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November 22nd /10 Politics Of Development
Dec 6th – half lecture half discussion on semester
look on bb for what room I will be in on Dec 8th
The Washington Consensus
Neoliberalism as a strategy of development.
Left, right and neo-liberalism- importance of individual freedom but practically this leads
to different kinds of commitments- classical- implies a limit on the sphere of government.
Negative freedoms- freedom FROM. How to secure freedom? What that means? Classical
think freedom is a preexisting condition that individuals automatically have, securing
freedom means noninterference.
Modern Liberals- freedom is no preexisting and must be produced. Under conditions of
equality freedom is not equally distributed- rich are ‘more’ free or, the poor are free to
starve. Government involvement in necessary to distribute and equalize access. Modern
liberals endorse state interaction whereas Classical liberalists fear a despotic state.
Economic Liberal- Adam Smith:
citizens must be free to follow their own directions. Theory of Moral Sentiments. Wealth
of Nations. Market would regulate itself. Limited role for the state- Provide that which the
market will not supply (things in which there is no profit).
Neo-liberalism is a restatement of Adam Smith without some outmoded aspects.
Coined in 1938 for 20 years or so the idea that the market would behave rationally if left
Keynes- Keysian- market decisions lead to inefficient macroeconomics. Fiscal
intervention by government
Struggle between Liberalism and Keynsian economics. Depression helped K win out
(believe the government needs to infuse market with money)
Then Free Market Neo-liberalism wins out again until 2008 with global financial crisis.
Rather than this type of intervention wasn’t right, another kind would be better people
reacted with intervention is bad.
40s and 50s there was a global economic boom- green revolution: 1948, refers to research
and development in agriculture that revolutionized food production. Food production kept
up with population growth, decrease in price of food – decline in terms of trade. Poor
farmers are forced out of market and consumers consume gmo and chemical foods.
Mexico went from importing wheat to exporting it.
Decolonization, oil producing countries create cartel to control oil prices- price goes sky
high, force many countries to turn to IMF for loans to pay for oil. Many developing
countries run into enormous debt and turn to IMF and World Bank. OPEC falls apart- oil
producing countries get into trouble with drop in oil prices, then must turn to IMF. Most
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developing countries are taking loans in the 1980’s.
In exchange for loans countries must accept structural adjustment programs and
conditionality packages - room to determine own policies diminish. Scope of sovereignty
no longer includes deciding own economic policies.
Two components to conditionality packages:
Democracy and Free market.
FREE MARKET conditionality (Washington Consensus)
Fiscal discipline (for other countries since USA has highest debt)- balanced budget
(macroeconomic stabilization) May want to inject cash and run short term deficit so long
as the project is short term.
Fiscal deficit produces: inflation, payment deficits and capital flight
Second Concern of Washington consensus.
Reasons countries turn to IMF is because they have a fiscal deficit, spend more money
than they make. Two ways fiscal deficit can be reduced: increase revenue of decrease
expenditure. Increase revenue: increase taxes (money is more productive in private sector
according to Washington consensus) cut spending- subsidies (water, rice, electricity) cut
subsidies for items consumed by the poor. Normally produced by the market- government
should not subsidize them. Food shortages shortly follows- enormous part of population
put below starving without subsidies – food crisis. IMF riots.
Capital investments are allowed to be kept (health and education) investments in human
capital because it produces workers.
Tax reform – broad tax base, don’t get wealthy to pay most taxes or you will have capital
flight (send money to foreign country- money leaves country).
Interest rates – Market determined, but also positive. High enough that people will put
money in bank but low enough to encourage investment and loans aren’t too expensive
Exchange Rates- determined by either market or if the level seems consistent with
macroeconomic objectives. If objective is to export than it is to be expected that the
country will undervalue its exchange rate (which makes import more expensive).
Trade Policy; import liberalization – competitive prices, no import quotas, no tariffs.
Market must be open, no protectionism.
Canada Doller so high due to ‘quantitative easing’ (USA trying to boost exports)
Exports more expensive, imports cheaper for Canada (bad for our economy)
Encourage foreign direct investment: brings capital, skills and know-how. Through debt
equity swaps- when foreign country assumes part of your debt for equity in your
enterprise. Does not give them money or foreign exchange, pays the government by
taking some of their debt and paying interest to generate foreign direct investment.
Privatization: property rights guaranteed through rule of law
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