Categories of Countries according to Level of

Economic Development

OECD - Organization for Economic Cooperation and

Development
Industrial and post-industrial economies
High technology production, services
Examples:
USA, EU, Japan, Australia and New Zealand
plus some advanced NICS (Mexico, South Korea, Turkey)
plus some former CPEs (Poland, Hungary, Czech Republic)
NIC - Newly industrializing countries

Export-oriented economic development

Early: focus on low-priced, labor-intensive goods
Late: focus on large scale industrialized mass production
Examples: Taiwan, Brazil, Malaysia
LDC - Less developed countries

Economy is still largely agricultural

Most technology controlled by multinational corporations
High level of international debt
Frequently have problems of political stability
Examples: El Salvador, Zaire, Bangladesh
Former CPE (centrally planned economies)

Large but outdated industrial base

Educated workforce
Poor marketing systems
Immediate problems:
· Privatization
· Development of legal system
Examples: Romania, Ukraine, Russia, China
Brief History of Colonialism
1450-1600
Expansion of European navigation; "discovery" of Western
hemisphere

1600-1800
Intra-European trade wars; Britain and France in hegemonic
position by 1700; Britain by 1800
Gradual expansion of political control
Gradual expansion of political control by militarized trading
companies
Increased consumer demand for imported goods such as coffee,
tea, sugar, chocolate, tobacco.
Development of slave trade
Brief History of Colonialism
1800-1880
Industrialization; gradual shift to using colonies as markets
USA and Latin America gain independence
Meiji Restoration: industrialization of Japan

1880-1914
Machine gun provides overwhelming military superiority to
industrial powers, railroad and steamship provide efficient
transportation
Shift to direct political control, particularly in Africa and China
Late colonialism of USA, Japan and Germany
Brief History of Colonialism

1914-1945
Increased political pressure on colonial powers by national elites
in colonized areas (e.g. Gandhi)
European wars substantially weaken Britain, France and
Germany

1945-1965
Virtually complete decolonization under pressure from USA and
United Nations
Brief History of Development Issues

1940s: Establishment of Bretton Woods system

1950s: Decolonization
1960s: Foreign aid and UNCTAD
1970s: NIEO - New International Economic Order
OPEC decade
1980s: Debt crisis
1990s: Export-led industrialization
2000s: ?
 History of the 1980s Debt Crisis
1973-1979
OPEC price increases give international banks of excess of
money: the "petrodollar recycling" problem
Industrialized countries are in economic turmoil (inflation;
recession) due to OPEC price increases
therefore
These funds are rapidly invested in newly industrialized countries,
particularly in export-oriented industries
1981-1983
Recession in OECD countries leads to reduced demand for NIC
exports
Decline of OPEC leads to reduction of petrodollars going to banks
therefore
NICs can't repay the loans and threaten bankruptcy
Development: Colonial problems

• Lack of infrastructure
– Physical: roads, electricity
– Education and health
– Stable and uncorrupt government institutions
– Depoliticized military
• Dependence on agriculture and raw materials
• Declining terms of trade
• Price instability
• North-South trade linkages with colonial power
Price Volatility: Agriculture
Price Volatility: Mining
Post-colonial problems
Inspired by Soviet Union:
• Central economic planning
• Excessive bureaucracy ("rent-seeking")
• Urban bias and top-down development
Inspired by United States:
• Military regimes and excessive military spending
• Massive foreign borrowing
• IMF intervention
Other problems:
• Inflation: departure of money of middle class
• Human rights violations: departure of children of the middle
class
Prices can also go down…
 Models of Development
Europe
Function How it was done
Financing internal

Markets internal and colonial

Primary exports industrial goods

Trade Orientation mercantilist

Comparative advantage high technology

Role of government provide internal political

stability; maintain colonial
systems to provide raw
materials
USA

Function How it was done

Financing external (European banks)
Markets internal
Primary exports agricultural and raw materials
Trade Orientation liberal
Comparative advantage natural resources
Role of government provide infrastructure (e.g. public
education; railroads; roads; irrigation)
Tennessee Valley Authority (TVA)
provides model for internal
development;
industrial policy is confined to
defense
USSR
Function How it was done
Financing internal; urban areas developed
in preference to rural ("urban
bias")
Markets internal; then colonial after
WWII
Primary exports raw materials (oil, minerals,
timber)
Trade Orientation mercantilist
Comparative advantage none
Role of government centrally planned economy
Japan (export oriented)

Function How it was done

Financing internal
Markets external
Primary exports industrial goods
Trade Orientation liberal
Comparative advantage initially low wages, then mass
production then quality
production
Role of government provide infrastructure;
systematic industrial, trade and
development policy (MITI)
Early Development Strategies

• Export-oriented development
• Import rather than invent technology
• Deemphasize traditional agriculture
• Use multinational corporations (MNCs) to provide
– Marketing and management expertise
– Technology transfer
– Finance
• Low wages and social services
• Low environmental standards
Risks of Export-Oriented Strategy
• Imported technology may be inappropriate and/or expensive
• MNCs inhibit the development of national business
• Foreign financing leads to excessive interest payments
• Mechanized agriculture leads to rapid urbanization
• Economy cannot remain competitive indefinitely based only
on low wages
• Low environmental standards lead to major health problems
• Resources such as forests, clean air, etc are finite
 Sources of Development Funding

Foreign aid
Advantage:
1. It is free
Disadvantages:
1. There isn't very much of it
2. Comes with conditions
3. Mostly gets spent back in donor anyway
4. There is a tremendous amount of waste
5. It distorts the development of markets
US Public Perceptions of
foreign aid
US Private Contributions

Note; “International Affairs” includes international aid

 Loans
Advantages:
1. Lots available, particularly in late 1970s
2. Non-political
3. No foreign ownership
Disadvantage:
1. You have to pay back the loan and interest in convertible
currency
2. Repayment is not linked to the success of the project
3. If you get into trouble, the IMF may impose conditions
 Foreign Direct Investment

Advantages
1. Increasing amounts available
2. Usually includes marketing, management and technological
expertise
3. You only have to pay if the venture is successful
Disadvantages
1. Development is partially controlled by outside investors
2. Loss of national ownership
3. Foreign exchange is lost through repatriated profits
4. Transfer pricing-and tax evasion-is possible
Post-1990 expansion of FDI
TYPICAL IMF CONDITIONS
• Devalue currency
• Reduce subsidy programs for food and energy
– Occasional result: IMF riots
• Reduce government spending; raise taxes
• Reduce restrictions on foreign direct investment
• Reduce restriction on movement of foreign exchange
• Reduce trade restrictions
IMF will:
• ·Loan additional money directly (coordinating with World
Bank)
• Encourage loans from OECD countries
• Coordinate with major banks to restructure debt
So what’s not to like??
• Structural adjustment programs have only about a 50%
success rate
• Moral hazard: IMF is protecting banks from their own
mistakes, and reducing the incentive for them not to make
more mistakes
• The sacrifices required in structural adjustment programs tend
to fall disproportionately on the poor
– Wealthy individuals have less need for a social safety net and can also
move their wealth out of the country. Income inequality increases
• Neoimperialism: IMF is controlled by the wealthy countries
• As with nuclear proliferation, the developed countries are
enforcing policies they did not follow themselves
– Protection of trade and infant industries
– US states defaulted on many loans in 1840s when canals went bankrupt
 MULTINATIONAL CORPORATION
DEBATE
Arguments Favoring MNCs:
Business internationalism: MNCs are less militaristic than states
Liberal economic theory
Technology transfer
Production techniques
Management techniques
Marketing
Increased competition with national oligopolies
 MULTINATIONAL CORPORATION
DEBATE contd…
Arguments Opposing MNCs
Interference with internal affairs of states
Encourage low wages and lax environmental regulations
Absorb local capital, inhibiting growth of local business
"Brain drain" and dual loyalty problems
Transfer pricing is used to evade taxes
Repatriation of profits causes loss of foreign exchange
MNCs create inefficient bureaucracies; licensing is more
profitable
Transfer Pricing (Hypothetical)
Brazil:
Manufactuering cost of shirt: $3
Shirt is exported for: $5
Taxable profit in Brazil: $2

United States:
Shirt is imported for $5
Shirt is sold for: $8
Taxable profit in US: $3
 Transfer Pricing (Hypothetical) contd…
After: MNC sets up subsidiary in Cayman Islands, which has no corporate taxes
 Transfer Pricing (Actual)
Examples found in a 2001 Congressional study of possible transfer
pricing by U.S. multinational corporations:
Imports
Toothbrush $5,655
Disposable razor blade (1) $461
Vinyl record $5,670
Ink-jet printer $179,000

Exports
Bulldozer $528
Diamonds $3/carat
ATM $36
Metal building 82-cents

Estimated loss in tax revenues: $45-billion