February 6, 2012

North-South Economic Relations: The Main IssuesThe origins of inequalityThe role of international regimes in

preserving or increasing that inequalityThe role of commodity and raw materials

trade in preserving or increasing inequalityImport substitution vs. export-led growth as

strategies for industrial growth in the Third World

Consequences of PovertyLack of access to

food, shelter, and education

Feelings of helplessness and insecurity

Low self-esteem

Garbage dump harvestingin Phnom Penh, Cambodia

Gross National Income per Capita, Purchasing Power Parity Method, 1980-2006, in Dollars, in High-, Middle-, and Low-Income Countries

Source: World Bank, World Development Indicators 2008, online data.

Hobson’s Theory of Economic ImperialismUnequal Distribution of Income Capitalism

Surplus production

Overseas outlets

imperialism

war John Hobson

Lenin’s Theory of ImperialismUnequal Distribution of Income Capitalism

Surplus capital

Overseas outlets

imperialism

war

Revolution

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Vladimir I.Lenin

Declining Terms of Trade Theory• Developing countries (LDCs) depend upon

exports of raw materials and agricultural commodities

• Prices of LDC exports decline over time relative to price of their imports (mostly manufactured goods)

• Until LDCs diversify their economies, they will remain poor

Raul Prebisch

Prices of ExportsPrices of Imports

Why do they decline?• Competition among LDCs for export markets• High population growth rates in LDCs• Low bargaining power of LDC unions• Oligopolistic markets for IC goods

SirArthurLewis

Policies Recommended by Raul PrebischIndustrialization through Import SubstitutionRegional IntegrationIncreased South-South Trade and Investment

FlowsPopulation Control

Import SubstitutionHigh tariff barriers on imports of

manufactured goods to encourage domestic manufacturing (“infant industries”)

Tariff barriers are supposed to be reduced when domestic manufacturers become internationally competitive

Regional integration (helps to deal with limits imposed by small internal markets)

ExamplesDairy Farming in JamaicaCorporacion Venezolana de Guayana in

VenezuelaPosco (steel manufacturing) in KoreaBohemia (beer) in MexicoEarly automobile industry in Japan

1936 ToyotaModel AA Sedan

Why Import Substitution Bogs Down• Inward FDI displaces domestic manufacturers• Country develops trade deficit because

exports are not competitive while both domestic and MNC firms import expensive inputs for assembly plants and light manufacturing

• Government often turns to subsidies and state enterprises to encourage deepening of manufacturingThis is called the “deepening

of import substitution”

Examples of Crises of Import SubstitutionMexicoIndiaBrazilKoreaTaiwan

See chapters 4-7 of Episode 2 in The CommandingHeights documentary.

Export-Led GrowthInitial period of import substitutionReduce tariffs on inputs for manufacturingAdopt new incentives for exports:

export processing zonesnew trade-oriented infrastructuresubsidies for exporting firmsexport performance requirements for MNCs

ExamplesJapanKoreaTaiwanHong KongSingaporeChileChinaIndia

Per Capita Income in the Four Asian Tigers, 1975-2006

Sources: World Development Indicators 2008; and (for Taiwan only)Taiwan Economic Statistics 6 (May 2008). The data for Taiwan are GNP per capita; for the others GDP per capita at purchasing power parity.

Per Capita Income in China and India, 1980-2006

Source: World Development Indicators 2008.

The Millennium Development GoalsEradicate extreme poverty and hungerAchieve universal primary educationPromote gender equality and empower womenReduce child mortalityImprove maternal healthCombat HIV/AIDS, malaria, and other diseasesEnsure environmental sustainabilityDevelop a global partnership for development

Source: http://www.un.org/millenniumgoals/

Ending Extreme Poverty Videos Global Poverty Project videoHans Rosling at the State Department videoHans Rosling washing machine video