Theory Of Economic Development And North South Relation Economics Essay

Globalist perspective which believe that market-oriented system and private firms activate to provide a global economic growth, a huge variety of productions and services at lower prices for consumers, energetic environment protections, convenient working conditions at higher wages, protection of human rights and related with maintaining of democratic governments.

This paper aims to answer the question of has globalization reduced the North-South gap in economic development with modernization theory through the lens of trade relation, economic growth and Washington Consensus’ principles.

Liberal Theory of Economic Development and North South Relation

Technologic improvement of transportation, communication and information infrastructures has been concluded with a phenomenon mostly known as “globalization,” and it is an increased connection of people and places around the world.

There are many indicators that show globalization of goods, capital, and people;

World GDP through trade rate (good and services) increased from %42.1 in 1980 to %62.1 in 2007.

FDI increased from %6.5 of world GDP in 1980 to %31.8 in 2006.

International claim’ stock (bank loans) according to world GDP increased from %10 in 1980 to %48 in 2006.

Cross-border telephone call’ minutes numbers on basis of GDP increased from %7.3 in 1991 to %28.8 in 2006.

The number of foreign workers has increased from %2.4 of the world population in 1965 to %3.0 of the world population in 2005.

The impact of the major movement of goods, services, workers and capital on the North-South economic relations has been differently commented by political economists and different perspective’s explanations give distinct results. Question of “Is globalization positive or negative for the development of the Southern states?” indicates the realities about economic gap between North-South. Modernization theory of liberal approach presents main hints about North-South relation on the basis of global economic structure. Developing nations are poor because they are inefficient in economic performances and they must build open markets and invest in human and physical capital. Globalization is a great opportunity for the developing nations. The invisible hand of a market without limitations redistributes the wealth among the nations, leading to economic growth, more efficient allocation of resources, enhanced civil liberties and peaceful relations between states. Free trade is a win-win situation when it is seen from the “comparative advantage” perspective. If all countries were to concentrate on those products they can produce most efficiently and the world’s products would increase and everyone’s standard of living would rise. Development is usually described as improvement in five areas: industrialization, socioeconomic transformation, economic diversification, higher standards of living and urbanization according to liberals. The goals of development are growth, equity, democracy, stability and autonomy. The top priority is economic growth because it makes possible the achievement of all the other goals with spill over affect domestically and internationally. Since global economic integration sets off growth, it is seen as a positive factor. This cornerstone acts into inequalities between North and South’ growing, while the global economy is expanding. For explaining the gap between expectations and reality, Liberals emphasized a “modernization theory,” which suggests that the causes of poverty are not connected to globalization but they are internally related with least developed countries domestic structure. Domestic economic, social and political structures are the key factors for development so a developing country has to carry out a transition from a “traditional” society to a “modern” capitalist economy if it wishes to develop. Modern societies are successful because they are more urbanized, dynamic, flexible and willing to adapt. Namely international trade is a basic component of globalization that eliminates or reduces trade barriers like import tariffs. Trade provides national competitiveness and gives host country comparative and competitive advantages and it promotes economic resilience and flexibility.

Chart 1

Limitation on international trade like protectionist approach prevents good products at low level and poverty will increase due to restrictions. So it can be said that developing countries can benefit from expansion of international trade. Ernesto Zedillo’s words, former president of Mexico, “In every case where a poor nation has significantly overcome its poverty, this has been achieved while engaging in production for export markets and opening itself to the influx of foreign goods, investment, and technology.” claimed that market-oriented economy with global size would alert developing nations (South) to improve domestic economic structure.

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– Cross-border investment has a critical position for industrialization and speed economic growth. Developing countries that accepted foreign investment moved successfully from non-oil commodity exports to alter manufacturing and services exports. And they have generated the highest sustained economic growth during the last quarter of the twentieth century. From 1989 to 1996, foreign direct investment jumped from just $11 million a year to over $5 billion in Poland; from $3 billion to over $10 billion in Mexico; and from $2 billion to almost $10 billion a year in Singapore.

– Developing countries which have adopted open economic system developed by an average of %4.5 per year in the 1970s and 1980s, while closed economies developed just %0.7 a year. The fastest developing region of the world was East Asia where grew in real per capita income at an annual average rate of 4 to 6 percent since the 1960s. In China, per capita GDP has nearly increased 4 plus since 1980. Since 1972, the poverty rate in Indonesia has been cut in half. Per capita GDP (in U.S. dollars) increased from $163 in 1980 to $235 in 1997.

– Brazil, Venezuela and India has been reduced their trade barriers from huge amount of tariffs to low level that market oriented structure needs according to WTO principles. And these arrangements have given them sustainable development.

– Some of the developing nations of the world have driven IMF’ projects and they have sustainably developed annually.

Transnational companies are min figure of globalization and international trade. TNCs are seen as messengers of modernity for underdeveloped countries. TNCs give underdeveloped and developing countries unobserved amounts of capital, technology, management expertise, marketing networks, jobs and tax revenue. Globalization constitutes an opportunity to “climb to the top” and TNCs help this process. Competition for foreign direct investment (FDI) will lead countries in the North and in the South to try to provide well-educated labour and high-quality infrastructure. Increasing competition will lead to a greater global efficiency and modernization of the developing country. Liberal theories of economic development argue that the existing international market structure provides the best framework for Southern economic development. The major problems of development are caused by the domestic economic policies of the developing countries. It emerge with creation of market imperfections; reducing of the productivity of land, labour, and capital; and intensify social and political rigidities. According to liberals the best way to overcome these weaknesses is related with adoption of market-oriented domestic reforms. Convenient internal policies and the international system will increase levels of trade, foreign investment, and foreign aid and this structure can provide a basis for rapid growth and economic development. According to liberals trade is an engine of growth. Specialization that is adaptable with national comparative advantages increases income levels in all countries engaging in free trade. Specialization also encourages higher levels of capital formation through the domestic financial system and increased inflows of FDI.

Chart 2Chart 3

From the liberal viewpoint, the correct international Southern strategy for economic development is to encourage those domestic changes necessary to promote foreign trade, inflows of foreign investment, and the international competitiveness of domestic firms. This strategy means that quit from policies that prevent trade and investment flows like high tariffs and restrictions on FDI inflows.

Washington Consensus

‘Washington Consensus’ was introduced in a period when the Keynesian dominance in economic theory and policy had collapsed after the mid-1970s crisis and it indicates that domestic arrangements through the lens of market-oriented structure constitute economic development for developing countries. There is a geographical dimension in the term ‘Washington Consensus’. Its policy prescriptions were primarily issued for the Latin American economies in the 1990s, although they subsequently spread to the rest of the developing and less developed countries. John Williamson attracted attention that market oriented structure should have been constituted for developing countries through the lens of Latin American countries. These policy prescriptions can be summarized in ten titles:

1) The imposition of fiscal discipline.

2) The redirection of public expenditure priorities towards other fields.

3) The introduction of tax reforms that would lower marginal rates and broaden the tax base.

4) The liberalization of the interest rate.

5) A competitive exchange rate.

6) The liberalization of trade

7) The liberalization of foreign direct investment inflows.

8) The privatization of state-owned economic enterprises.

9) The deregulation of economic activities.

10) The creation of a secure environment for property rights.

The theoretical foundations of these principles can be easily explained as withdrawal of the state from the economy and restructuring of the unobstructed operation of the market economy. On the contrary of Keynesian deficit and expansionary budget system fiscal discipline should be constituted on public activities for providing balanced budget to prevent crisis. Limited public expenditures should support private entrepreneurs instead of concentrating on public works and redistributive policies. Tax system should be arranged to pave the way for business profits that are locomotive of the economy. In addition financial system should be formed as liberal perspective to construct market oriented economic system. Additionally state should give up economic operation so privatizations of all activities and enterprises of state-owned should be provided with state’ guarantee that there will not be any violations of property rights on the contrary of protectionist and nationalist structure. Protectionist measures should be abolished and free trade must be established with a secure position of movement of capital investment. Namely all of these regulation aim to provide economic growth for developing nations through the example of Latin American countries. Washington Consensus principles have emerged on the contrary of protectionist economic system and it also gave up Keynesian liberal views to establish market basis economy. Consensus’ principles create a growth opportunity for developing countries with free market advantages like win-win position. FDIs on the hands of TNCs directly reach the host countries with open market rules and this opportunity expose a greater development chance for countries itself.