Developed vs. Developing States

December 2012/First Year of College

According to Liberals, developing countries are poor because of they are inefficient (due to social aversions to change and poor government policies) – and therefore must undergo socioeconomic transformation (i.e., modernize), build open markets, and enhance their worker productivity. According to structuralists, developing countries are poor because they are exploited by the world capitalist system, which keeps them as low-wage, low value-added goods and commodity producers, dependent on developed country consumption and capital. In this essay, I will evaluate the arguments and policy recommendations of Liberals and structuralists to promote development. I will also investigate trade as “an engine of growth” by contrasting the performances of export-led and ISI policies; discover whether transnational corporations (TNCs) are a benefit or detriment to development; and discuss to what extent the globalization of economic activity produced a “race to the top” or a “race to the bottom” (Packer 2012, 3).

To begin, I will highlight the differences between a Liberalist and a structuralist approach to economics. Liberalists “portray individuals interacting in their self-interest, but doing so in a mutually beneficial exchange” (Hughes 1999, 315). Adam Smith provoked a real interpretation of commercial liberalism, arguing that human nature drove individuals to “truck, barter, and exchange” and that individuals act rationally to pursue self-interests in trade. This is called a mutually beneficial exchange. “If they act freely and in their rational self-interest, no party will enter into any exchange unless it benefits them” (Hughes 1999, 304).

Milton Friedman argues that “the consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell” (Hughes 1999, 304).

Liberalists also have certain ideas and beliefs when it comes to three areas of economics: production, trade, and development. Liberalists believe that the reinvestment of profit yields a higher level of production. They believe that “growth in the economy requires such capital accumulation, or reinvestment in excess of the wearing out of capital”(Hughes 1999, 305). Liberalists also believe in a division of labor, or specialization, to maximize profits. Investment in human capital is also important to liberalists, adding to labor productivity overall. Liberalists also take a specialization view on trade. The production of a good that can be produced most efficiently in a state allows for a mutually beneficial trade for something that cannot be so efficiently produced.

Liberals believe that developing countries can reach the level of a fully developed country by following a “development model.”

Liberalists believe in government intervention only where the market has “failed.” Such failures are pollution and corporate monopolies. Otherwise, liberalists take a “laissez-faire” view on market intervention (Hughes 1999, 309).

Structuralists, on the other hand, follow the ideas of Karl Marx, who argued that an overarching class system worked to create a whole political economy and that “these economic divisions condition political and social relationships.” (Hughes 1999, 314-5).

Unlike liberalists, structuralists believe that there is a trade-off between costs and benefits in a class system. “The game is a win-lose or zero-sum.” Structuralists believe in an “international class-structure,” where the development of one country results in a trade-off for the contracting economy of another. (Hughes 1999, 315-8).

Structuralists follow a dependency theory, in which the periphery states are dependent on the core states, sacrificing their ability to develop and benefit from trade. “This creates a dual economy within the developing country—one part superficially modern, international, and wealthy; one part traditional, domestic, and poor” (Hughes 1999, 319-20).

Is trade an “engine of growth?” A liberalist would argue that it is. Kegley and Wittkopf provide arguments supporting trade as a factor of economic growth. In discussing specialization, the authors state: “If all countries were to concentrate on those products they can produce most efficiently, the world’s output and income would increase, and everyone’s standard of living would rise” (Kegley and Wittkopf 2006, 208). Unfortunately, however, trade involving a country in a lower class ranking can be disproportionate. Structuralists believe that this is the downfall to ‘marginal benefit’ in liberalism. The gains are disproportionate even if the ‘principle of comparative advantage’ rules. Liberalists are more concerned with absolute rather than relative gains, while structuralists are more concerned with “how the benefits of trade and other economic exchanged are distributed than with their total benefits” (Kegley and Wittkopf 2006, 208-9). Spiegal argues that trade cannot be fair between developed and developing countries because most peripheral countries’ exports are dominated by a single commodity. Because these countries lack the diversity of goods and services that most core countries have achieved, their exports are “very vulnerable to fluctuations in the demand for or price of their main export” (Spiegal 2011, 356). Thus, it should be left up to the individual state to determine whether or not the trade is fair—rational individuals will not make choices that cost the state, but rather marginally benefit it (Hughes 1999, 315).

Are transnational corporations a benefit or a detriment to development? Krugman seems to think so. In his article, Krugman outlines why Third World workers are the biggest beneficiaries of globalization and TNC’s—despite the common belief that they are the greatest sufferers. Krugman argues that because of factors like “lower tariff barriers, improved telecommunications, and cheaper air transport” the disadvantages of producing goods in foreign countries were greatly decreased. “Low wages allowed developing countries to break into world markers” (Krugman 1997, 3). The plethora of jobs that the exporting sector creates in a Third-World country has a ‘ripple effect’ on the given economy. When the pressure on land becomes less intense and rural wages rise, the number of workers desperate for jobs will decrease, and a natural, healthy competition between companies for labor will be created. This will cause the wage equilibrium to rise—making Third-World workers the beneficiaries of globalization. Some staggering statistics given by Krugman support his hypothesis: in Indonesia, “since 1970, per capita intake has risen from less than 2,100 to more than 2,800 calories a day. A shocking one-third of young children are still malnourished–but in 1975, the fraction was more than half” (Krugman 1997,4) While some argue that TNC’s are a detriment to developing countries, I believe that more evidence exists for globalization being beneficial than harmful.

To what extent has the globalization of economic activity produced a “race to the top” or “race to the bottom”? The first view, a “race to the top,” promotes the idea that multi-national corporations are more motivated by investments in human capital, strong infrastructure, and high demand and are unmotivated by low wages and government imposed taxes. The second view, a “race to the bottom,” suggests that government intervention such as regulatory tax and wage concessions will feed off the economy, benefitting capital and costing laborers and communities. “Winners and Losers in the Global Economics Game” supports this view by pointing to “the winners in the race to the bottom [to] include highly educated (or skilled) workers, or workers in particular professions…along with the capitalists” (Epstein, Crotty, and Kelly 1996, 377).

The races to the top and the bottom can also converge, leading to “uneven development.” This view is parallel to the structionalist’s theory that there is a trade-off between the benefits and costs between two regions, where “one region of the world grows at the expense of the other” (Epstein, Crotty, and Kelly 1996, 378).

Globalization will hopefully turn to the “race to the top” in the future. The hope is that businesses will motivate one another to competition for growth and development, causing each state to grow parallel to the other. The growth of incentives, such as trade and expansion will hopefully lead to an equal exchange of beneficial and capital encouragement, leading to the “race to the top.” Either way, appropriately titled by Epstein, Crotty, and Kelly: there are always ‘Winners and Losers in the Global Economic Game.’

Bibliography

  • Epstein, Gerald, James Crotty, and Patricia Kelly. 1996. “Winners and Losers in the Global Economics Game.” Current History, November.
  • Hughes, Barry B. 1999. Continuity and Change in World Politics: Competing Perspectives. New Jersey. Prentice Hall Publishing.
  • Kegley Charles W., and Eugene R. Wittkopf. 2006. World Politics: Trend and Transformation. New York. St. Martin’s Press.
  • Krugman, Paul. 1997. “In Praise of Cheap Labor: Bad jobs at bad wages are better than no jobs at all.” Dismal Scientist, March.
  • Packer, Robert. 2012. Exam 3 Prompt. The Pennsylvania State University.
  • Spiegal, Steven L. 2011. World Politics in a New Era: North-South Economic Relations. Fort Worth. Harcourt Brace College Publishers.
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