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Development and Institutions Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government. -- Adam Smith, Wealth of Nations
Is Dependency Theory just a complaint? • Provides explanation for poverty of the south but not a good prescription • NIEO failed • Bowing out of the international neo-liberal economy won’t work • Have any strategies to promote development actually worked?
Testing Dependency Theory • Dependency perspectives have evolved • There has been an impressive rise of former poor countries of the South in Latin America and in Asia. • ISI worked in some places, as we shall see • Countries could develop WITH Dependency! • Dependent Development • Negotiations between governments, firms, and MNCs
A modification of Dependency Theory: Dependent Development • Sometimes the surplus is invested in the host country---location of plants, services • This can stimulate domestic industry and business • The result: “Dependent Development” • So maybe stagnation is not inevitable
If dependent development is possible, why do MNCs invest in some countries and not others? • The answer might be government policies and institutions
Why institutions are needed to spur development • Poor countries can’t afford to wait while natural market forces work their beneficial effects. • Market forces take too long • Produce unbalanced economies • Vulnerable to price shocks • Vulnerable to manipulation by strong trading partners
Poor Countries can be seen as “late developers” ….adding to our terminology • Liberal and modified Liberal Theory • Developing countries • Less Developed Countries (LDCs) • Emerging markets • Late Developers • Newly Industrializing Economies (NIEs) • “dependent development” • Dependency theory • Underdeveloped Countries • Periphery • Neutral? • The “South” • Third World
Requirement for development: A developmental State • Example of Soviet Union • Compatible with Keynes • Compatible with embedded liberalism • Historical experience • Gerschenkron’s contribution
If You’re Late, Use the State! • Development Banks • The STATE • Czarist Russia and Soviet Union
The advantages of backwardness • Need for rapid development • British example • British investment in a “developing” country: the U.S. • Technology diffusion • Late developers got the newest technology • Why I call this perspective “modified Liberalism”
It pays to be late • Latecomers grow faster • Access to state-of-the-art technology • Quick move to heavy industry • Development is possible through contact with the International Economy
Development is possible through contact with the international economy
Accumulation of Capital is the Key to development • Theories differ on the BEST way • Trade? • Aid? • Technology transfer? • State mobilization of capital? • ISI? • Growth of a middle class? • Dependent Development?
And the explanations are….. • Liberal claim……. • Marxists and dependency theorists maintain…. • Economic Nationalists demand…… • And Modified Liberals (Institutionalists) believe……
Who is right? • Maybe it depends on the conditions under which a country tries to develop • And countries have to learn to play their cards right
The Asian “Tigers” • South Korea, Singapore, Taiwan, China, India • Moved out of “periphery status” • High growth Rates and relative income equality
How did Taiwan do it? • Colonial legacy • Japan was a different colonial power than Britain, France, and Belgium • Japan contributed to Taiwan’s economic development
Role of the State • KMT conviscated Japanese assets after WW II • No middle class—the state did not emerge from within Taiwanese society • An authoritarian, non-democratic state…. • ….That guided the growth of the economy • To attract foreign investment • Only resource was disciplined labor force • Investment in R&D
U.S. Aid and Hegemony • US need to build up strong capitalist countries to counter communism • USAID allied with the small business elite • US forced switch from ISI to Export orientation
