiution” that makes other institutions work well. Because you need feedback from the local level to get institutions right (can’t just use institutional blue-print from other countries), you need ways of ensuring dialogue between policymakers and citizens. Empirically, democracies tend to experience better economic growth, more stability, better distribution of resources within society. o Criticism of institutions argument: The only criticism I noted was with regards to the argument that institutions inherited from colonialism determine growth, and this explanation has also been criticized for being overly deterministic(what can you do about your colonial past?). Henry and Miller do point out a case when institutions were the same, but policies varied, to argue against an institutional prescription for growth. · ** Policy argument (Henry and Miller; Rodrik—though secondary to, and stemming from, institutions; Sen): ** In particular, getting macroeconomic and industrial policies right has been emphasized as the key to growth. Henry and Miller note that in Barbados and Jamaica, the same institutions and geography lead to different outcomes because of policy. o Rodrik notes that policies must be “homegrown” and “creative”—sometimes you go with “second best” policies that are not necessarily the most directly targeting the distortions. Rodrik is in fact more concerned with processes by which policies are formed (institutions) than getting the outcomes right (policies) o “Industrial policy” refers to government intervention in supporting certain sectors of the economy to lead growth—in its modern iteration, can refer to sectors beyond “industry.” § In 60s and 70s, big state led development was championed (import substitution industrialization, public industries, planned economies), then big backlash against this with economic liberalization of the 80s and 90s because it was purported that gvmt intervention was a distortion (rent opportunities lead to corruption, and gvmts can pick “winner” industries as well as the market, so lots of wasted gvmt money). § However, looking at East Asian economies, and more successful Latin American economies (Brazil, Chile, Mx), you see that some degree of industrial policy was key in their success. Empirically, some degree of subsidies, protectionism, venture capital on the part of gvmts lead to growth. § Theoretically, industrial policy is necessary according to Rodrik. It overcomes information externalities (great deal of experimentation needed for a developing country to figure out it can produce something at lower costs—figuring this out means high private costs, and high public payoffs, so undersupplied by market) and coordination externalities (for some industries to work, you need a bunch of different industries to grow together on which that industry depends—gvmt needs to help coordinate this). § Sen—notes that some government planning and involvement in promoting industrialization has been positive, particularly in looking at China, Sri Lanka (though says data on this hard to find). o Other policy prescriptions (denoted “Macroeconomic” policies by Miller and Henry): § Get the exchange rate right: When pegging to the dollar inevitably led to crisis, Barbados effectively devalued its currency by negotiating a drop in real wages. This wage cut restored competitiveness. (Henry and Miller). Note, this is difficult to do in democracy. § Adopt an outward-looking growth strategy: Avoid nationalization, keep state ownership to a minimum and be open to trade. (Henry and Miller) § Ensure fiscal discipline: Policy makers in Barbados kept government spending under control (Henry and Miller). § Note that these are largely in line with the general neoclassical economic goals that Rodrik agrees are important goals.
 * SIS-700 Final Preparation**
 * Potential Outline for Questions: **