POL 4410: Week 9International Development

Structure1.International Aid:

1. Debt

2. Aid

3. IMF and the World Bank

4. NGOs

2.International Inequality

1. Convergence

2. Divergence

Debt• ‘External’ or ‘foreign’ debt is the amount a

country owes to foreign creditors (banks, foreign governments, IMF, World Bank)

• ‘Sustainable debt’ is the relative burden of holding this debt. Measures: debt/GDP; debt/exports; debt/tax revenue

• ‘Odious debt’: this is debt incurred by a regime for purposes that do not serve interests of the state. Such debts are presumed to be personal.

Who Used Debt?•Major users were ISI states (see next

week).

•Why? Because such states could not afford their imports of technology through currency earned from exports

• Instead they had to borrow this currency.

•And how would they pay back currency without future earnings? Why did banks lend?

Sustainable Debt

Sustainable Debt

Frieden (1)• 2 periods: era of borrowing 1970s; debt

crisis 1982-84.

• Two sectors of capital: liquid and specific assets.

• Two types of class-conflict: weak and strong.

•Weak class conflict led to sectoral policies whereas strong conflict led to free-market policies.

Frieden (2)

•Chile: strong labor / capital hostility. This meant government had non-sectoral policy and consequent decline of manufacturing. Debt crisis failed to lead to political revolt.

•Brazil had weak labor / capital hostility. Government used debt for sectoral policies - expansion of manufacturing. During downturn, sectors fought back against austerity and overthrew government.

Foreign Aid•Millennium goal of 0.7% of GDP as aid.

US currently spends 0.15%.

•Much aid goes to debt relief. Jubilee 2000 was plan to produce debt relief for HIPCs. Live 8 intended to increase this goal. Agreement to write off $40bn debt of 18 HIPCs to IMF and bank.

• Problem of ‘moral hazard’ and debt forgiveness

The IMF: Aid?• Role of the IMF is to bail out states with BOP

crises.

• Each state must contribute annual dues proportional to national income

• Countries can borrow up to 25% of dues

• Further borrowing requires entering a Structural Adjustment Program (SAP) which has conditions attached - ostensibly to reduce future BOP problems

• Overall funding of $215bn.

Przeworski & Vreeland

•Countries enter IMF when reserves low and BOP high, when rejection costs are high, and when sovereignty costs are low.

•P and V find that countries that enter IMF programs tend to have worse economic outcomes post-program than states that do not enter, even controlling for selection effects.

P and V

P and V

The World Bank• The World Bank lends developing states

(under $865 per capita) money for development projects.

• As with IMF, voting is tied to income. US holds 16.4% of votes: 85% supermajority needed to pass major decisions

• Why loans not grants?

• Has authorized capital of $184bn (10% from dues, most from borrowing)

NGOs

•Gates Foundation ($32bn endowment): Global Health Program; Global Development Program; United States Program

•Oxfam ($300m per annum)

•Red Cross

•Amnesty

International Inequality

•We must try to distinguish between WITHIN-STATE inequality and BETWEEN-STATE inequality.

•While former has increased in many areas, the latter is much larger.

•There has been ‘divergence big time’ (Lant Pritchett, 1997)

Within-State Variation

•H/O predicts this should rise in developed states and decline in developing states. Why?

•The former has happened but no the latter. Why?

•What would Rudra argue?

Within-State Graph

World Poverty

World Income Distribution

Income Growth by percentile

Income distribution 1970

Income Distribution 1999

1990

1999

Impact of China and India

Showing Divergence

•Pritchett 1997 estimates that a lower bound for income is P$250 per annum.

•Purchasing Power Parity vs. Market X-rates.

•For poorest countries today to have not diverged from US growth they would have to have had incomes way below P$250

Convergence in OECD

Divergence Elsewhere

Divergence

Winners and Losers

Next Week

•TUES: Development Strategies pre-1990sFascism, Communism, Social Democracy, ‘Embedded Liberalism’; ISI; EOI

•THUR: New Winners and Losers and their development strategies: Asian Tigers; European Tigers; China and India; Sub-Saharan Africa; Latin America