ECONOMIC DEVELOPMENT VERSUS        DEPENDENCY  Neoliberal Policy Brief               Coauthored by:       Laura Aguilera a...
1Executive Summary “Give a man a fish and you feed him for a day; teach a man how to fish and you feed him for a lifetime....
2Development versus Dependency In order to analyze the efficacy of economic growth we must peel back each layer that has p...
3they also apply a neoliberal economic agenda as a precondition toreceiving the financial assistance. They prescribe cutba...
4them to cut spending in private and public investments due toStructural Adjustment Policies (SAPs) that have been imposed...
5developing nations because a developed nations trade consistsmostly of internal trade and trade with other developed nati...
6as the IMF will not bring prosperity to developing countries becausethe powerful countries influence international politi...
7Spain in which austerity measures instituted in response to financialcrises in 2009 proved ineffective in combating publi...
8explicitly and transparently given with the premise of finality.There should be exit strategies implemented to foreign ai...
9ihttp://www-personal.umich.edu/~alandear/glossary/e.html -EconomicDevelopment Easterly, William. 2006. “The White Mans Bu...
10  Stiglitz, Joseph E. "The end of the beginning: Debt relief alonexviiiwont relieve third-world poverty." The Guardian, ...
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Economic development versus dependency

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Economic development versus dependency

  1. 1. ECONOMIC DEVELOPMENT VERSUS DEPENDENCY Neoliberal Policy Brief Coauthored by: Laura Aguilera and Vanessa Avila
  2. 2. 1Executive Summary “Give a man a fish and you feed him for a day; teach a man how to fish and you feed him for a lifetime.” But what if said man could not afford a fishing pole? What if an intermediary buys his fish for a small sum and keeps all the profit because the man cannot determine the market price? Do you continue providing the man with a fish every time he is hungry? Many who fear that the US is simply giving developing countries abroad the proverbial ‘fish’ minus the ‘fishing lesson’ are criticizing economic development. Economic development has shifted to economic dependence in many developing nations. This policy brief will outline the role of: neoliberalism, investment, trade, aid, fiscal austerity, and the importance of human capital. The brief will conclude with policy recommendations geared towards reforming economic development and reducing dependency.Statement of the ProblemThere are a multitude of problems with the existent paradigm ofeconomic development. In short, economic development is noteffective in its current state, resulting in dependency. Economicdevelopment is defined as being the sustained increase in theeconomic standard of living of a countrys population.i Aidbureaucracies like the IMF and World Bank aim to encourageeconomic growth in developing countries, however their initiativeshave not been successful. Achievement stories like South Korea andTaiwan are being projected as examples of the benefits of economicdevelopment, yet these countries may just be exceptions to the rule.More than 2.3 trillion dollars has been poured into Africa and otherr e g i o n s ii. T h e m a j o r i t y o f c o u n t r i e s t h a t h a v e h a d t h e m o s tfinancially assistance are in fact no better off, or even worse off,from when they first started. The existent development model is notsustainable for growth and it is time to take a critical look at whatmeasures we need to take for reformation. As policy makers it isvital to implement purposeful fiscal efforts that do not result independency. 1
  3. 3. 2Development versus Dependency In order to analyze the efficacy of economic growth we must peel back each layer that has played a role in the struggle between development versus dependency: A. NEOLIBERALISM B. INVESTMENT C. TRADE D. AID E. FISCAL AUSTERITY F. HUMAN CAPITALA. NEOLIBERALISM"Remember, aid cannot achieve the end of poverty. Only homegrowndevelopment base on the dynamism of individuals and firms in freemarkets can do that."-William EasterlyThe free world economy is thought to be a beneficial factor ineconomic development according to the neoliberal economici d e o l o g y iii. E c o n o m i c c o n n e c t i o n s b e t w e e n a d v a n c e d e c o n o m i e s w i t hless developed economies are thought to be helping the developingsocieties through elements of trade, international aid, and foreigndirect investment. In some cases economies that are from countriesthat are less developed attain the export markets, capital, andtechnology required for economic growth. The problem is that theideology regarding trade, capital, and free movement assumes that amarket exists. For many developing countries, like those in Africa,this prescription may be unfeasible due to lack of capacity. Forneoliberal economists, economic development requires the removalof political and social obstacles to the functioning and effectivenesso f a m a r k e t s y s t e m iv. I n t h e 1 9 8 0 s a n d 1 9 9 0 s t h e W o r l d B a n k a n d t h eInternational Monetary Fund prescribed a neoliberal agenda forAfrica’s economic development, which resulted in devastatingresults. The IMF and World Bank provide financial assistance, yet 2
  4. 4. 3they also apply a neoliberal economic agenda as a precondition toreceiving the financial assistance. They prescribe cutbacks on socialspending, liberalization of the economy, and resource extraction thatis export-oriented to open markets as part of their structuraladjustment. The role of the state is minimized and privatization isencouraged with reduced protection of domestic industries. Otherneoliberal adjustment policies also include currency devaluation,increased interest rates, flexibility of the labor market, and theelimination of subsidies. To be attractive to foreign investorsvarious regulations and standards are reduced or removed, alsoknown as ‘the race to the bottom’. This neoliberal agenda has notbeen successful in reformation of these developing economies andtherefore has resulted in increased dependency.B. INVESTMENTAs early as 1989 the World Bank endorsed the view that financingwas vital to economic growth "by improving the productivity ofi n v e s t m e n t " v. T h e i n v e s t m e n t m e t h o d w a s s i m p l e : s a v i n g s l e a d s t oinvestment, investment leads to growth, and growth in the end wouldlead to reduction in poverty. The Marshall Plan was built on thispremise and is a successful example of programs that were short andlimited. Critics would argue that the ‘100 billion dollars over fiveyears’ is different than the current investment system we see inAfrica. The economic development strategies are no longer short andlimited, they are instead long and consistent, resulting independency. Many African governments see investment as justanother source of income. Investment made sense when Africannations were coming out of colonialism because they did not havethe money to capitalize and grow. Investment ideally was intendedto increase growth and reduce poverty so that developing economiescan be independently sustainable.Conversely, Sachs would argue that investment is vital in capitalaccumulation and economic growth. Economist Sachs notes that “thepublic sector should be focused on five kind of investments: humancapital, infrastructure, natural capital, public institutional capital,a n d p a r t s o f k n o w l e d g e c a p i t a l ” . vi T h e s e i n v e s t m e n t s p a i r e d w i t hprivate capital lead to financial growth. This model, however, is notfeasible for developing countries who’s IMF conditionalities require 3
  5. 5. 4them to cut spending in private and public investments due toStructural Adjustment Policies (SAPs) that have been imposed toensure debt repayment. SAPs have required developing countries toreduce spending on things like health, education and development,while debt repayment and other economic policies have been madethe priority. In effect, the IMF and World Bank have demanded thatpoor nations lower the standard of living of their people. Some mayargue that this is a poverty trap in which the developing countriescannot invest to build capital and therefore will remain in debt as aresult of their loan conditionalities. To escape the paradoxical trapthere must be investment across the board on all elements of privateand public investment. Examples of this can be seen with the “GreenRevolution” in Asia and global efforts like the eradication ofs m a l l p o x a n d p o l i o vii.Figure:1 Private and Public Investment in Capital Infrastructure Business Capital Natural Human Human Capital Capital Capital Knowledge Capital Knowlege Capital Household Income Public BudgetC. TRADEDeveloping nations are at a disadvantage in their market interactionswith industrialized developed nations. Developing nations economictrade consists of exports and imports from developed nations. Theproblem with this dynamic is that only a small proportion of theeconomic activity of the developed nations consists of trade with the 4
  6. 6. 5developing nations because a developed nations trade consistsmostly of internal trade and trade with other developed nations wehave seen this with the implementation of regional trade agreements(RTAs). If developing countries like those in Africa wanted to tradewith one another it is nearly impossible due to high tariffs. Tradebetween African countries is in the double digits, sometimes almost3 0 % viii. T h i s a s y m m e t r i c r e l a t i o n s h i p p u t s a d e v e l o p i n g n a t i o n i n aweak trading position face to face with a developed nation. Manydeveloping countries are rich in natural resources but manyneoliberal practices prevent developing countries from competing inthe global market through the imposition of tariffs.D. AIDDeveloping countries currently find themselves struggling toovercome their poor economic situations. The fact is that neoliberaltheories will not bring prosperity to poor countries. On the contrary,Neoliberal guidelines make developing countries more dependent onthe rich countries because it does not allow development growth. Forexample, a short-term fix is foreign aid. When wealthy countriesgive food aid to starving communities, they create a long-termdependency. The problem is that communities receiving aid thenexpect the food donations to continue. Furthermore, local farmersare struggling to grow and sell their crops and have a higher chanceof discontinuing their crops and eventually falling into the groupreceiving food donations, also known as dependency. Aid becomes aform of income to the country and its citizens, when aid should beused to create employment opportunities that will be long-terms o l u t i o n s ix. T h e a b s e n c e o f d e v e l o p m e n t s i m p l y m e a n s m o r e a i d .More aid without strategic implementation will lead to more loansthat will be added to the debt. Therefore, aid introduces poorcountries to a cycle of dependency. The lack of developmentalgrowth leads to more aid. More aid leads to more debt.The IMF’s goal is to “foster global growth and economic stability. Itprovides policy advice and financing to members in economicdifficulties and also works with developing nations to help thema c h i e v e m a c r o e c o n o m i c s t a b i l i t y a n d r e d u c e p o v e r t y . ” x. P r o v i d i n ginternational aid for development to developing countries is a maingoal of the IMF. Nonetheless, such international organizations such 5
  7. 7. 6as the IMF will not bring prosperity to developing countries becausethe powerful countries influence international politics for their ownnational interests. Furthermore, the IMF easily loans money todeveloping countries. However, these loans come with SAPs thatmake the borrowers more dependent on the lenders. For example, thehigh interest rates on these loans make it difficult for countries torepay.Unfortunately, many times the aid given to developing countries hasfallen in the hands of corrupt governments. Take Africa for example.Africa has consistently received aid. Yet countries in the Africancontinent have shown no major progress. On the contrary, Africa’sGDP decreased despite the trillion dollars in aid. African countriesdid financially better during the time of their independence fromc o l o n i a l p o w e r s xi. D o n o r s n e e d t o b e s t r i c t w h e n p r o v i d i n g a i d .According to Sachs, a country that has fallen into an economiccrisis, almost always needs some external assistance. One example ist h e f o r g i v e n e s s o f a c o u n t r y ’ s d e b t xii.E. FISCAL AUSTERITYCountries that cannot honor their debt obligations practice fiscalausterity. Many times we see this dynamic with developing countriesthat have borrowed money from intergovernmental institutions likethe IMF who will demand austerity measures. IMF conditionality’sare problematic because they make countries cut their socialspending on educational, welfare, and development projects. Sometypes of fiscal austerity not only fail to bring growth, but they mayn o t e v e n b r i n g a d j u s t m e n t i n t h e l o n g r u n xiii. T h e s e a u s t e r i t ymeasures have a negative impact on the country’s standard of living.In 2009 and 2010, workers and students in Greece and otherEuropean countries protested against cuts to pensions, publicservices and education spending as a result of government austeritym e a s u r e s xiv. O p p o n e n t s a r g u e t h a t a u s t e r i t y m e a s u r e s t e n d t o d a m p e neconomic growth, which ultimately causes governments to lose moremoney in tax revenues. In countries that had weak economic growthto begin with, austerity can cause deflation, which inflates existingdebt. Another hazardous result would be a liquidity trap, causingcredit markets to freeze up and unemployment to increase.Challengers of austerity measures outline the cases in Ireland and 6
  8. 8. 7Spain in which austerity measures instituted in response to financialcrises in 2009 proved ineffective in combating public debt, andp l a c i n g t h o s e c o u n t r i e s a t r i s k o f d e f a u l t i n g i n l a t e 2 0 1 0 xv.F. HUMAN CAPITALThe World Bank defines Economic Development as: “Qualitativechange and restructuring in a countrys economy in connection withtechnological and social progress. The main indicator of economicdevelopment is increasing GNP per capita, reflecting an increase inthe economic productivity and average material wellbeing of ac o u n t r y s p o p u l a t i o n . ” xvi I n t h e o r y e c o n o m i c d e v e l o p m e n t c o n s i s t s o fsocial progress and results in the wellbeing of a country’spopulation, however in practice how important is human capital toagrarian and industrialized societies?Human capital is compromised when developing countries areadhering to structural adjustment policies. Spending that is centeredaround the well being of human capital like: health, education, anddevelopment are suppressed. The ideology behind the tightening ofcosts of human capital is done on the premise that once GNP/GDPincreases there will be an automatic increase human capital.Needless to say, this premise is not what we are seeing inindustrialized and agrarian societies. Human capital is not at theforefront of their economic developmental measures. This isproblematic due to the hindrance of growth.RecommendationsThere is no ‘one size fits all’ policy approach to the followingrecommendations. The subsequent proposals should be tailored on acase-by-case basis. In application of these policy measures one mustuse “clinical economics” and take into consideration corruption,gender inequality, diseases, and geographic barriers.Easterly notes that development is not about solutions, it is aboutp r o b l e m s o l v i n g s y s t e m s . xvii T h e m a i n ‘ p r o b l e m s o l v i n g s y s t e m ’ t h a tshould be implemented is for funds granted in aid to phase out overtime. The amount of time is dependent on the conditions andfeasibility of each individual country. Giving money to countrieswithout a date of finalization is problematic. The funding should be 7
  9. 9. 8explicitly and transparently given with the premise of finality.There should be exit strategies implemented to foreign aid in orderto systematically work the countries out of reliance. Rwanda is agreat example of this policy recommendation, they refuse to rely onaid because they know it is not economically sustainable. Rwandawas ranked by the World Bank the most improved in 2010. Due tokleptocracy donor countries should also enforce rules and make suretheir aid money is being strategically spent with goals attached anda s k f o r p r o g r e s s r e p o r t s xviii . T h i s i s k e y i n i n c o r p o r a t i n g a s e n s e o faccountability to the recipients. The cutting of the provorbialumbilical cord between donors and recievers is key in eliminatingdependency. Implementing a time frame in which the reciever iscognizant of termination of aid, will allow the country to exploreother avenues of economic growth.The next recommendation calls for the modification of structuraladjustment policies (SAPs) imposed by international lendinginstitutions. These SAPs are inefficient and have been criticized forcreating a cyclical dynamic of poverty. As outlined in this brief,investment is vital for growth and investment is repressed bylending institutions who want to tighten social spending and reliefdebt. The SAPs are currently designed to adhere to a short-termdynamic with a ‘one size fits all’ approach. The SAPs need astrategic reformation in which investment in the countries’ publicsector is adhered to. Investment should be recognized as a form ofdebt relief for lending institutions. In order for countries to pay offtheir debt they need strategic ways to obtain capital and throughinvestment these countries can grow.In essence, the current neoliberal structure is paradoxically creatinga poverty trap for developing nations. After years of followingneoliberal policies, the world has seen no improvements amongdeveloping nations. The rich kept getting richer and the poor,poorer. The benefits of neoliberal policies are questionable; manydeveloping countries are worse off from when they started economicdevelopmental measures. It is time that policy makers,intergovernmental lending institutions, and governments modify theway they are doing business. 8
  10. 10. 9ihttp://www-personal.umich.edu/~alandear/glossary/e.html -EconomicDevelopment Easterly, William. 2006. “The White Mans Burden: Why the Westsiiii E a s t e r t oEfforts ly, AWd l t i a mR e2 0 0H . v e h eo n eh s t e M uacn sI lB u rn d n :o W hty lteh G o o d s,t T h e i i lhe . st 6a “T D W i o M h l a de s Li t e We sEfforts to Aid the Rest Have Done so Much Ill and so Little Good, ThePenguin Press, New York.iii http://rosalux-europa.info/userfiles/file/DD51.pdf#page=75ivMidgley, J. and Tang, K.-l. (2001), Introduction: social policy,economic growth and developmental welfare. International Journal ofSocial Welfare, 10: 244–252. doi: 10.1111/1468-2397.00180v World Bank, World Development Report, Washington DC, 1989, 9.30. Sachs, Jeffrey D. 2005. The end of poverty. New York: PenguinviGroup. Sachs, Jeffrey D. 2005. The end of poverty. New York: PenguinviiGroup. (p262) Dambisa Moyo. 2009. Dead aid: Why aid is not working and howviiithere is another way for Africa. Sachs, Jeffrey D. 2005. The end of poverty. New York: PenguinixGroup. (p246)x http://www.imf.org/external/about/overview.htm Dowden, Richard. 2005. Aid ‘is no solution’ for Africa. BBC News.xihttp://news.bbc.co.uk/2/hi/programmes/if/4105140.stmxiiSachs, Jeffrey D. 2005. The end of poverty. New York: PenguinGroup. Easterly William, Timothy Irwin and Luis Serven, Walking Up thexiiiDown Escalator: Public Investment and Fiscal Stability, The WorldBank Research Observer, 23, no. 1, (Spring 2008): 37-56.xivhttp://www.nytimes.com/interactive/2010/09/23/business/global/20100923-europenow.html?ref=global#/0xvhttp://www.bloomberg.com/news/2010-11-11/stiglitz-says-ireland-has-bleak-prospect-of-cutting-deficit-saving-banks.htmlxvihttp://www.worldbank.org/depweb/english/beyond/global/glossary.htmlxvii http://aidwatchers.com/2010/07/the-answer-is-42/ 9
  11. 11. 10 Stiglitz, Joseph E. "The end of the beginning: Debt relief alonexviiiwont relieve third-world poverty." The Guardian, 12 Jul 2005www.guardian.co.uk/world/2005/jul/.../debtrelief.development 10

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