Transcript Savings Rates in 1989 (Percentage of GDP)

Developing Countries and
Globalization
Lecture 20
The Logic of Economic
Development
• Economic Development:
– Raising Per Capita Incomes
– Improving Quality of Life
• Development Necessarily
Causes Structural Change.
– Growing Demand for Labor
Pulls Workers Away from
Agriculture into Industry.
– “Traditional” Labor Intensive
Methods of Production are
Replaced by “Modern”
Capital-Intensive Methods
• Incomes Rise as Employment
Opportunities and Productivity
Expand
Source: World Bank, World Development Report 1995
Investment is the Key to
Economic Growth
• Investment: the Purchase
of Machines that Produce
Other Goods.
• Without Investment:
– No Expansion of
Employment
– No Productivity Gains
– No Economic Growth
• With Investment:
– Employment Grows
– Productivity Grows
– The Economy Grows
Source: Dani Rodrik 1999.
Economic Growth and Incomes
• Investment Drives
Economic Growth
• Economic Growth
Drives Income Growth
Source: World Bank, World Development Report 1995
Saving is the Key to Investment
• Savings: That Portion of
National Income Not
Consumed.
• Societies must Save In
Order To Invest.
• Low-Income Countries
Don’t Save Much
– As a Percentage of Their
Incomes.
– In Absolute Terms.
Savings Rates in 1989
(Percentage of GDP)
East Asia
34.7
Latin America
22.5
Sub-Saharan
Africa
12.4
OECD
22.2
Source: World Bank
Summarizing…
• Economic Growth is the Key to Economic
Development
• Investment is the Key To Economic Growth
• Savings is the Key to Investment
• Developing Countries Lack Large Pools of
Savings, and Thus Can’t Investment
Enough to Spur Development.
The International Economy and
Economic Development
• Do MNCs Facilitate or Frustrate Economic
Development?
• Does International Trade Facilitate or
Frustrate Economic Development?
• Theoretical Answers and Real-World
Experience Suggests…
MNCs and Developing Countries
• Transfer Savings from Rich to Low-Income
Countries.
– More Investment Than Otherwise Possible
• Transfer Technology from Rich to Low-Income
Countries
– More Productivity Gains Than Otherwise Possible
• Provide Access to International Marketing
Networks
– More Export Opportunities Than Otherwise Possible
• Higher Growth, More Jobs, Higher Wages Than
Otherwise Possible.
Trade and Investment
• Investment Requires the Installation of Machines
that Produce other Goods—Capital Goods.
• Developing Countries Do Not Produce Capital
Goods, and Must Import Them
• To Pay For Imported Capital Goods, Developing
Countries Must Export.
• Development Dependent Upon International Trade
Balance of Payments
• Current Account Deficits as they Import
Capital Goods.
• Capital Account Surplus as they Import
Financial Capital to Pay for Capital Goods.
International Trade and Wages
• Factor-Price
Equalization Says:
• Developing Country
Wages Should Rise as
they Open Up To
International Trade.
Source: World Bank, World Development Report 1995
Who Has Been Open To Trade
and Investment?
• Governments in Africa and Latin America Adopted
“Import Substitution Industrialization” Development
Strategies.
– Closed To Imports
– Exported Very Little
– Limited MNC Presence
• The East Asian NICs (South Korea, Taiwan, Singapore,
Hong Kong, Malaysia, Indonesia, Thailand) Adopted
“Export-Oriented” Development Strategies.
– Controlled Imports
– Exported a Lot
– Welcomed MNCs
Implications of Different
Development Strategies
• Should Expect to See Very Little Wage Growth in
Africa and Latin America During the Latter Part of
20th Century.
• Should Expect To See Rising Wages in East Asia
During the Latter Part of 20th Century.
Source: World Bank, World Development Report 1995
Summarizing
• Theory and Evidence Suggest Real Benefits to
Developing Countries that Participate in
“Globalization.”
• In Theory, Provides Financial Capital and Capital
Goods Needed for Development
• In Practice, those Developing Countries that Have
Been Most Integrated into the International
Economy Have Realized the Largest Income
Gains.
Qualifications?
• Opening to the International Economy Brings
Vulnerabilities.
– Financial Crises, Brazil 1998, Asia 1997, Mexico 1994
– “Terms of Trade Shocks”
• Not Every Country Will Be Growing at Every
Moment.
– Need to Focus on Long Term Rather than Short Term
Developments
– Need to Focus on Broad Patterns Rather than Specific
Cases that Are Clear Exceptions.
I’m Not Pangloss
• Many People in Developing Societies Remain Very, Very
Poor
– Globalization Has Not Made them Wealthy by Western
Standards.
• Working Conditions in Most Developing Countries are Not
to Western Standards.
– Child Labor, Long Hours, Low Pay, Health Hazards
• MNCs and Local Firms Take Advantage of Conditions.
• The Real Question is, What is the Alternative?
– The Only Developing Countries that Have Improved Have
Integrated into the Global Economy.
– None of the Countries that Stood Aside Have Improved.