What is the meaning of the so-called “resource curse” & How does it affect current international trade?

2011/04/25

DEFINITION

Leif Wenar describes in the article “Property Rights and the Resource Curse” that one of the practical limitations of global justice that affects international trade is the so-called “resource curse”. Resource curse refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors, volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (2008:3)

AFFECTS ON INTERNATIONAL TRADE

One of the main negative effects that the resource curse has on international trade is the strong correlation between easily exploited natural resources ( diamonds, coltan, timber, drugs, gold) and armed conflict. In year 2001 more than 50 armed conflicts in the world could be linked to resource curse such as Congo, Sierra Leone and Angola.
Even more difficult extracted natural resources are strongly linked to armed conflict. In particular is the relationship between oil resources and armed conflict for independence large, such as in Colombia, Aceh, Biafra, Katanga and West Papua. But even the export of natural resources with less financially value, such as Coffee can be indirectly linked to the conflict in the way that they are coated with illegitimate taxes and customs fees (Bannon & Collier, 2003:7).

The economic consequences of armed conflict through resource course and the effect in international trade can be divided into three levels. Macro (governmental level), meso (intergovernmental level) and micro (households). In generally terms is international trade negatively affected and hurt through armed conflicts because of exports decline, interest rate rises, educational opportunities are lost, the informal economy increases, the judiciary is undermined and insecurity among citizens increases which makes trade and cooperation difficult (Stewart & FitzGerald, 2001:11). Resource course countries are also more severely affected by armed conflicts and hold less economic resources than industrialized countries to address the under-development like in the cases of Mozambique, Nicaragua, Sudan and Uganda (Stewart & FitzGerald, 2001:2).

On the macro – level, it is possible to see clear economic consequences of armed conflicts such as falling GDP, lower exports, lower food production, damaged in infrastructure, lower savings, lower tax revenue, more investment rate and accelerating inflation (Stewart & FitzGerald, 2001:12). Imports doesn’t drop as sharply as exports because the need persists, but instead to finance imports with exports, imports are paid by the captured foreign loans and the obvious dependence on aid funds (Stewart & FitzGerald, 2001:80). The aspect that armed conflict is something that requires large financial resources to operate also affects the ability of governments to manage the financial impact on reducing under-development, making the relationship stronger. Primarily focusing resources on conflict management and social resources makes living standards fall in general because of the lack of possibility to achieve positive international trade (Stewart & FitzGerald, 2001:30). The fact that modern armed conflicts also usually goes on for several years, leads to even greater financial burden on the state because the financial resources taken to deal with the conflict are coming from foreign loans, aid and credit by banks (Stewart & FitzGerald, 2001:24).

On meso – level the armed conflict result in restructuring of the finances and assets towards conflict related sectors which requires that funds are moved from another part of the public sector (Stewart & FitzGerald, 2001:18).
The informal market is growing significantly during armed conflicts where the state’s regulatory potential is breaking up and smuggling and illegitimate trade is conducted. This generates enormous economic benefits for the criminal networks involved but not for international trade in general (Stewart & FitzGerald, 2001:27).

On the micro – level the households directly or indirectly are affected by the fact that standard of living drops dramatically which gives less purse ability which affects international trade (Stewart & FitzGerald, 2001:196). Households are taking the hardest hit because they are heavily influenced by the rising inflation, wages are falling, food prices are soaring, a focus on catering is created, jobs might increase in the military sector but it changes the family structures and the income security when young men disappearing into the conflict (Stewart & FitzGerald, 2001:27).

Displacement of people because of armed conflicts that occurs through resource course also affects international trade both externally and internally, leading to underdevelopment (Stewart & FitzGerald, 2001:128). Potential employees that can participate in economic development, disappears from their own country. Often it is the people with the best economics, high education and a socially high position, which is able to escape the country, leading to so-called ”brain drain” (Stewart & FitzGerald, 2001:101).

Contrary is important to understand that international trade is not only affected by resource curse, it can also impact resource curse in a positive way and be one of the crucial factors that can lead a state’s development. However the general impact that international trade has on armed conflicts through resource course is clear and clarifies and explains the relationship between armed conflict and underdevelopment. The direct and indirect linkages can for example be seen in terms of income inequality and insecurity, which can generate a national discontent which in the end can lead to armed conflict.

Another factor for resource coursed developing countries is the fact that they doesn’t have the same opportunities in international trade because of the hierarchy system that allows developing countries’ economies to be exploited for short term gains of the actors in the international trade market. This results in long-lasting damage to the economic development which could lead to armed conflict (Stewart & FitzGerald, 2001:205-207). The single most important actor to turn this hierarchy around is the governments that through decisions on the protection of the internal market and the subsidies affecting competition can increase the possibility to act in international trade. But many other strong actors are also affecting the trade and monetary flows connected with resources coursed development countries. Transnational companies (TNC) can create a major pressure on the States’ economy due of its large financial resources. TNCs can affect the economy positively, but may also affect negatively by preventing the growth of local businesses, create monopolies and cartels, exploit local resources and labor power in an unsustainable manner, taking advantage of weak laws and put pressure on state governments in a way that leads to corruption and dependency (Stewart & FitzGerald, 2001:210).


Major international institutions like the WTO, World Bank and IMF also effects the resource coursed countries ability to act on the international trade market through the loans offered for development. The problem is that the requirements that institutions impose on borrowers in the form of structural adjustment programs of the economy can adversely affect in the long term perspective and there is several examples of loans that has been granted to illegitimate governments (Stewart & FitzGerald, 2001:215).


Another problem with international trade that goes along with the correlation between resource course and armed conflict is the fact that whoever that can oppress or terrorize the people of a country enough does allegedly get the legal right to sell off the country’s resources. The fact that there is actors within the armed conflicts that gain economically on the conflict results into one of the driving forces behind today’s armed conflict are getting longer and effects the international trade even deeper(Stewart & FitzGerald, 2001:55). One example of that is the taking over and exploitation of easily extracting natural resources such as diamonds, coltan and timber plain in Sierra Leone, Liberia and Congo. These light extracting natural resources are exploited through forced labor and smuggled out and sold on the international trade market. Even areas that contain more difficult extracting natural resources is exploited by illegitimate actors that take control and sell the land and mining rights to other companies. By racketeering, control of aid funds and illegitimate trade tariffs criminal networks gain big profits and the individuals who are paid to be part the illegal actions are raising their living standards and acquire new assets through, for example looting. This makes the involved actors more willing to be a part of the process and the effect in international trade continues (Stewart & FitzGerald, 2001:62-65).
Contrary one main premise of the legal argument, is deeply embedded in international law. The premise is that the natural resources of each country belong to the people of that country (Wenar, 2008:9-10). But in for example the cases of Equatorial Guinea, the political conditions are such that the people, who own the natural resources of the country, couldn’t possibly be consenting for anyone to sell those resources off (Wenar, 2008:6).


Even do there are initiatives like “The Clean Hands Trust” that aims for that Western governments should prevent their corporations from buying resources from severely repressive regimes and civil warriors the questions still remains on how to stop other kinds of buyers from simply stepping in and buying up these resources anyway (for example China). Which will then of course get recycled and channeled back in the economy or the economies of any country that actually refuses to buy the oil or natural resources directly from resource cursed countries (Wenar, Public Ethics Radio).

POLICY MEASURES

To sum up the arguments and cases in this assignment it is fair to say that the relationship between armed conflict and underdevelopment is crucial to analyze in order to understand how the resources curse effects international trade. An explanation of the relationship between natural resources and armed conflict is the dependence that global export of natural resources creates in form of export tariffs. Sudden reductions around the world can affect the entire national economy negatively, leading to dissatisfaction which may lead to armed conflict. Therefore would I argue that the main policy measures to achieve fairness in international trade is to create a economic development of the inner market. That aims for alternative opportunities to export in order to reduce the link between strong dependence on exports of natural resources and conflict. This is done by assist economic development and creating policy that shows how this economic growth should be handled.

However is one of the major issues that must be faced is in developing policy the conflict and trade-offs among the various ideal-typical approaches. Etah B.Kapstein explains in the article “Models of International Economic Justice” changes, policy and levels of analyses is connected with different policy theories:

  • The Communitarian nation state theory that aims for change in income distribution within countries (2004:83-85)
  • The Liber internationalist multilateral institutions theory that aims for changes in income distribution among countries (2004:85-87)
  • The cosmopolitan/priority individual theory that aims for changes in poverty rates among people(2004:87-89).

Kapstein is emphasizing on the fact that scholars of international economic justice share a common concern regarding the effects of the current rules that govern world trade, finance, and investment (2004:91-92). Wenar goes even a step further and explains that the hope for policy measures that can handle the effects of resources course has on international trade is that, the more “we” know about these problems, the more “we’ll” know about what contributions we can make to the solutions (Public Ethics Radio).
I know t about the problem of resource curse and the effects it has on international trade. But I don’t believe it is possible to achieve global justice in the sense that the resource curse can be transformed into resource luck in a short term perspective. But I do believe that creating sustainable development in a long term perspective is linked to the possibility of ensure fairness and reduce poverty. So I hope it is possible to transform the resource curse and make international trade justice.


I say so because I would argue that the one proven step towards policy measures that can handle the effect on international trade from resource curse is the Kimberley Process Certification Scheme (KPCS). KPCS was introduced by United Nations General Assembly Resolution 55/56 and is a process designed to certify the origin of rough diamonds from sources which are free of conflict funded by diamond production. The process was established in 2003 to prevent diamond sales from financing rebellious movements. In this way the certification scheme aims at preventing ”blood diamonds” from entering the diamond market which assure consumers that they purchase diamonds they are not financing armed conflicts and human rights abuses (Kimberley Process, 2011).

I argue that a such concrete steps to create both a global justice and sustainable world trough handling the resource curse is to be seen as a model on how to create policy measures. The 73 countries that has agreed upon the KPCS shows that it is possible to deal with the resource curse in a concrete way and that other policy implementations on for example timber, coltan and gold is possible to achieve. However I believe that the smuggling and illegitimate trade of natural resources from resource cursed countries is almost impossible to stop. But through a policy like KPCS the international trade will gain and eventually provide an economic foundation for improvement of the government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions.

REFERENCES

  • Kapstein, Ethan B (2004) “Models of International Economic Justice” Ethics & International Affairs 18(2): 79-92
  • Wenar, Leif (2008) “Property Rights and the Resource Curse” Philosophy & Public Affairs 36(1): 2-32
  • Bannon, Ian & Paul Collier (2003) Natural Resources and Violent Conflict: Options and Actions, Washington, D.C.: World Bank
  • Stewart, Frances & FitzGerald, Valpy (2001) War and Underdevelopment. Volume 1: The Economic and Social Consequences of Conflict, Oxford: Oxford University

If not global justice, then what?

2011/03/05

Mathias Risse shows in his article ”Do We Owe the Global Poor Assistance or Rectification?” that the global order not only does harm to the poor, but can plausibly be credited with the considerable improvements in human wellbeing that have been achieved over the last 200 years. For developing countries, things have been better recently than they were for countries at the height of their power during any other period in history. Between 1960 and 2000, real per capita income in developing countries grew on average 2.3 percent (doubling living standards within thirty years). That development is also showed by looking at development aid, which has often been given for strategic reasons, has declined since the end of the Cold War, and currently makes up a tiny percentage of donor countries’ GDP. But conclusion based on such statistics depends totally on the time horizon considered (sub-Saharan Africa has made progress over a 200-year horizon, but not for the last 20 years) (2005:10-11).

“Historically almost everybody was poor, but that is no longer true.”(Risse, 2005:9)

Antoher pratical limitation is that even do Wenar explain that that it is possible to aim for a global justice because more and more people know about these problems it is hard to disagree with Joseph Carens description of the fact that the world community is build up around the suverinity principle. This principel must be seen as one of the main practical limits to achieving global justice.

“Citizenship in the modern world is a lot like feudal status in the medieval world. It is assigned at birth; for the most part it is not subject to change by the individual’s will and efforts; and it has a major impact upon a person’s life-chances.”(Carens,1992:26).

Thomas Nagel builds his arguments about the pratical limitations of global justice around Rawls “veil of ignorance” which can be summarized as thinking that countries have only limited humanitarian obligations to less well- off nations; those lucky enough to be born in prosperous national circumstances doesn’t need not share their gains with others (Rawls, 1999). Nagel asks a fundamental question: Why should inequality mandate any redistribution at all, once people have risen above the level of absolute deprivation?                   Even if you do not deserve to benefit from your superior talents, that fact in itself conveys no claim on these talents to others. Nagel continues by describing that members of certain groups can sometimes have stricter obligations to each other than they owe to strangers. In other words, you owe more to your parents than you do to a next-door neighbor to whom you are not related. This argument is directly connected with the fact that citizens belonging to a state. Citizens share the obligation to obey their country’s laws; and, if they live in a democracy, they share responsibility for enacting these laws. If people are bound to each other in the way that Rawls and Nagel suggest, then they might very well have stronger obligations toward their fellow members than to others therefore it will be hard to argue for global justice.

But a glaring gap remains in Nagels argument that might be the hope for global justice from my point of view. Nagel has not shown that people have reason to establish the type of coercive enterprise that he describes. I would say that the people in a sovereign nation, as Nagel suggests, think that too much inequality interferes with the sense of social solidarity they wish to promote. Nagel fails to see this obvious point because he regards the sovereign state as the only way, under modern conditions. It is almost like Nagel argues that unless people cement themselves together as Rawls mandates, disaster threatens. But why believe this? Could not people establish a strictly limited state or—even better—rely on private protection agencies to ensure social peace? Nagel wrongly assumes that unless people establish egalitarian social bonds, they cannot benefit from social cooperation. Nagel offers no grounds at all for people to subject themselves to the difference principle argued for in the cosmopolitan project (Nagel, 2005).

In Simon Caney article International Distributive Justice” a different versions of governance focusing on political institutions is explain trough the cosmopolitan project (Caney, 2001). Political communities are in process of change from nation-state towards regional structures and global governance. The change is especially driven by globalization because the globalization is changing the relationship between state and the market but not only on the expanse on the state part. In the new international collaborations that the globalization creates the state still plays a central role because of the suverinity principle.             One area where the change is notable is the economic, it is a multidimensional phenomena. The economy through globalization is more open, fluid and volatile. Global and regional governance is therefore filling the gap for governance because the nation-state can handle it alone. In the path of the changes that the globalizations is producing more and more people argue for accountability, transparency and openness of decision-making in international, economic and social demands like the “Global justice now” joint campaign in order to create global justice. The cosmopolitan project specifies principles and institutional agreements in order make sites and forms of power that are located beyond the control of democratic power  able to transform to global justice. Citizens can through the new principles and institutional agreements that transform the political fate become active national citizen but also regional and global citizens (Held, 2000).

“The locus of effective political power can no longer be assumed to be national governments – effective power is shared and bartered by diverse forces and agencies at national, regional and international levels.” (Held 2000:399)

Maybe can this transformation of the locus of political power away from the state open up a space were the agenda and need to create global justice will prosper. But the first week of lecture and course reading has made me understand there is strong pratical limitations to overcome in order to create global justice.

Still has I have metioned before I belive that without global justice we might end up with a anarchistic justice situation. That situation from my point of view wont lead to sustainable development and in the end will “harm” everyone in the world. Mayby then will the idea of global justice became a main focus on the worlds agenda.

Are there any practical limits to achieving global justice?

2011/03/03

Principles of distributive justice are normative principles designed to allocate goods in limited supply relative to demand.

But the world today is not based on principles of distributive justice…

Even do people in developing countries are today having economically a better life looking back on the last 40 years there is still over a billion people going hungry. This unequal development occurs while we are exploiting the earth’s natural resources at a furious pace. Often this is done at the expense of poor countries and people’s ability to prosper. Mining and large scale plantations destroy nature, while small farmers driven out and many indigenous peoples’ territories and rights. Farmers and small businesses are knocked out of competition with the West’s large scale and subsidized agriculture and industry (UNDP, 2010).

When thinking about global justice I have understood that my way of think about global justice dosent goes along with the reality.

I agree with the cosmopolitan concept of human equality, freedom of people, human rights but I don’t see I happening when it comes equal economically situation because that require transfer of resources from the haves to the have-nots as it is not practical. Therefore is my conclusion that there is a lot of practical limits to achieving global justice and they can’t be overcome.

The explanation to why I argue that there practical limits is based Thomas Pogge explaniation to the “Resource privilege & Borrowing privilege”. These privileges allow illegitimate political leaders to sell natural resources and to borrow money in the name of the country and its people. In Pogge’s analysis, these resource and borrowing privileges that international society extends to oppressive rulers of impoverished states play a crucial causal role in perpetuating absolute poverty.

Pogge also argues that these privileges are no accident; they persist because they are in the interest of the wealthy states. The resource privilege helps guarantee a reliable supply of raw materials for the goods enjoyed by the members of wealthy states, and the borrowing privilege allows the financial institutions of wealthy states to issue lucrative loans. It may seem that such loans are good for developing states too, but Pogge argues that, in practice, they typically work quite to the contrary. Local elites can afford to be oppressive and corrupt, because, with foreign loans and military aid, they can stay in power even without popular support (Pogge, 2002: 295 + 238).                                                                           

Leif Wenar goes even further in his rhetoric of practical limitations and he calls the “Resource privilege” the “Resource Curse”. Wenar describes that whoever can oppress or terrorize the people of a country enough does allegedly get the legal right to sell off the country’s resources. Contrary at the same time one main premise of the legal argument, is deeply embedded in international law. The premise is that the natural resources of each country belong to the people of that country. But for example in Equatorial Guinea, Sudan, Zimbabwe and Burma the political conditions are such that the people, who own the natural resources of the country, couldn’t possibly be consenting for anyone to sell those resources off.

Even do there are initiatives like “The Clean Hands Trust” that aims for that Western governments should prevent their corporations from buying resources from severely repressive regimes and civil warriors the questions still remains on how to stop other kinds of buyers from simply stepping in and buying up these resources anyway(for example China). Which will then of course get recycled and channeled back in the economy or the economies of any country that actually refuses to buy the oil or natural resources directly? Wenar´s explains that the hope is that the more we know about these problems, the more we’ll know about what contributions we can make to the solutions.

I know about the problem of global justice but I don’t belive it is possible to achive. But I belive that creating sustainable development is linked to the possibility of ensure fairness and reduce poverty so I hope it is possible to create global justice. There is a need for concrete steps to create both a global justice and sustainable world.

Therefore I together with 6407 people had signed the petition for “Global Justice Now” that is a Swedish joint campaign organized by solidarity organizations, environmental movement organizations  and folk high schools to bring the climate and the global justice issues on the agenda. The petition was submitted to the Swedish government on the 13th of January 2011 in order to make a statement for a sustainable and just world and included four concrete action: create a global tax on greenhouse gas emissions, sign trade agreements that promote sustainable development and human rights, establish an international tax on currency trading and use international aid assistance to fighting poverty (Global rättvisa nu, 2011). But one of the main pratical limitations to why the campaign “Global Justice Now” never will work is do to the time horizon considered because it affects the actors that can change the situations directly.

References

  • Björkman, Pontus (2010) Kampanjen Global Rättvisa Nuhttp://globalrattvisa.nu/, access: 2010-01-24
  • Caney, Simon (2001) Review Article: International Distributive Justice, Political Studies 49: 974-997
  • Carens, Joseph H (1992) Migration and Morality, Free Movement, Harvester Wheatsheaf
  • Held, David (2000) Regulating Globalization? The Reinvention of Politics, International Sociology 15, no. 2: 394–408
  • Nagel, Thomas (2005) The Problem of Global Justice,  Philosophy & Public Affairs 33, no. 2: 113-147
  • Pogge, Thomas (2002) World Poverty and Human Rights, Cambridge: Polity Press
  • Rawls, John (1999) A Theory of Justice (revised edition), Harvards University press
  • Risse, Mathias (2005) Do We Owe the Global Poor Assistance or Rectification?, Ethics and International Affairs 19, no. 1: 9-18
  • United Nations Development Programme (2010) What Will It Take to Achieve the Millennium Development Goals?, USA
  • Wenar, Leif (2008) On the Resource Curse, Public Ethics Radio, http://publicethicsradio.org/2008/10/07/episode-3-leif-wenar-on-the-resource-curse/, acces: 2010-01-23

 

So which is the most relevant theory of development?

2011/01/15

All these theories have something to offer and each has a component that is relevant to the problems of development.

Joseph Stiglitz

Stiglitz is a recipient of the Nobel prize in economic sciences in 2001 and he is also the former Senior Vice President and chief economist of the World bank.

Stiglitz is known for his critical view of the management of globalization, free-market economists (whom he calls ”free market fundamentalists”) and some international institutions like IMF and WB.

If you dont have tome to read Stiglitz book ”Globalization and Its Discontents” you can listen to as audio when Stiglitz discusses the book with Kenneth Rogoff. The discussen briefly shows why some countries have been able to use the Globalization process for their benefit and why.

Go to and click on B-span podcast ”Stiglitz and Rogoff on Globalization and its discontents”

http://info.worldbank.org/etools/bspan/index.asp

 

 

 

 

 

The International-Dependence Revolution

2011/01/13
Developing countries face institutional, political and economic rigidities, both on the domestic and the international front and are caught in a dependence and dominance relationship with rich countries.
Three major streams of thoughts can be sorted out:
  • Neo-Colonial Dependence
  • The False-Paradigm Model
  • The Dualistic- Development Thesis

Neo-Classical Dependence

This is an indirect outgrowth of Marxist thinking that attributes the existence and continuance of underdevelopment between the  rich  and poor countries primarily to the historical evolution of a highly unequal international capitalist system. In this systems rich countries are intentionally exploitative or unintentionally neglectful and the international system is dominated by unequal power relationship between the centre and the periphery. This makes it difficult for the poor nations to develop.
The situation is perpetuated by the power groups (landlords, entrepreneurs, military leaders, merchants, public officers and trade union leaders etc.). These group enjoy high incomes, social status, political power and constitute an elite ruling class whose principle interest is to knowingly or unknowingly lies in the perpetuation of the international capitalist system of inequality for which they are rewarded. Therefore underdevelopment is seen as an externally induced phenomenon.

The False-Paradigm Model

Attributes underdevelopment to faulty and in appropriate advice provided by well-meaning but often uninformed, ethnocentric international experts from developed countries or multinational donors – also suspect are the western trained university teachers and bureaucrats and technocrats.

Criticism

These sets of theories emphasize that removal of the international and domestic imbalances is the most effective way to deal with the diverse social problems and accelerate the pace of economic growth through domestic and international reforms,  accompanied by a judicious mixture of both public and private economic activity.

Major weaknesses:

1. They offer little formal or informal explanation on how countries initiate and sustain  development.

2. Secondly, more important – the actual economic experience of Less Developed Countries that have pursued revolutionary campaigns of industrial nationalization and state-run production has been mostly negative. Also according to these theories countries pursuing policies of autarky – or inwardly directed development should be doing well – like China and to a certain extent India – However, both these countries experienced stagnant growths unless they opened up their economies in the 1978 and 1990.

The Neo-classical Counterrevolution

Advocate freer markets and the dismantling of public ownership, central planning by the state and government regulation of economic activity.
Underdevelopment results from poor resource allocation due to incorrect pricing policies and too much state intervention of overly active developing country governments- thus slowing the pace of economic growth.

This challenge can be divided into 3 component approaches:

1. Free market approach analysis argues that Markets alone are efficient – as prices of products and factors reflect the accurate scarcity values of goods and resources – competition is effective if not perfect – technology is freely available and nearly costless to absorb – information is also perfect and nearly costless to obtain – under these conditions any intervention by the government is a distortion – however this is not really the case in the Dg countries.
2. Public-choice theory – also the new political economy approach – politicians, bureaucrats, citizens and states act solely from a self-interested perspective using their power and  authority – resulting in corruption and  mis-allocation of resources
3. Market-friendly approach- recognizes that there are many imperfections in the LDC product and factor markets and that governments do have a key role to play in facilitating the operation of markets through non-selective (market friendly) interventions- for example investing in physical and social infrastructure, health care facilities and educational institutions and by providing a suitable climate for private enterprise.

Structural Changes Models

2011/01/12

Structural change model focuses on the mechanism by which underdeveloped economies transform their domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, more urbanized and more industrially diverse manufacturing and service economy.

Two important example of such models are:

1. Lewis’s Model
2. The pattern of development empirical analysis by Chenery

Lewis’s Structural Change Model

Nobel laureate Lewis said that underdeveloped economy consists of two sectors. A traditional, over populated rural subsistence sector with surplus labour and a high productivity modern sector to which this surplus labour is transferred.
The focus of the model is on the process of surplus labour transfer from the traditional sector which leads to the growth of output and employment in the modern sector. Lewis calculated that with an increase of 30% or more in the urban wages, workers will migrate from the rural areas to the urban areas- which would lead to growth in output and employment through the modern sector.

Criticisms

It reflects the historical experience of economic growth in the West

1. Assumes that the faster the rate of capital accumulation the higher is the growth rate of the modern sector and the faster is the rate of new job creation- but it is not necessary that the capitalist profits will be re-invested in more sophisticated labour-saving technologies or there will be no capital flight.
2. Surplus labour exists in the rural areas while there is full employment in the urban areas- this un supported by empirical literature and is generally not valid.
3. Notion of competitive modern-sector labour market that guarantees the existence of  constant real urban wages up to the point where the supply of rural surplus labour is exhausted – however, urban wages continue to rise even in the presence of  rising levels of open modern sector unemployment and the existence of surplus labour in the rural sector due to the presence of unions, civil services wage scales and Multi National Corporations own hiring practices that tend to negate competitive forces in the LDC  modern sector.
4. Finally evidence suggests that increasing returns prevail in the modern sector instead of diminishing returns, which means that the modern sector might continue to use more and more of capital instead of labour.

Structural Change and Patterns of Development

In Structural Change and Pattern of Development, in addition to the accumulation of capital, both physical and human, a set of interrelated changes in the economic structure of the country are required for the transition from a traditional economic system to a modern one.
These structural changes involve all economic functions – including the transformation of production and changes in the composition of consumer demand, international trade and resource use as well as changes in socioeconomic factors such as urbanization and the growth and distribution of a country’s population.
Development shows certain patterns – for instance, a shift away from agriculture to industrial production, the steady accumulation of physical and human capital, the change in consumer demands from emphasis on food and basic necessities to manufactured goods and services. This leads to the growth of cities and urban industries as people migrate from the rural to the urban regions with a decline in overall family size and rate of population growth.

 

Criticisms

Lack of a proper theory in explaining the pattern of development leads to the problem that we might not be sure about the causation and the effect.

Theories of Economic Development

2011/01/09

Linear Stages of Growth Model

In the 1950s and the early 1960s, the process of development was viewed as a series of successive stages through which all countries must pass.
With the right mix of savings, investment and foreign aid – these countries could be put on the path to development, thereby making development synonymous with aggregate economic growth.

Walt Rostow became the most influential advocate of the stages of growth model of development- he argued that the advanced countries had all passed through a series of steps leading to development and growth.
The developing countries were still in either the traditional society or the preconditions stage and had to follow a set of rules to take-off into self-sustaining economic growth.
The principal strategy to help this takeoff was the mobilization of domestic and foreign savings in order to generate sufficient  investment to accelerate economic growth.
– The economic mechanism through which more investment leads to more growth can be described by the Harrod- Domar Model.
In simple words the HD theory of economic growth states that the  rate of growth of GNP is determined jointly by the national savings ratio and the national capital-output ratio.
Thus the most fundamental strategies to grow for economies is to save and invest a certain proportion of their GNP – but the actual rate at which they can grow for any level of saving and investment, depends on how much additional output can be had from an additional unit of investment.
According to this theory the major obstacle to growth is the capital constraint, which became the reason for transfer of capital and technical assistance to the developing countries.
Criticisms

Stages theory did not always work – because although savings and investment are a necessary condition for accelerated rates of growth- it is not a sufficient condition. Economies also need to possess the structural, institutional and attitudinal conditions  like well integrated commodity and money markets, highly developed transport facilities, a well-trained and educated work-force and an efficient government etc.

How relevant are the lessons learnt from the historical growth process?

2011/01/08

Due to differences between the initial conditions of the Developing countries NOW and the Developed countries, when they started their economic growth are the lessons we have leartn of limited relevance.

1. Physical and human resource endowments

Developing  countries are less well endowed with natural resources. Asia where half of the world’s population lives is poorly endowed.Even though Africa and Latin America are better endowed they need heavy capital investment to exploit these

2. Per capita incomes and levels of  GNP in relation to the rest of the world

Four fifth of the world  has the real per capita income that is on average lower than their counterparts in the 19th century. Secondly, today’s developed countries were in advance of the rest of the world and hence could take advantage of the strong income gaps between themselves and the other nations.

3. Climate

Most Developed countries are located in temperate climatic zones as opposed to the Developing  countries that are located in the tropical zone. Heat and humidity results in decline in soil quality and  depreciation of natural goods, lower agricultural  productivity, weakens regenerative growth of forests and poor health of animals.  It also causes discomfort to workers and weakens their health – it reduces their desire to engage in strenuous work – diseases like malaria etc. are concentrated in tropical areas.

4. Population size, distribution, and growth

In the earlier growth years the Developed countries of today experienced a slow population growth rate and as industrialization proceeded, population growth was mostly due to falling death rates – at no time the natural birth rate of Europe or North America was more than 2% per-a.  For the Developing countries however, the population growth rates are increasing at rates of more than 2.5 % per-a.

5. Historical role of migration

During 19th and early 20th century there was a major outlet for excess rural populations in international migration, which was both large scale and wide-spread, for instance, three major contributions to the labour scarce areas of North America and Australia came from the Irish, Germans and the Scandinavian.
International emigration till WW I was both distant and permanent whereas after the WWII it was mostly within Europe- over short distance and essentially temporary.
The same type of migration is not possible today because of large distances involved and the very restrictive nature of immigration laws in modern developed countries.

6. International trade benefits

During early 19th and early 20th century international free trade was called the engine of growth – however, today the developing countries cannot expand as rapidly  because:
The terms of trade have declined – that is the price that they receive for their exports is much less than the price that they have to pay for their imports.
The developed countries are so far ahead in terms of producing more competitive and new products that the developing countries cannot compete.
Developing countries of today also face various barriers from tariffs and non-tariff reasons- like import quotas, sanitary requirements and special licensing arrangements.
7. Basic scientific and technological research and development capabilities
90% of the Research and Development is concentrated in the  Developed countries and is focused on solving their problems.
Technological requirements of the Developing  countries are very different and require simple solutions.

8. Stability and flexibility of political and social institutions

The developed countries in their pre-industrial time were independent consolidated nation states able to pursue national policies on the basis of consensus towards modernization with ideals embodied in the notions of rationalism.In contrast many of the Developing countries have recently got their independence and have yet to gain political and social stability – to become consolidated states.

CONCLUSION:

No strong empirical evidence of convergence between the living standards of Developed and Developing countries.
Most important lesson to be learnt is the significance of technological, social and institutional changes that are essential for the long-term economic growth.

Measuring Development

2011/01/06

From travelling in Ecuador I have learnt that there is a lot of Ecuadorians that think that migration to USA or Europe will improve life a lot.

But how do you measure what a good life or development?

One way is Human Development Index (HDI) statistic is composed from data on life expectancy, education and per-capita GNI (as an indicator of standard of living) collected at the national level using a formula for calculation.

HDI gives a better measurment then economic growth because I tells the wider pictuare. Countries like Malaysia and Saudi Arabia for exampel that were success stories in terms of economic measures, do not seem to do very well on the HDI.

 

According to HDI Ecuador is given a relatively high development index and ranks the on 80 spot of the world’s 194 sovereignty states.

But Ecuador’s positive index is strongly related to exports of oil, making Ecuador’s economy extremely sensitive and depending on environment resource which increases the risk of conflict have I learnt from the year at the university.

According to the UN definition, more than half of Ecuadorians citizens live in poverty and the gap between rich and poor is large.

Therfore it would be easy to say according to HDI that life is better in large parts of USA and Europe but HDI doesn’t measure the way that the people think and feel about life.

Can the answer therefore be different?

Well it is hard for me to say but from my point of view  the people I meet in Ecuador smiles, dances and talks more than we do in Sweden generly speaking. When I ask them the majority of the Ecuadorians tells me that life is good. I might be a bit over positive and is difficult to generalize issues like this but I normally tell peopel that ask me:

“What makes a good life for you?”

“I good life for me is when you have money so that you can enjoy life and don’t have to work as a slave like me in order to get food on the table. Look at me I get about 300 USD every month for my work and you make about 3 000 USD every month…”

“I understand, but what about your family and friends, the climate here in Ecuador and the oranges that you can pick from the three over there, the music that you dance and the football filed that’s always is filled with players, how much is that worth? For me a lunch cost about 9 USD in Sweden and for you 1½ USD. I think that life is better in Sweden but I also think that you are happier here in Ecuador then in Sweden and that happiness can’t be measured in money only as a measure on development. But nothing says that development is equal to happiness even do it many times is.”

What do you think?

 

 

 

What do I mean by Development?

2011/01/05

Definition of Development from Nationalencyklopedin:

”The term development differs from term change, which are more value-neutral: Development adopted most often come from a lower and more undifferentiated state to a higher, better and more differentiated.”

Before 1970s  development was supposed to be just an  economic problem with the primary focus on economic growth . But the dilemma was that high rates of economic growth was observed with  existence of mass poverty…

Even do has economic development a qualitative dimension, entails structural change and encompasses the reduction of poverty and widespread gains in nutrition health, education and standard of living.

But the objectives of Development is wider and should also improve life-sustaining goods, to raise levels of living, to expand the range of economic and social choices.

I would say  that human development is about expanding the choices people have to live a full and free life!

That includes aspects and issues like:

  • Political freedom participation
  • Security
  • Cultural and religious freedom
  • Health
  • Education

= Overall the standard of living!