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1Economic Development 12.03.12ED: Theories and Strategies - I

* Some parts of this note are summaries of references for teaching purpose only.

Semester: Spring 2012 Time: Monday 9:00~12:00 am Class Room: No. 115 Professor: Yoo Soo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com2Economics is not only concerned with generating income, but also making good use of that income to enhance our living and our freedom.-Amartya Sen. Conversation with SenMeaning of DevelopmentConcept of development- Economic development is the increase in the standard of living of a nations population with sustained growth from a simple, low-income economy to a mordern, heigh-income economy. Its scope includes the process and policies by which a nation improves the economic, political, and socila well-being of its people.Important aspects of developmentThe challenge of development is to improve the quality of life. Especially in the worlds poor countries. Development means less poverty, cleaner environment, more equal opportunity, greater individual freedom and a richer cultural life.Development must be conceived of as a multidimensional process.

3Development must involve major changes in social structures, popular attitudes and national institutions as well as acceleration of economic growth, the reduction of inequality and the eradication of poverty.Development must represent the whole set of changes by which an entire social system tuned to the diverse basic needs and desires of individuals and social groups within that system , moves away from a condition of life widely perceived as unsatisfactory toward a situation or condition of life regarded as materially and spiritually better.Development is seen as an economic phenomena in which rapid gains in overall growth would either trickle down to the masses in the form of jobs and other economic opportunities.Development is the reduction or elimination of poverty, inequality and unemployment within the context of a growing economy. The development of people rather than development of things.

4Core Values of DevelopmentSustenance: The Ability to Meet Basic Needs

When life sustaining basic human needs like food, shelter, health and protection are absent underdevelopment exists.

One clearly has to have enough in order to be more.

Purpose of development is to create an environment in which all people can expand their capabilities and opportunities can be enlarged for both the present and future generations.

Real foundation of human development is universalism in acknowledging the life claims of everyone.

5Beyond GDP6GDP is not an Appropriate Measure for DevelopmentIt includes economic activities that can reduce the well-being (e.g., production and consumption of goods with negative impact on human health and natural environment) It does not include all available resources (in particular the resources of households)It excludes several important factors of well-being (health, education, working conditions, equity, time use, social relations, social cohesion, citizenship, etc)It ignores essential factors of sustainability of well-being (e.g., environment, human and social

Relationship between Human Well-being, Economic Well-being and GDP7

Source: OECD, Well-being of Nations 2001.Key Inputs to Human Well-being and Their Inter-relationships8

Source: OECD, Well-being of Nations 2001.What is the Cycle of Poverty?

The cycle of poverty has been described as a phenomenon where poor families become trapped in poverty for generations. Because they have no or limited access to critical resources, such as education and financial services, subsequent generations are also impoverished.

Due to the many root causes of poverty and the complexity with how poverty is measured and defined, there are multiple cycles of povertybased on, among other things, economic, social, spiritual and geographical factors. Many cycles overlap or perpetuate new cycles and therefore any attempt to depict the cycle of poverty will be far more simplistic than realistic.

A key goal of development aid, working together with recipients, is to fund new and existing poverty-reduction initiatives that inject positive change into a poverty cycle with the intent of breaking the cycle for the individual, family or community benefiting from that initiative.

9A cycle of poverty related to hunger keeps a person or household poor in a developing country.

10In most cases, the cycle of poverty is systemic in nature, meaning action needs to be taken to combat the root causes of poverty. For instance, the reduction or cancellation of the national debt for the world's poorest countries will have a potentially dramatic effect on those nations' economies. They can, in turn, spend money on government-funded education for instance, rather than interest payments on a debt they will ultimately never repay.

One cycle of poverty can expand or develop into another. A country's slow economy, and consequently a family's low income, not only means a lack of access to food and safe water, but also means limited or no funds for sending their children to school.

1112 Mult-facet Causes of Poverty- Physical capital differences; poor countries don't save enough.

- Human capital differences; poor countries don't invest enough in education and skills.

- Technology differences; poor countries don't invest in R&D and technology adoption, and don't organize their production efficiently.

- Markets; markets don't function in poor countries.

- Institutions: humanly-devised rules shaping incentives

- Geography: exogenous differences of environment

- Culture: differences in beliefs, attitudes and preferences

Question: Why do poor countries cannot solve these problems, if any?1213Economic Development ProcessHuman Welfare (W)WARelatively lowerlevel of welfareSociety ASociety BA fillter named Ideal Typus (ideal type of cultural values of different countries or areas)Various Types of path for transition, which dependon various causal relation-ships and likelihood of their realizationWBRelatively higherlevel of welfareC11CijCMN(Direction of Economic Development)Source: Lee, Jong Won. 2004. Revised.14Study of Economic Development Theories start with observations of facts. On the basis of theories and observations, policies are formulated and applied to the real world, which will change facts. There is a circular flow.

Facts Several different schools (theorists) of economic development emerged.TheoriesPoliciesDevelopment EconomicsDevelopment economics is a branch of economics which deals with economic aspects of the development process in low-income countries.

Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population.

DE involves the creation of the theories and methods that aid in the determination of policies and practices and can be implemented at either the domestic or international level.

Unlike in many other fields of economics, approaches in development economics may incorporate social and political factors to devise particular plans.15Simon Kuznets (1st Nobel Economics Prize 1971)Growth = long-term rise in capacity to supply increasingly diverse economic goods, based on advancing technology, and the institutional and ideological adjustments that it demands.

Characteristics of modern growth - High rates of growth of per capita product - Rise in the rate of productivity - High rate of structural transformation - Change in social and ideological structures - Globalization of technological and capital flows - Large income gap between developed and emerging countries

1617A Brief History of Development TheoriesNeoclassical Growth/Development Theory

- These economists argue that international trade can provide a substitute for low domestic aggregate demand.

- The only things governments need to do is to position an economy on an autonomous, sustained-growth path is to remove barriers to international trade in commodities.

- Comparative advantage, combined with the Hecksher-Ohlin theorem, will then do the rest.

- In this view, domestic and international liberalization programs suffice to bring about sustained economic growth and structural change.18Neoclassical Growth Thery: 1950s-1960s

Harrod-Domars Growth Model (Neo-classical): Convergence? gc=s (g=growth rate in GDP, c=marginal capital coefficient (change in capital growth/change in output growth), s=savings rate) (Ex: If the final goal, g=7% and c=5, s should be 35%.)

Stages-of-growth TheoryFormulated in the 1950s by W. W. Rostow in The Stages of Growth: A Non-Communist Manifesto, following works of K. Marx and F. List.Rostows Stages of Economic Growth: Traditional society, Preconditions for take-off, Take-off, Drive to maturity, High mass consumption

19 The Structural Change Approach - The Two-Sector Model of Lewis(=Model of Unlimited Supply of Labor)

Kuznets and Chenery - Focused on changes and patterns of industrial structure

The Dependency Theory and Neo-Marxian Approach - To be explained

1970s International Dependency TheoryThese theories gained prominence in the 1970s as a reaction to the failure of earlier theories to lead to widespread successes in international development.

The theories have their origins in developing countries and view obstacles to development as being primarily external in nature, rather than internal.

These theories view developing countries as being economically and politically dependent on more powerful, developed countries which have an interest in maintaining their dominant position.

1980s Resurgence of the Neo-Classical School Emergence of the Neo-Institutional School

2021Economic Develpment Schools

Contrasting Views on DevelopmentEconomic development is rooted in market-driven economic policies, in cautious monetary management, and in trade liberalizationFree trade is mutually beneficial = positive sum gameDevelopment catch-up takes place as capital flows from rich to poor countries with technology transfersThe State should limit its intervention to the strict minimum to avoid any market distortionCompetition for profits leads to ever extending the capitalist system into developing economies where labor is cheaper, hence higher profitsKeen competition between multinationals erodes the dynamic stimulus of competition and leads to monopolies for the sharing of markets worldwide.The State must intervene to foster a steady expansion of aggregate demand to fight unemployment

Classical/liberalKeynesian with Marxist ramification22The Roots of Underdevelopment Marx and his sons and grandsons - The dependency school - The dissidents

The anti-liberal school of thought - Marx and his grandsons - Dependency School: Paul Baran/Sweezie, Samir Amin, Immanuel Wallerstein, A. Gunder Frank - The dissidents (non-Marxian): Krugman, Sachs, Stiglitz

2324Dependency Theory Emerged in Latin America in the 1960s - Suggested by socialists and political scientists, on the basis of the experience of Latin America (countries which export mainly primary products). - They viewed that economic theories developed by developed countries were not appropriate for solving problems of underdevelopment in less developed countries. Namely, the neo-classical school assumed efficient market mechanism, but less developed countries have many structural problems, they claimed.Periphery point-of-viewThe core-periphery relationship is responsible for the chronic state of under-development in the periphery.Economic exploitation Dependency of inputs from the core

Marx s Grandsons: Dependency Theory Economic developments roots of industrialized countries? - Theory: Center-periphery interactions with massive exploitation of cheap labor and abundant raw materials in under-developed countries.

- Who: Wallerstein, Baran, Sweezie, Samir Amin, Palloix, Gunder Franck...

- View: The Capitalist World-Economy

CENTERPERIPHERY25Dependency ApproachThe only kind of social system is a world system, defined as a unit with a single division of labor and multiple cultural systems.

The capitalist world-economy emerged in the mid-16th Century and spread over the entire world. It is characterized by a situation of structural dependence of developing countries under the domination of center-country economies.

The capitalist world-economys objective is production for sale in a market in which the aim is to realize the maximum profit. In such a system, production is constantly expanded as long as further production is profitable.26Engine of growth: Capitalism is the only mode of production in which the maximization of profit creation is rewarded per se. The rewards and penalties are mediated through a structure called the market, that is the principal arena of economic power struggle. Thus the pressure is for constant expansion.

The world capitalist system involves not only appropriation of the surplus value by an owner from a worker, but an appropriation of surplus of the whole world-economy by core areas (Britain in the 14th Century, USA and industrialized countries in the 20th and 21st Centuries). 27- Engine of growth and crisis? The ability of the system as a whole to expand and create more profit regularly runs into the bottleneck of inadequate world demand: crisis of overproduction, stock market crisis, deflation

- The role of the state as an institution in the world-economy is to regulate the market, i.e., to monitor the freedom of the market to minimize the risk of crisis.

- The world economy does not tolerate any socialist systems because it is rooted in a single world system, capitalist in form.

28The Dissidents Paul Krugmans view on globalization

- In the 1980s, openness to trade was widely believed to reduce the likelihood of financial crises.Today, growing global integration does predispose the world economy toward more crises because it creates pressures on governments to relax restrictions. Economies are doing better in good times but are far more vulnerable to sudden crises due to rapid capital flight. The ride will continue to be very bumpy for many years to come!

29 Krugmans view on Asias 1997-98 economic crisis The logic of catastrophe was pretty much the same in Thailand, Malaysia, Indonesia and South Korea. In each case investors--mainly, but not entirely, foreign banks who had made short-term loans--all tried to pull their money out at the same time.

The result was a combined crisis:

- a banking crisis because no bank can convert all its assets into cash on short notice; - a currency crisis because panicked investors were trying to convert baht or rupee into dollars. - a governance crisis

30 Paul Krugmans view on Asias crisis - Was the crisis a punishment for bad economic management? Like most clichs, the catchphrase "crony capitalism" underlies something real: excessively cozy relationships between government and business really did lead to a lot of bad investments. - The still primitive financial structure of Asian business--too little equity, too much debt and too much of that debt consisting of soft loans from accommodating banks--also made the economies peculiarly vulnerable to a loss of confidence

3132 Joseph Stiglitzs views

- Poverty is an affront to human dignity G7-governments urge liberalization on developing countries while maintaining trade restrictions and pushing intellectual property protection into the WTO.

- The IMF's policies, in part based on the outworn presumption that markets, by themselves, lead to efficient outcomes, failed to allow for desirable government interventions in the market.

- Asymmetries of information prevent markets from full efficiency. Government and market are complementary and there is an important role, if limited, for government to play.

Consequences Deregulation will not promote financial development when information is asymmetric and competition inadequate. The economic efficiency is not secured. It will spur corruption and create an oligarchic elite that opposes the emergence of competitive markets.

The partisans of the Washington consensus overlook the importance of economic and corporate governance, underestimate the difficulty of building institutions, and forget that many countries lack the sophisticated public administrations needed to ensure adequate competition.33Endogenous Growth The new growth theory/endogenous growth theory was developed in the mid 1980s. - This theory was developed in response to criticisms of the Neoclassical Growth Model.

The neoclassical growth theory defines growth as being exogenous. - The endogenous growth theory originates with the growth source being inside the model. - Neoclassical growth models are able to describe how an economy grows, but not why it grows. - Endogenous growth theory was developed to make up the shortfalls of the neoclassical approach to growth and take a step further understanding developmental growth.3435Endogenous Growth Theory

The role of technology and knowledge is endogenously treated in this theory.

Trade and endogenous growth have been linked to growth through technological and knowledge spillovers and learning.

Imported capital embody information about new technologies and producers; exposed to this information are more likely to innovate hence growth.

Higher degree of competition in foreign markets increases incentives to innovate, as domestic firms enlarge the stock of domestic knowledge due to interactions in foreign markets.

Knowledge is acquired through learning by exporting and exposure to international competition, leading to exploitation of the economies of scale.

Trade facilitates knowledge and technology transfer across countries, and facilitates spillover effects due to learning by doing gains and better management practices triggered by the new technologies.

3536 - There is need to create a conducive environment to allow the acquisition, dissemination and utilization of knowledge and technologies. (Knowledge-based Economy)

- Develop or strengthen innovation systems so that countries are able to tap on the growing stock of global knowledge, assimilating and adapting it to local needs and creating new knowledge.

- There is need to expand access to educational levels that are critical for knowledge acquisition, dissemination and utilization (e.g. secondary and tertiary education).

- There is need to improve quality of the whole education system as well as content and relevance of what is taught. Need to shift from the formal education system to the development of on-job training and life-long learning systems to cater for the technological advances.

- There is need to continuously invest in ICTs especially in areas that have a direct bearing on knowledge and technological access and transfer.

Visions of Endogenous Growth Theory As an economy growths, organization of the industry increases, potentially providing the opportunities for one of the firms to specialize in one different activity.

Firms can now develop differentiated products and compete on the quality of products.

Options available to the Government for Policy Implications - Encouraging research and development, in order for firms to continually experience increasing returns and thus grow.37The new growth theory relaxes the assumption of diminishing returns to capital. It does so with the new assumption of continuous research and development. With constant or increasing returns, the new growth theory does not conclude that income per capita will converge across world economies.

Neoclassical vs. New Growth Theory - The neoclassical growth model of Solow assumed technological progress to be exogenous not because this was a realistic assumption but because it was the only theoretically manageable one. The problem with neoclassical theory is not that it analyzes capital accumulation but that it does not analyze technological progress.

- The purpose of endogenous growth theory is to fill this gap in neoclassical theory and to open up technological progress and innovation to systematic analysis, and to study their effects on growth3839Theory of Modernization and Stages of Economic Development/Growth - Modernization is a change process for less developed countriesto the development process of the Western countries in the 17-19 century. Economic development is a part of the modernization process. Modernization theory distinguishes a society to a traditional one and a modern one.Rostows five-stage economic development/growth hypothesis is a response to Marxian view, but differs from the Marxian materialistic interpretation of history. - The take-off stage is the distinctive stage in which investment rate increases usually from less than 5% to more than 10%; development of manufacturing sectors; existence of a political, social and institutional framework which supports the expansion of the modern sector.- It is questionable whether all countries follow the same stages as claimed by Rostow.

Rostows Five-stage Model of Development40

Modernization TheoryIncrease investment increase industrializationImprove productivity and raise GDPIncomes increase, and thus consumption increases41Five-stages of Economic Development

42Stages of Economic Development and Countries

Economic GrowthAfricaIndia Pakistan ChinaLatin AmericaAsiaEastern EuropeTaiwanSouth KoreaChileOECD outside Korea and MexicoStages 1-2 34 5Maturity StageTake-off Stage

43435 tapes de la croissanceSocits traditionnelles (pas de science moderne)Pr-conditions du dcollage (priode de transition entre socits traditionnelles et socit moderne technologique)Dcollage (apparition des premires industries, forte augmentation de la productivit agricole)Marche vers la maturit (dvpt au del des secteurs qui ont initi le dcollage)Consommation de masse (conomie de service)44This theory modifies Marxs stages theory of development and focuses on the accelerated accumulation of capital, through the utilization of both as a means of spurring investment, as the primary means of promoting economic growth and development.

Such theories have been criticized for not recognizing that capital accumulation is not a sufficient condition for development. Early and simplistic theory failed to account for political, social and institutional obstacles to development.Dependency Development TheoryCore-orientedAttempt to replicate the prosperity of the core in the periphery by encouraging economic growth through industrialization and modernization.Two assumptions of the core The periphery should attempt to be like the core in its pathway to development.The economic problems of the periphery are due to poverty and backwardness.Development requires separation from the capitalist world-system and economic dependency.Opposite of neo-liberalismLatin America prior to the debt crisis4546 Failure of strategy for domestic-oriented (=inward-looking) and import-substitution industrialization - In LAC most of the population live in the absolute poverty status and the main investors in industrial sectors are foreign multinational corporations.

Global and structural polarization - Underdevelopment and development are not different stages, but a coexisting structural phenomenon.47II3II2II1EFG(MPL)3 = (DL)3(MPL)2 = (DL)2(MPL)1 = (DL)1L1L2L30WCABCMPLModel of Unlimited Supply of Labor by LewisLWs48Essence of the Lewis Model

The Structure of the Lewis Model: Dual economy RegionsUrban areaRural areaIndustryIndustryAgricultureDevelopment levelModernizationTraditionalFunctions in the modelIndustrial production & employment absorptionSubsistence income & unlimited supply of laborFactors of economic developmentCapital accumulation & labor productivityAgricultural technology development & productivity Structural-change Theory

This theory deals with policies focused on changing the economic structures of developing countries from being composed primarily of subsistence agricultural practices to being a more modern, more urbanized, and more industrially diverse manufacturing and service economy.

Lewis two-sector surplus (or unlimited supply of labor )model, which views agrarian societies as consisting of large amounts of surplus labor which can be utilized to spur the development of an urbanized industrial sector.

Chenerys patterns of development approach, which is the empirical analysis of the sequential process through which the economic, industrial and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth.

49Criticism on the dual structural-change theory:

Emphasis on urban development at the expense of rural development Underlying assumption that predominantly agrarian societies suffer from a surplus of labor (the two-sector surplus model) Lacking a theoretical framework (the patterns of development approach)

50Structural ChangesThe Process of Structural Changes and Economic Development There is continuous and successive structural transformation in the process of development from a less developed country to a developed country. This structural transformation continues even after being a developed country.

S. KuznetsEmpirically analyzed the development process of developed countries in the last 200 years. H. B. CheneryIdentified structural patterns in the process of development through empirical analyses of the relationship between structural change and economic development in both developed and developing countries in about 20 years period.

5152 Characteristics of Structural Transformation in an Economy Realized with plural and close interrelationships Not a temporary phenomenon but a continuous process Speeds and types of structural changes are not necessarily the same among countries Usually follow an S-shape logistic curve 10 basic Process of Structural Transformation Related to physical and human capital accumulation: investment, government revenue, education, Related to resource allocation: domestic demand, production, trade Related to population and income distribution: employment, urbanization, population changes, income distribution.53 Factors of Changes Factors resulting common changes

Commonality of consumption change according to growth of incomeNecessity of physical and human capital accumulation for increasing incomeUse of similar technologiesIncrease in international trade Factors resulting different changes Difference in social goals and policy means Difference in endowed natural resources Difference of community size Difference in using foreign capital utilization Difference in supply conditions of production factors 54 Upper limit line Lower limit line Income Level Negative acceleration of structural changes Positive acceleration of structural changes S-Type Curve of Structural Changes (Growth Curve)(%) Structure55 Industrialization and De-industrialization The Law of Petty-Clark (A survey of 50 countries)They discovered the phenomena of changes in industrial structure in the increasing order of share such as the primary industry < the secondary industry < the tertiary industry, according to the increase in the national income.Due to the income inelasticity of demand for the primary industry and to the decreasing returns of the secondary industry overtime. Hoffmans Ratio (= the share of light industry/the share of heavy industry)When a country's economy enters the process of industrialization, in general, the share of the consumption goods industry (the light industry) is increasing first. Then, the share of the capital goods industry (the heavy and chemical industry) is increasing. Krauses Stages of Industrial DevelopmentSee the following table of Krause (p.24)56 Classification of IndustryAgricultureForestryFishing Primary IndustryMining Construction Manufacturing Secondary IndustryElectricity GasTransportationCommunicationWholesaleRetail tradeFinanceInsuranceServicesGovernment Administration Tertiary IndustryFood BeverageTextileWood Paper ProductsChemistryPetroleum Coal ProductsSteelMetal ProductsMachineryMachine for TransportPrintingPublication57Industrial Growth Pattern by Factor-Intensity (Krause)Advanced electrical equipment, optic & precision machinery, special non-electric machineryR&D-intensive & high wages5thOptical goods synthetic rubber, generator & office appliances, photography equipmentR&D, capital-intensive & high wages4thBasic mineral products, steel products, non-metallic products, tractors & construction equipment, motor vehicles & trucks, paper, synthetic fiber & similar products Capital-intensive & high wages3rdArtificial fiber, home appliances, other non-electric machinery Capital-intensive2ndTextile&clothing, construction material, other metal products, metalwork, electricity & electronic, motor cycles, shipbuilding, food & beverages & tobaccos, miscellaneous productsLabor-intensive1stIndustriesCharacteristicsStage58Recent Theoretical Development

New Growth School - Endogenous growth theorists. * P.Romer

Neo-Schumpeterian School - The engine of capitalist development is innovation ( creative destruction ). * K. Pavitt

Neo-Institutionalist School - Critical of neo-classical economic approach. Emphasizing institutions. * D. North

Evolutionary Economics School - Development the firm and economy follow the survival of fittest on the basis of technology and market competition. * R. Nelson, S. Winter

Comprehensive Approach

Flying Geese Model

58Liberal and Neo-classical School Market-based economic policy

Minimum state intervention

Key role of competition59The IMF Approach to Economic Growth and Development Development is economic growth + those conditions that make it sustainable, i.e. social mobilization, good governance, macro-economic stabilization; institutional development...

A country cannot have a sustained economic adjustment unless the government gets its budget in order.

Setting the prices right: interest rates, exchange rates, domestic prices, agricultural and commodity prices

6061 Institutional changes: staffing, training, education, procedures, laws, regulations...

Sustainable development stems from a combination of sound economic policies, growth, and institutionalization with timely structural reforms: - Stabilizing the macroeconomic situation - Reducing the size of the public sector as the private sector is the main engine for growth - Reform of the regulatory framework - Good governance

The Washington Consensus

Fiscal discipline A redirection of public expenditure priorities toward social fields (primary health care, primary education, and infrastructure)

Tax reform (to lower marginal rates and broaden the tax base)

Interest rate liberalization

A competitive exchange rate

Trade liberalization

Liberalization of inflows of foreign direct investment

Privatization

Deregulation (to abolish barriers to entry and exit)

Secure property rights 62Amartya Sens Development as FreedomRecent theories revolve around questions about what variables or inputs correlate or affect economic growth the most, including: Elementary, secondary, or higher education Government policy stability Tariffs and subsidies Fair court systems Available infrastructure Availability of medical care prenatal care and clean water Ease of entry and exit into trade Equality of income distribution - Should provide sound governments macroeconomic policies and all policies that affect the economy, politics and society

63Comprehensive ApproachEconomic Growth to Sustainable Development Political order in changing societies

- Probing the conditions under which societies undergo rapid and disruptive social and political change.

- The primary problem of politics is the lag in the development of political institution behind social and economic change

- Growth extends political consciousness, broadens political participation, and increases political demands

- Instability stems from rapid social change and rapid mobilization of new groups into politics coupled with slow development of political institutions6465Institutional Economics

Douglass North:Institutions are the humanly devised constraints that shape human interaction.

Economic institutions (e.g., property rights)Shape economic incentives, contracting possibilities, distribution

Political institutions (e.g., form of government, constraints on politicians)Shape political incentives and distribution of political power.6566Formal vs. Informal Institutions

How rules are codified vs. how rules are applied e.g., Constitutions of U.S. and many Latin American countries are similar, but the practice of politics is different.Why? Because the distribution of political power is different.

De jure vs. de facto political power

De jure political power: power allocated by political institutions (e.g., power allocated to a party by an election)De facto political power: determined by economic, military or extra-legal means (e.g., power of rebel groups in a Civil War, or the threat of such groups in peace)De facto power typically relies on solving the collective action problem

Kinds of Institutions6667Big differences in economic and political institutions across countries

Enforcement of property rights

Legal systems

Entry barriers

Democracy vs. dictatorship

Constraints on politicians and political elites

Electoral rules in democracy

Institutional Variation 6768

Economic Institutions and Economic Performance (1) Avg. Protection Against Risk of Expropriation, 1985-9569Economic Institutions and Economic Performance (2)

70Four Meta-Theories of InstitutionsInstitutions adopted if socially efficient (e.g. promote aggregate growth)Institutions adopted depending on beliefs by elite or citizens as to what is socially efficientInstitutions determined by historical accidents or unusual events, and are unchanging except for random events and future accidentsInstitutions chosen for their distributional consequences by groups with political power7071Power and InstitutionsEconomic institutions

Economic policies

Political institutions 71International Political Economy What Is International Political Economy (IPE)? International political economy is an analytical effort to break down the barriers that separate and isolate the disciplines of politics, economics, and sociology and their methods of analysis, seeking a comprehensive understanding of mainly international issues and events.

IPE employs three major analytical perspectives and four international structures that combine elements of economics, politics, and sociology to describe and explain international and global problems and issues in a way that cannot adequately be addressed by each of those disciplines alone.72 The Essence of IPE IPE is international in scope, meaning that it deals with issues that cross national borders and with relations between and among nation-states. Increasingly today, people talk about a global political economy because more and more problems and issues affect the whole world, not just a few nations, and require a universal perspective and understanding.

IPE involves a political dimension in that it usually focuses on the use of state power to make decisions about who gets what, when, and how in a society.

IPE is about the economy or economics, which means that it deals with how scarce resources are allocated for different uses and distributed among individuals, groups, and nation-states through the market process, which is sometimes decentralized and other times quite centralized or controlled by state officials.

IPE attempts to understand the complex interaction of real people in the real world, along with their attitudes, emotions, and beliefs.

7374 A Japanese Model: The Flying-Geese Model Background

In neoclassical theory, growth is ultimately traceable to the availability of given resources in conditions of full employment; at each moment of time, relative factor endowments also strictly determine, under conditions of static optimization, each countrys comparative advantages. Any change in international specialization can originate from accumulation of savings and translate into investments.

Flying Geese (FGP) was described as early as 1932 by the Japanese economist Kaname Akamatsu. In the west, Akamatsus ideas were interpreted simply as a version, or a completion of Vernons product cycle theory, which sees in the phases of maturity of the product and standardization of technology in the moment when the direct investment of the multinationals are directed towards countries with lower labor costs.

75 Flying Geese Pattern

Akamatsu derived the FGP from analysis of the historical evolution of the textile industry in Japan, focusing on the interrelations between the development of European capitalism and development of Asia.

Akamatsu traced out in seven stylized phases, laid down in sequence, the story of the interrelations between countries that give rise to an awakening of less developed areas of the world to modern economic development.

The industrialization process is seen as a succession of sequences in which imports set off domestic production, which subsequently finds an outlet in exports. This sequence begins with consumption goods, to extend later on to capital goods.

76

Substitution Strategy Concept by Gerscenkron

Gerschenkronian Thesis - The more backward a countrys economy, the greater was the part played by special institutional factors(and) the more pronounced was the coerciveness and comprehensiveness of those factors.

- The patterns of industrialization was a combined result of: The technological trends, Degrees of backwardness (=underdevelopment), The necessity and will for latecomers to compete with forerunners. 77

- The more backward (underdeveloped) a countrys economy, the more pronounced was the stresson bigness of both plant and enterprise..(and) the greater was the stress upon producers goods as against consumer goods.

- Different institutional patterns among countrys were a result of different catching-up strategy.

- A main driver in Gerschenkronian thesis is the competition among countries.

Gerschenkrons Late-Comer Advantage Hypothesis -Claimed that less developed countries can catch up with industrialized, developed countries.

- The different strategies and institutions adopted by latecomers were substitutes for the lack of prerequisites of development such as capital, technologies or financial intermediaries. a substitution (innovative) strategy.

78Late-Comers Advantage Characteristics of late industrializing countries - Industrialization starts by sudden high growth - Preference for large-scale factories and firms - The capital-good sector is more emphasized than the consumption-good sector. - There is a tendency to restrict peoples consumption - Utilization of centralized financial institutions Emphasis on diversification of growth types - Late industrializing countries do not necessarily follow the same stages of growth and trials and errors of developed countries. They have more opportunities in technology selection and learning, so that their growth can be faster and they can catch up with developed countries. The later starters should find more innovative or radical development strategies. 79

Cases of Gerschenkron and Shin

-G took and compared England, Germany and Russia whereas S compared US, Japan and ANIEs (Korean, Taiwan, Singapore).

Degree of backwardnessGerschenkronShinCountryStrategyCountryStrategyForerunnerEngland First innovator Commercial banksUS First innovator Technological leaderBackwardGermany Universal bankJapan Importance of the state Technologically industries EOSMost backwardRussiaState leadingANIEs Korean: Chebols Taiwan: SMEs Singapore: MNCs80Characteristics of late industrializing countries

- Industrialization starts by sudden high growth - Preference for large-scale factories and firms-The capital-good sector is more emphasized than the consumption- good sector. - There is a tendency to restrict peoples consumption - Utilization of centralized financial institutions Emphasis on diversification of growth types - Late industrializing countries do not necessarily follow the same stages of growth and trials and errors of developed countries. They have more opportunities in technology selection and learning, so that their growth can be faster and they can catch up with developed countries. The later starters should find more innovative or radical development strategies. GerschenkronsTheory (Summary)