© Randall W. Stone, 2002

Globalization and Underdevelopment

Or, If globalization is so great, why are there so many poor people?

© Randall W. Stone, 2002

Statistics

• Infant mortality: – 4 of 1,000 in the richest fifth of countries;– 200 of 1,000 in the poorest fifth

• Childhood diseases:– 2 million die of dehydration from diarrhea– 2 million die of pertussis, polio, diptheria, tetanus,

measles. Vaccination costs $15.– 3 million die of bacterial pneumonia. The antibiotic

treatment costs $.25

Easterly 2001

© Randall W. Stone, 2002

Statistics

• Nutrition– Calorie intake 1/3 lower in the poorest fifth of

countries than in the richest

• Child labor– 42% aged 10-14 in the poorest countries– 2% in the richest fifth

• Women’s rights– None of the poorest fifth has equal rights for

women

Easterly 2001

© Randall W. Stone, 2002

Case study: Ghana

• Auspicious start– At independence in 1957, Gold Coast

exported 2/3 of the world’s cocoa– Best educational system in Africa– Under British rule, Nkrumah built roads,

clinics, schools– Leading economists were optimistic

© Randall W. Stone, 2002

Case study: Ghana

• World Bank project: Akosombo Dam– Electricity– Aluminum smelter owned by multinational Kaiser

Aluminum– Artificial Lake Volta for water transportation– Fishery– Irrigation

• But Ghana was poorer in the 1980s than in 1957, and is not much better off today

© Randall W. Stone, 2002

What went wrong?

• 5 military coups

• Famine in the 1970s

• Drought

• By 1983– Per capita GDP was 2/3 of the 1971 level– Calorie intake was 2/3 of recommended

level

© Randall W. Stone, 2002

Financing gap approach

• Evsey Domar (1946)• Roy Harrod (1939)• Sir Arthur Lewis (1954)• W. W. Rostow (1960) The Stages of

Economic Growth: A Non-Communist Manifesto

Growth is proportional to net investment

Problem: the evidence

© Randall W. Stone, 2002

Solow’s paradox (1956, 1957)

• Investment cannot lead to long-run growth

• Diminishing returns

• Technological innovation growth

• But, how do we explain variation across countries?

• Does technology vary? Why?

© Randall W. Stone, 2002

Other explanations?

• Human capital• Complementarities• Incentives & institutions

– Saving & investing– Maximizing profits (not rents)– Competition– Resource allocation– Missing markets

© Randall W. Stone, 2002

Globalization

• Trade

• Technology

• Capital flows

• Capital controls

• Interdependence

• Communications

© Randall W. Stone, 2002

Joseph E. Stiglitz

• Nobel Prize in Economics• Major contributions in the economics of

information—transaction costs, principal-agent models, incentives

• Expertise in public economics & development

• Council of Economic Advisers, 1993-97• Chief Economist, World Bank, 1997-

2000

© Randall W. Stone, 2002

Globalization & Discontent

• IMF, World Bank & WTO are managed in the interest of the richest countries

• Current trade regime is unfair

• Abolishing capital controls exposes poor countries to too much risk of crises

• IMF programs hurt the poor and do not promote growth

Major claims:

© Randall W. Stone, 2002

Indictment of the IMF

• Poor economic analysis

• “Market fundamentalism”

• Little local knowledge

• Lack of transparency

• Excessive attention to inflation

• Overextension beyond core competencies

© Randall W. Stone, 2002

Critique of conditionality

• Little evidence that it works: – Influencing policy– Increasing growth

• Political backlash

© Randall W. Stone, 2002

Recommendations

• Adjustment should be gradual• Wider role for state involvement in the

economy– Regulation– Deficit spending– Industrial policy

• Reform of IFIs and WTO in the interests of the poor

• Abolish conditional lending