INR 3016
Global Political Issues
INR 3016
Global Political Issues
Module 2: Problems With the Global Economic Order,
Part I
Module 2: Problems with the Global Economic Order, Part I
I. Concepts
A.
B.
C.
D.
E.
Normal trade relations
Less Developed Countries (LDCs)
More Developed Countries (MDCs)
Fotreign Direct Invetsment (FDI)
Three types of traded goods
• Primary goods (minerals & agricultural)
• Secondary goods (manufacturing)
• Tertiary goods (services)
Module 2: Problems with the Global Economic Order, Part I
II. Decolonialization Period, 1957 to 1985
A. Less Developed Countries (LDCs) produced mostly
primary products and were “monocultural”
1. Problem for LDCs
a) Accessing MDC markets: Tariffs highest on
primary goods
b) Dependency on single agricultural exports is not
good
1) Instability in prices
2) In long run primary products tend to get
cheaper
3) Not a lot of ‘value-added’ in agriculture
Module 2: Problems with the Global Economic Order, Part I
II. Decolonialization Period, 1957 to 1985
A. Less Developed Countries (LDCs) produced mostly
primary products and were “monocultural”
2. Two leading economic theories of the period:
• “Liberal” freer trade (comparative advantage) and
smaller government; less redistribution
• Dependency theory / reduce trade with importsubstitution industrialization (ISI)
3. Most LDCs choose Dependency theory / ISI
• Most had weak markets and weak market culture
• Heavily steeped in patronage
• Impressed with Soviet command economy
Module 2: Problems with the Global Economic Order, Part I
II. Decolonialization Period, 1957 to 1985
B. Global strategic environment
1. Cold War superpower competition
• US & USSR provide substantial economic aid
• Critics: Promotes corruption? Influence?
2. Vietnam / ’73 October War / ‘70s Oil Crisis:
Nationalizations
3. United Nations General Assembly (UNGA)
• Demands for ‘New International Economic Order’
• Colonial reparations
• Wealthy/Western nations refused demands
Module 2: Problems with the Global Economic Order, Part I
III. Transition Period, 1985 to 1991
A. 1985+ Soviet Union failing / ISI failing (though model
worked well up to a point, it promotes balance of
payments problems)
B. Reagan & UK PM Thatcher pushing liberal model
• Smaller government and ideological belief in the
“magic” of marketplace
• Freer foreign trade
C. New US pro-market initiatives:
• Africa free market access
• Carribean Basin Initiative free market access
Module 2: Problems with the Global Economic Order, Part I
IV. Which nations succeeded?
Answer: The Asian Tigers: Hong Kong, Singapore, South
Korea, & Taiwan
A. Did the Tigers choose the “liberal” or “dependency”
model?
Answer: Neither - the Tigers choose state-managed
“neo-mercantilism”
• State-centric goal of trade surplus
• State-guided strategic investment in education and
high value added export industries
• Restrictions on foreign investment
• Restained domestic consumption (all the Tigers
were autocratic)
• State control and devaluation of currency
Module 2: Problems with the Global Economic Order, Part I
IV. Which nations succeeded?
A. Did the Tigers choose the “liberal” or “dependency”
model?
“neo-mercantilism”:
• Strategic “dumping” on the US market, tolerated by
the US
• Result: creation of comparative advantage in high
value-added consumer electronics
• Consumer electronics rebounds postively
throughout economy because it requires multiple
high tech industries and an educated populace
Module 2: Problems with the Global Economic Order, Part I
V. What economic theories are popular today?
A. Dependency / ISI model largely rejected
• Most nations now embrace foreign investment &
freer (less controlled) foreign trade
B. Most LDCs would like to emulate the Asian Tiger
model, but cannot:
• Dumping and strategic currency devaluation now
illegal in WTO laws
C. What LDC nations are doing best today?
Module 2: Problems with the Global Economic Order, Part I
VI. Today: Great Improvements Most Everywhere
B. Decreasing global inequality (at individual level)
1. Great advances in LDCs (India, China, Brazil, Asian
Tigers)
• 2 Billion people have advanced . . .
• Africa the major exception, but Africa too doimng
much better
2. Increasing globalization is reducing the incomes of
many workers with less formal education in the
MDCs
• Why?
• LDCs have comparative advantage in low wages
• Mexico’s wages just 11% of US workers
• China’s wages just 3% of US workers
Module 2: Problems with the Global Economic Order, Part I
V. What economic theories are popular today?
D. What LDC nations are doing best today?
– China
– Brazil
– Turkey
E. What model are the sucessful LDCs following?
• Not entirely Liberal (they are embracing freer trade,
but with big government and redistribution)
• Not entirely neo-mercantilist (they are less
concerned with trade surplus; currency devaluation
and dumping illegal; embrace of FDI)
• General mix of: Keynesian-like spending; promotion
of high-value added goods with tax breaks;
diversification of industrial bases
Module 2: Problems with the Global Economic Order, Part I
VI. The International Monetary Fund
A. Voting system based on contributions
B. 1944-1980: “Keynesian” period
• Goal: stimulate demand
C. 1981-2002: “Washington Consensus” period
• Goal: monetarist price stability (Milton Friedman)
• Problems:
– Evidence for theory weak (but application in
banks’ interests)
– IMF conditionalities caused reduced govt services
– “One size fits all” (Stiglitz)
– IMF too powerful due to dependency on FDI
(Stiglitz)
Module 2: Problems with the Global Economic Order, Part I
VI. The International Monetary Fund
D. 2002+: Post-Washington Consensus
• New voting system adopted that favors LDCs. EG:
– US has 16.8% [contributes 17.1%]); Europe has
25%
– Venezuela has 1.21% (about ¼ Germany’s, yet
Germany’s contribution is 8-fold larger)
• Reduced conditionalities
• Reduced emphasis on monetarist price stability
• New emphases on:
– Good governance (EG: banks in Turkey)
– Women’s education
– Redistribution
– Environment
Module 2: Problems with the Global Economic Order, Part I
VII. Today: Great Improvements Most Everywhere
A. Rise of manufacturing in LDCs
1. Today most “LDCs” export some manufactured
products
2. The US now imports more manufactured goods from
LDCs than from other MDCs
3. Many MDCs are exporting fewer manufactured
goods
– EG: US autos, steel, and textiles. . .
4. Many MDCs never stopped exporting agricultural
goods
– EG: The US
Module 2: Problems with the Global Economic Order, Part I
VI. Today: Great Improvements Most Everywhere
B. Decreasing global inequality (at national level)
3. Fact: 2005 first year with fewer than 10 million baby
deaths
4. Prices of oil/wheat/rice way up
• Why?
• Answer: Many of billions of people are now:
o Eating more meat (consumption in LDCs up
33% 1997 to 2007)
o Buying/driving cars