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Political Economy of Third World Development
In recent years, scholarship on the Third World has
increasingly turned to political economy. Martin Staniland defines this field as the study of “how politics determines aspects of the economy, and how economic institutions determine the political process as well as “the dynamic interaction between the two forces”. This chapter focuses on several important economic issues: What should the role of the state be in stimulating and regulating economic growth and industrialization in the LDCs? What are the major strategies for development? How should countries deal with the deep economic inequalities that persist or even increase, during the modernization process?
The Role of the State
During the sixteenth and seventeenth centuries, major
European powers were guided by the philosophy of mercantilism, which viewed a nation’s economic activity as a means of enhancing the political power of the state and its monarch. Government was viewed as “both source and beneficiary of economic growth”. That perspective was sharply challenged by the 18th cc Scottish political economist Adam Smith, who favoured a minimized state that allows market forces a relatively free hand.
The Role of the State
Today, the collapse of the Soviet “command economy” and
the poor economic performance of the remaining communist nations (except China and Vietnam, which have largely abandoned Marxist economics)have discredited the advocates of state-dominated economies. At the same time, however, no government embraces full laissez faire (i.e allowing market forces a totally free reign, with no government intervention). All countries, no matter how capitalistic, have laws regulating banking, domestic commerce and international trade. In the real world, governments must decide where to position themselves between the extreme poles of laissez faire and a command economy.
The Role of the State
In the less developed countries (LDCs), the fragile
nature of many Third World economies, their high levels of poverty, their poor distribution of wealth and income, their extreme dependence on international market forces, and their endangered natural environment have encouraged many governments to assume an active economic role. As a consequence, their governments have often built the steel mills, railroads, or sugar refineries that the private sector could not or would not.
a worldwide trend toward “neoliberal” economic policies has sharply reduced government economic intervention in both the developing and developed world.The Role of the State More recently. Not surprisingly. governments have been called upon to protect the environment against the ravages of economic development. In recent decades. Latin America and South Asia than in the West. . however. state economic intervention traditionally has been more pronounced in Africa.
few countries fit any of these models perfectly. . ranging from command economies such as North Korea’s to very limited state intervention in Hong Kong.The Role of the State What follows is a discussion of a number of alternative models prescribing the role of the state in Third World economies. Yet these are just ideal types.
. then. One of Marxism’s appeals to its supporters. is its promise of great equality and social justice.The Command Economy Marx argued that capitalism produces an inequitable distribution of wealth and income because those who control the means of production (industrialists. peasants). landlords) exploit those who work in them (the working class.
. which have the greates disparities between rich and poor. A second assertion made by Third World Marxist regimes is that only they can free their country from the yoke of dependency. That argument is particularly persuasive in Latin America and parts of Africa.Command Economy The ideology has appealed to many Third World leaders and aspiring leaders who are troubled by the deep injustices in their own economic systems.
farms. Second. initially established in the Soviet Union. A command economy. retail establishments. the private sector has been quite limited. has two central features: First. major trade and commercial institutions. While all communist nations have allowed some private economic activity. and frequently. banks. which have largely abandoned Marxist economics in recent years. That includes factories.The Command Economy Another of communism’s appeals has been its belief in centralized state control over the economy. . decisions concerning production are not set by market forces but rather by centralized state plans. the means of production are primarily owned and managed by the state. aside from communist nations such as China.
. communist countries such as the Soviet Union and China were able to jump-start their industrial takeoffs.The Command Economy Command Economy’s earlier achievements: by being able to dictate the movement of people and resources from one sector of the economy to another. During the early decades of its revolution. During the 1920s and 1930s. along with millions of jobs that drew peasants away from the country-side and into higherpaying jobs and higher living standards”. China also moved quickly from a backward agrarian economy to a far more industrialized society. “entire industries were created [in the USSR].
though some of these gains were undermined in the 1990s. subsidized rents. following the loss of Soviet economic assistance. command economies have generally made great strides toward reducing income inequalities. In Cuba. It is here that communist LDCs most clearly outperform their capitalist counterparts. and free health care.The Command Economy Finally. the revolution brought a substantial transfer of income from the richest 20 percent of the population to the poorest 40 percent. The poor also benefited from an extensive land reform program. .
Moreover. Non of these qualities exist in Third World bureaucracies.The Command Economy Weaknesses: In the absence of signals of consumer demand. factory and farm managers in centrally controlled economies are rewarded for meeting their output quotas. with little concern for product quality. All efficient. . centralized command economy would need a highly skilled and honest bureucracy equipped with sophisticated technology such as computers and accurate consumer surveys. state planners have little basis for deciding what to produce and how much.
.than they are at developing sophisticated. hence harder to control to centrally. By the late 1970s (in China) and in the 1980s (USSR). their leaders (Deng Xiaoping and Mikhail Gorbachev) recognized the need to decentralize their economy and reduce state control. Moreover. command economies are more adept at building heavy industries such as steel mills or contructing public work projects-endeavors more typical of early industrialization.The Command Economy While the Soviet Union and China enjoyed impressive bursts of growth in the early decades of their revolutions. with both economies deteriorating. high-tech production techniques or producing quality consumer goods. each eventually ran out of steam as their economies became more complex and.
In the period between the two World Wars. many Latin American nations first pursued state-led industrialization. Argentina. That process accelarated during the Great Depression. when countries in the region had difficulty finding markets for their food and raw material exports and consequently lacked foreign exchange for industrial imports.Latin American Statism Even in capitalist Third World countries. seeking to be an engine of economic growth. Brazil. Uruguay and Mexico were among the early leaders in the push towards industrialization. . the state has often played a major economic role. Chile.
prior to the recent privatization of state enterprises. Latin American nations. But their government have generally owned strategically important enterprises and have invested in industries that failed to attract sufficient private capital. . Consequently. electronic power plants etc were state owned. petroleum industries. airlines.Latin American Statism Unlike communist countries. many of the region’s railroads. with rare exceptions. mines. have left most economic activity in the hands of the private sector and have not imposed centralized control over the economy. steel mills.
Latin American Statism Government takeovers frequently were not opposed by the domestic private sectors. and railroads in Argentina.involved companies that had been owned by multinational corporations. railroads. In fact. power and other needed resources. Many of the most important nationalizations.incuding the petroleum industries in Mexico and Venezuela. state-owned petroleum industries. mining in Chile and Peru. not local capitalists. and utilities provided private sector industries with subsidized transportation. conservative governments in the region were as likely to expand as were left leaning or populist regimes. Second. until the 1980s. .
Although import-substituting manufactures were almost always privately owned. favourable exchange rates were essential for stimulating industrial growth. government economic policies such as protective import tariffs. . quotas. the government initiated import-substituting industrialization (ISI) programs in the early to mid 20th cc. ISI sought to replace imported consumer goods with products that were manufactured domestically.Latin American Statism The state also played a pivotal role in formenting private sector-indutrial growth. In Latin America’s largest economies.
Virtually. Colombia. From 1945 to 1970. packaged food and furniture. Larger nations such as Argentina. rates of investment in Latin America were higher than in the Western industrial powers. every countyry in the region began to manufacture basic consumer goods such as textiles. .Latin American Statism In Argentina. steel mills and other heavy industries. apparel. Brazil. Mexico and elsewhere these state policies were quite succesful. Brazil and Mexico established automotive industries.
. perhaps necessary. in the early stages of economic development.Latin American Statism But state sponsored ISI also promoted economic inefficiencies and inequalities. and the income gap widened both between urban and rural populations and between skilled and unskilled workers. While its nurturing of industrialization was helpful. trade and fiscal policies designed to promote industrialization often harmed agricultural exports. government protection and stimuli were employed too broadly and too long. Inefficient domestic industries received excessive protection.
In the face of high unemployment and underemployment rates. these enterprises are also under political pressure to sell the public consumer goods and services at highly discounted prices. few Third World governments manage to do so. most state economic enterprises are substantially overstaffed. governments are under great political pressure to hire more personnel than the enterprises need. At the same time.Latin American Statism Two sources of inefficiency shall be noted: While it is quite possible to run state enterprises efficiently. Consequently. .
Another important weakness of Latin America’s development model was the inefficiency it encouraged in the private sector. By 1982 virtually every government in the region was deeply in debt and experiencing severe fiscal problems. To be sure. consumer subsidies and subsidies to private-sector producers helped bankrupt many Latin American governments. Yet over time the level of protection needs to be scaled back down or domestic firms will have little incentive to become more productive and internationally competitive. .Latin American Statism Ultimately. governments throughout the world have effectively used protectionist measures to help infant industries get off the ground during the early stages of industrialization. the combination of money-losing state economic enterprises.
have sharply reversed their earlier statist policies. These reductions in public-sector activity were implemented at great human cost. Privatizations. Throughout Latin America. . moved by the region’s severe debt crisis and economic depression. most Latin American nations. millions of workers lost their jobs.Latin American Statism Since the 1980s.
Their impact on world trade has been enormous. But other Southast Asian economies. . a number of East and Southeast Asian economies have grown at a phenomenal rate during most of that period.East Asia’s Developmental State While Latin America have been struggling since the early 1980s.Thailand. Hong Kong and Singapore and China have received the most attention. Taiwan. South Korea. Malaysia and Indonesia have also grown dramatically. China is now one of the US’s leading trading partners.
with a relatively smaller state sector.East Asia’s Developmental State With the partial exception of Communist China (which has developed a mixed socialist and free market economy). East and Southeast Asian countries have largely tied their growth to the free market. productive capacity has been largely owned by private enterprise. More so than in other Third World regions. .
governments in that region have been key players in stimulating economic growth.East Asia’s Developmental State This has led conservative economists to hail East Asian economic miracle as a triumph of unfettered capitalism. But many scholars specializing in East Asian economies argue that. a testimony to keeping government out of the economy. to the contrary. .
East Asia’s Developmental State Chalmers Johnson’s notion of the developmental state: The early developing Western nations established regulatory states in which government refrained from interfering in the marketplace. . while the East Asian developmental states “intervene actively in the economy in order to guide or promote particular substantive goals”. except to insure certain limited goals.
Indonesia. capitalist development model. and electronics) or particular companies. Singapore. there is far more extensive and direct goverment economic intervention than in the West. South Korea. Under the developmental model. Taiwan. . targeting either whole economic sectors (such as agriculture or industry). automobiles. whole industries (such as computers.East Asia’s Developmental State Japan’s powerful Ministry of International Trade and Industry (MITI) directed that country’s postwar industrial resurgence. Subsequently. and other industrializing nations in East and Southeast Asia adopted many aspects of Japan’s stateguided.
control over credit. Example: South Korean and Taiwanese governments electronics. and influencing the price of raw materials to encourage private sector activity. computer software . Governments used tax policy.East Asia’s Developmental State East Asian state intervention more indirect than Latin America.
East Asia’s Developmental State But can this model be applicable elsewhere? Developmental state’s requirements: Chalmer Johnson notes that most developmental states have been authoritarian or soft authoritarian during their major industrialization push. Thus. The governments of Malaysia. the question is how the developmental states would perform under the democratic pressures now spreading across the Third World. Taiwan and South Korea industrialized under authoritarian governments. . Singapore and Indonesia have all repressed democratic expression in varying degrees. though both have subsequently become democracies.
The developmental state seems to require qualities that are in short supply elsewhere in the developing world: a highly skilled government bureucracy and close cooperation between business. labor and agriculture.East Asia’s Developmental State Another important question is the transferability of East Asian political and economic practices to other parts of the Third World. .
it argues.The Neoclassical Model Unlike the preceding models. police protection. It can also supply physical infrastructure. such as national defense. The state. a judicial system and an educational system. the neoclassical ideal assigns government a very limited economic role. including sewers and harbors. should provide certain fundamental “public goods”. . when it is not feasible for private capital to do so and perhaps allocate enough resources to the very poor to meet their basic needs.
Only when these artificial constraints are removed will the economy “get prices right” (i.e let them be determined by free-market forces”. state subsidies to producers and consumers.The Neoclassical Model Neoclassical economists insist that free-market forces should determine production decisions and set prices without government interference. Consequently. they have criticized government policies designed to stimulate industrial growth in the LDCs: protective tariffs and import quotas that restrict free trade and thereby drive up prices to the consumer. .
neoclassicalists (also known as neoliberals) have largely won the debate against advocates of extensive state intervention.far from following the market. deregulating the private sector. . As we have observed. governments throughout Africa and Latin America have liberalized their economies in recent years. East Asian miracle. Yet neoclassical model did not triumph completely. it was state “governing the market”. and freeing prices.The Neoclassical Model Since the 1980s. removing trade barriers.
Initially. As the least regulated economy in the area. its wealth was tied to its location as a major port for Asian trade and an outpost of the British Empire. But Hong Kong is such a unique case that it may not offer many lessons for other countries. it is rather small and consists of a single city with no rural population. For one thing.The Neoclassical Model The only East Asian economy that has been conformed to the neoclassical model has been Hong Kong. it is often cited as a success story for unrestricted capitalism. .
Neoclaccisists maintained that most Third World Nations should abandon plans for industrialization and concentrate. instead. washing machines). That is. . on the production and export of raw materials or agricultural products. it should produce and export those goods it can provide most efficiently and cheaply relative to other nations.Industrialization Strategies Since the time of Britain’s industrial revolution. arguing that each country should specialize in economic activities for which it has a “comparative advantage”. Neoclassical economists frequently criticized industrialization. governments have equated industrialization with economic development. (Sri Lanka producing tea rather than cars. economic sovereignity and military strength.
in most of the developing world. EOI stresses industrial development with East and Southeast Asia. it is a strategy that has been used. at least initially. . While ISI has been most closely identified with Latin America.Industrialization Strategies Industrializing nations have generally pursued two alternative strategies: import-substituting industrialization (ISI) and export-oriented industrialization (EOI). LDCs reduce their dependency on manufactured imports by producing more of them at home. In the first case. it is a strategy now widely embraced in Latin America and other parts of the Third World. While ISI focuses on producing consumer goods for the home market.
ISI has emerged as a development strategy in Latin America during the 1930s as the worldwide depression sharply reduced international trade. Because the industrialized nations of North America and Europe curtailed their consumption of Third World primary goods. partly the result of political and socioeconomic opportunities and constraints. Latin America was denied the foreign exchange needed to import manufactured products. Then ISI became a long term strategy for industrial development.Import Substituting Industrialization National economic policies are partly the product of deliberate choice. .
To reduce the cost of those imports. most Latin American countries established multiple currency exchange rates.Import Substituting Industrialization In order to protect embryonic domestic industries from foreign competition. At the same time. with differing rates for transactions tied to either imports. namely capital equipment (primarily machinery) and raw materials needed by domestic manufacturers. . exports or other financial activities. Eventually. planners also wanted to facilitate other types of imports. consumer imports were generally subjected to protective quotas and tariffs. governments overvalued their own currencies.
the region never developed its own capitalgoods industry and instead. imported manufacturing technologies that were inappropriate to local needs. Because local consumer goods manufacturers were allowed to import capital goods cheaply.Import Substituting Industrialization Overvalued currencies and export taxes put traditional primary goods exporters at a competitive disadvantage. thereby depriving the country of needed foreign exchange revenues. Subsidized imports of machinery and heavy equipment encouraged capital-intensive production rather than the labour-intensive manufacturing common to Asia. .
while little was done to develop new manufactured exports. Traditional primary exports were allowed to languish.Import Substituting Industrialization The ISI model of industrialization benefited a small. leading eventually to a major debt crisis and an economic depression in the 1980s. relatively well-paid “labor elite”. foreign technologies. in the end it merely replaced dependence on consumer goods imports with dependence on imported capital goods. But it failed to provide enough jobs for the region’s unemployed and underemployed. Although ISI was originally designed to make Latin America more economically independent. Increased balance of trade deficits contributed to Latin America’s spiralling foreign debt. .
. East Asia’s booming economies became the envy of the developing world. By 1980. they diversified into manufacturing for export.Export Oriented Industrialization East Asia’s Newly Industrialized Countries initiated their industrialization drive through import substitution. Fueled by their dynamic industrial exports. Soon. just as their Latin American counterparts had done earlier. manufactured products constituted more than 90 percent of all South Korean and Taiwanese exports but represented only 15 percent in Mexico and 39 percent in Brazil.
Until the 1980s. Latin American intellectuals remained very committed to economic nationalism and the need to limit US influence. inspired by the GATT and the West’s economic boom. Another factor that distinguished East Asia from Latin America were the influence of US advisers and the differing training and economic orientation of government technocrats. . The opportunities offered by outwardly oriented growth were more obvious to government policy makers at that time. a period of unprecedented expansion in world trade.Export Oriented Industrialization The East Asian industrialization drive began in the 1960s.
Export Oriented Industrialization On the other hand. because of Taiwanese and South Korean military and political dependence on the United States during the postwar decades. their leaders were far more receptive to American policy advisers advocating Export Oriented Industrialization. .
. the baht.East and Southeast Asia’s Economic Crisis The onset of the crisis: On July 2. 1997. which had been previously fixed (i.e the Thai government had guaranteed that its value relative to the dollar remained constant) would be allowed to float (its value would now fluctuate based on market forces). the Thai government announced that the exchange rate for their national currency.
this meant that the cost of bahts of repaying those loans climbed incredibly. investments in the Thai stock exchange and bank accounst held in bahts also lost value. . in return. knowing that it would be difficult for debtors to repay. International banks.East and Southeast Asia’s Economic Crisis As the value of the baht fell. curtailed further dollar loans to Thailand. For both the Thai government and private companies that had secured extensive loans in dollars from international banks.
. technology) found the price of doing business sharply increasing as the value of the baht declined. raw materials.East and Southeast Asia’s Economic Crisis Companies that imported consumer goods or manufacturing inputs (machinery.
During the following year. the Philippines. Foreign and domestic investors in other Southeast and East Asian boom economies began to fear that those countries might also be overheated and plagued by the same fragilities (including excessive external debts) that had undermined Thailand’s economy. Japan and China.East and Southeast Asia’s Economic Crisis 1997 crisis was not limited to Thailand. Countries with smaller foreign debts (Taiwan. Indonesia. Vietnam and China) were less vulnerable to capital flight and have survived the crisis relatively well. . Singapore. the economic crisis threatened to spread to Hong Kong. Malaysia and later South Korea all forced to devaluate their currencies and were plunged into deeeper recessions.
Malaysia and South Korea had borrowed and invested excessively. From 1992 to 1997 alone.credit in some countries often not directed to firms or industries that could most effectively invest it. Indonesia. Asian companies (excluding Japan) had borrowed more than $700 billion from the rest of the world. Another problem. manufacturing overcapacity and excess construction of new real estate. . The result was questionable investments.Causes of the Asian Crisis Businesses in Thailand.
Causes of the Asian Crisis These underlying long-term weaknesses were then aggravated by additional short-term problems. . meaning that their governments had guaranteed to keep the currencies’ values fixed relative to the dollar. several Southeast Asian countries had pegged their currencies to the dollar. The purpose of that arrangement was to assure foreign investors that the value of their investments in the region would not be undermined by devaluation. For a period of time. as it had been in many Latin American countries.
Causes of the Asian Crisis But in the mid-1990s. when the dollar strengthened. contributing to a growing trade deficit. the region’s pegged currencies automatically gained value as well (relative to currencies such as the Japanese yen). the price of Southeast Asia’s exports increased while the cost of its imports declined. . As a consequence.
as international financial institutions watched events in Asia and became increasingly concerned about their investments in other LDCs. Ultimately. . the implications were even broader. Brazilian and Chilean stock markets as well. Asia’s sharp currency and stock market declines spread to Russia and caused steep drops in the Argentine.Consequences of the 1997 Crash The crisis next spread to Malaysia and South Korea.
. Countries such as Thailand. It shall be underlined that the key causal factor behind the crisis have been external indebtedness. Unable to pay their debts.Consequences of the 1997 Crash As Asia’s financial crisis intensified. throwing their employees out of work. got into trouble. the region sank into a deep economic recession. many companies were forced into bankruptcy. inflicting enormous pain on the population. Those that had either exercised restraint (Taiwan and China) or had been unable to secure extensive foreign credit (the Philipines and Vietnam) were not badly hurt. Indonesia and South Korea which had borrowed excessively.
Consequences of the 1997 Crash .
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