CH 10 Causes of the Wealth Poverty of Nations VOCABULARY INFRASTRUCTURE basic structures necessary for social activity such as transportation and telecommunications networks and power and water supply IMPORT SUBSTITUTING INDUSTRIALIZATION a set of policies pursued by most developing countries from the 1930s through the 1980s to reduce imports and encourage domestic manufacturing often through trade barriers subsidies to manufacturing and state ownership of basic industries EXPORT ORIENTED INDUSTRIALIZATION a set of policies originally pursued starting in the late 1960s by several East Asian countries to spur manufacturing for export often though subsidies and incentives to export production WASHINGTON CONSENSUS an array of policy recommendations generally advocated by developed country economists and policy makers starting in the 1980s including trade liberalization privatization openness to foreign investment and restrictive monetary and fiscal policies I Examples Zambia and Botswana Burma and Thailand o Zambia at the time of independence in 1964 had an income twice that of Botswana GDP per capita today 1400 o Botswana GDP per capita today 14700 o Burma at time of independence in 1948 richest country in S E Asia GDP per capita today 1900 o Thailand GDP per capita 8000 II Factors Contributing to Poverty Geography and History o Landlocked Islands tend to do better than non islands economically EX Great Britain and Japan Landlocked countries have a more difficult time growing economically because its more expensive to trade in landlocked countries o Climate Tropical countries have been at a historical disadvantage to grow economically Diseases a lot more Malaria cant be physically produced Soil is less rich so cant grow Infrastructure is harder and more expensive o Colonialism European empires that colonized much of Africa S E Asia and other places grouped together hostile tribes divided them into separate countries Many countries with abundant amount of natural resources oil have tremendous amounts of poverty o Resource Curse But why Natural resources causes corruption and patronage Natural resource wealth make taxes unnecessary But the absence of taxes the absence of voice security voice It also eliminates political accountability Resources don t have to be a curse depends on political institutions o Commodity Cartel Commodity cartel organizations of producers who cooperate to restrict the supply and raise the price of their products Organization of Petroleum Exporting Countries OPEC members doubled the price of oil in 1973 Why did they succeed They have been able to overcome the collection action problem They has small numbers and commonality same ideologies Government Policies and Institutions o Infrastructure power good economy o Rule of Law a public good Solid infrastructure good roads bridges ports electric Well functioning government and market protecting institutions base and interest Guards regulatory policy it makes policies more broad Economic growth happens with investment of those who are predatory on citizenry Private property is secured with a good government aka democratic government o All societies have a diversity of institutions o Collective Action Problem and policy EX interest groups o Encompassing coalition alliances that concern enough of society to be concerned about broad social welfare How do we get encompassing coalitions Representative political institutions National unification Existence of external threat S Korea Taiwan o North Korea and South Korea Japanese colony divided between Soviet and American occupiers in 1945 North was more developed and wealthier Today North GDP 1900 South GDP 24600 This is to show us institutions are the reason not the culture of money difference o North and South America were both colonized Why have their economies differed Many Latin American colonies had plantation agriculture or labor intensive mining N America has small scale wheat farms Higher equality democratic political institutions American South substantial slave plantations More inequality and less democracy Bottom line type of economic activity and degree of equality influences the development of democratic political institutions International Factors o Term of Trade countries Agriculture subsidies that rich countries give hurt poor Developed countries make an unfair advantage o Create better governments III Development Models Import Substituting Industrialization ISI o This policy has worked for some countries like India and Latin o Promote Industrialization in one s own country America High tariff Discouragement of international investment o Problem ignoring comparative advantage produce your best item and trade o It was a bust No economic improvement o Winners urban workers o Losers agriculture bankers and anyone international Export Orientated Industrialization o Opposite of above increases trade o Korea Taiwan Singapore and Hong Kong Encouraged more international economic activity Exporting items out Successful in all 4 countries o Winners Domestic Industry and bankers o Losers urban workers Wages are purposely kept low to increase exports The Washington Consensus o Much of Latin America 1980s 2000s o Involves policies that encourage the flow of capital Market oriented perspective Remove barriers of trade o Pushed government to privatize their state businesses This means selling off of many government enterprises to private investors o Liberalize the banking sector Openness for exports and imports o Lower government spending o It was the turn from economic nationalism to economic o China and India have followed somewhat of Washington openness Consensus China itself liberalized a big part o Winners foreign investors and traders those in competitive trade sectors o Losers urban workers New Model o State Capitalism China Russia Singapore IV Is foreign aid the answer Foreign aid is unlikely to significantly affect development because o Amount of aid given is small o Aid rarely address the root of the problem What regimes need aid the most o Poor regimes non democratic regimes Which regimes are most likely to abuse the aid o Least developed countries who s government works in the interest of themselves and their narrow supporters V Conclusion Private interests may slow economic growth o Domestic institutions can have an impact on how these interests affect growth Despite a common interest in international growth rich countries sometimes implement policies
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