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10 06 Lecture Notes Structural Adjustment and Development Dillemas.docx

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Geography 3312A/B
Haroon Akram Lodhi

Structural Adjustment and Development Dilemmas Decolonization after WWI Decolonization commenced following WWI » end of empires » the Russian revolution » the Great Depression » the rise of elite-led nationalism in the colonized countries After World War II, Third World countries promoted developmental states using ‘Listian’ import- substituting development strategies Instead of importing the goods you need, you try to protect your economy by creating the industries you need » modernization theory » structuralism » dependency theory People and products entered into market relations, commodification deepened and broadened, and economic growth occurred The things we take for granted became facts of life – people began buying things they needed instead of making them. To do this, people began to rely more heavily on selling their labour. Yet the numbers in poverty did not drop Comparative Advantage During the period of decolonization, the post-WWII global economic order was based on the idea of comparative advantage, argued by David Ricardo in 1817: • if countries specialize in the production of those goods and services that they are relatively more cost efficient at producing, and then freely trade with each other, then all countries—and people—will be better off This applies to individuals, companies and countries – do the job you’re best at To facilitate trade, all nations fixed the value of their national currency (the exchange rate) to the US dollar—it served as the anchor of the global exchange rate regime We have a freely flowing exchange rate between the US and Canadian dollar, it didn’t used to be this way In the 1960s, this system started to unravel, as a consequence of the costs to the US of the Vietnam War—the US started issuing printing more and more dollars, to pay for the war, generating inflationary turmoil amongst all those countries whose currencies were fixed to the dollar You had to pay 13% more for things as a result The 1970s were a period of deeper economic and political turmoil in the North (Aside from high inflation) • OPEC and increases in oil prices • the end of the Indochina Wars • socialist revolutions in Portugal, Ethiopia, Angola and Mozambique, amongst others (the Americans couldn’t contain or understand how the world was changing – almost went to war over the sinking of a ship) • labour unrest, inflation, exchange rate instability, balance of payments difficulties and budgetary deficits • up until 2008, the worst economic circumstances since the 1930s Laissez-faire The economic policies of the 1950s/1960s appeared to have failed, and the blame was laid at the door of the state There was growing intellectual and popular acceptance of monetarism—that inflation is caused by having too much money available in an economy--which led to a re-assertion of market-based laissez- faire economics in the North They had to stop printing money Laissez-faire literally translates as ‘leave to do’ remove the role of the state – let individuals and companies do the things they want to do, and in economics is the idea that allowing individuals to pursue their own interests through markets will result in optimal and more rational outcomes than the state intervention to regulate markets promoted by J.M. Keynes Important figures: Milton Friedman, Fredrich Hayek In the South there was also discontent with the world economic order • not enough aid where it was needed (poverty and inequality were still high) • not enough trade due to protectionism in the North (not allowing trade with developing countries) • not enough finance because of volatile primary commodity prices • claims of exploitation of the South by Northern transnational corporations (TNCs) As a consequence: • Non-Aligned Movement (NAM), 1961, which arose out of the 1956 Bandung (Indonesia) Conference • United Nations Conference on Trade and Development (UNCTAD), 1964 (said they were not aligned with the East-Capitalist or West- Communists. They were aligned with themselves. This created the UN conference – which tried to figure out how trade could be more favourable to developing countries) • Group of 77 (G-77), 1964 • New International Economic Order declaration, 1974 ( The Debt Crisis Then came 1973: in the wake of the Yom Kippur War, OPEC tripled oil prices Then came 1979: OPEC tripled prices again All hydrocarbon-import-dependent (countries that import oil) countries faced a major shock, having to finance huge increases in the oil import bill This was the backdrop to the systemic commercial debt crisis that was emerging in Asia and Latin America • OPEC countries, awash with petrodollars after 1973, deposited them in banks in the North • banks in the North, awash with petrodollar deposits, looked for places to lend, but the North, in economic recession, offered few profitable lending opportunities • countries don’t go bankrupt, and therefore banks started pushing loans based on petrodollar deposits to states in the South (recycling) • these loans were in dollars, and repayable in dollars • Southern states used the loans to finance imports from the North, helping to pull the North out of recession • however, when OPEC again raised oil prices 3-fold in 1979, the US Federal Reserve substantially raised interest rates, to reduce its inflationary impact • repayments on dollar-denominated loans soared The countries with the oil became fabulously wealthy in a short period of time – the oil earnings became known as petrodollars. They put them in banks in the North – Swiss, British, though usually German and American. This meant there was an explosion of deposits in the North because of these petrodollars – banks make money by lending money, not by getting it. So who did they have to lend to? There’s a saying – countries don’t go bankrupt. The banks began loaning to countries – usually in Asia and Latin America. The countries tried to sustain substitution development – which was good for the North because it improved the economy. So: Argentina takes out a loan from Citibank in 1977 at 6% floating; 3 years later the rate is 20%+, and Argentina cannot repay interest on the loan, let alone the principal (the amount of money initially borrowed) Get people to spend less money by putting it in the bank. They decided to crush inflation by soaring interest – repayment of the loans the developing countries took out became impossible – they can’t afford to keep up with the interest, much less pay off what they originally borrowed. Increasingly, Southern states had difficulty servicing their debt 19 August 1982: Mexico announces it is defaulting on its loans – it won't pay them because it could not – and the debt crisis begins on this day. Couldn’t pay their loans back to banks In Africa, a systemic debt crisis also developed as a consequence of an accumulation of official debt to Northern governments and international financial institutions. Couldn’t pay their loans back to organizations like the World Bank and various governments Two different crises because the amounts are owed to two different types of organizations Two Different Crises These different crises in Latin America, Asia and Africa all witnessed unsustainable • balance of payments deficits (imports exceed exports: how to pay?) Buying more than you’re selling • budgetary deficits (spending exceeds taxes: how to pay?) Spending more than you receive in taxes which national elites countries in the South dealt with by seeking assistance from the IMF and the World Bank to try to figure out how to get through the debt crisis The IMF and the World Bank are called the ‘Bretton Woods Institutions’ (BWI) because they were founded in Bretton Woods, New Hampshire, in 1944 What was the scale of the crisis? The effects still reverberate today Int’l Monetary Fund The IMF was created at Bretton Woods to promote international currency convertibility and provide short term assistance finance to stabilize balance of payments deficits (when imports exceed exports) Designed to help you balance those payments for the short term. The 187 members of the IMF pay a quota based upon the size of their economy that determines how much they can borrow and the size of their vote within the IMF If you need help, you can get it and if you give money, that determines the amount of “pull” you have. The IMF is mainly based out of D.C. – the local offices have no control. The IMF has a staff of 2400 from 140 countries (half are professional economists) and is run by a Board of 24 Executive Directors, whose permanent members come from the US, UK, Germany, France, Japan, Saudi Arabia, Russia and China Non-permanent members speak for a number of countries: so the 2 current African members represent all of Sub-Saharan Africa Within the Board, the advanced developed countries collectively have 61% of the voting rights The Managing Director is, by tradition, a European that is acceptable to the United States Treasury Department: currently, it is Christine Lagarde (the first lady) * former French finance minister * former head of Baker Mackenzie in Chicago * former member of the national synchronized swim team * on appointment she said she wanted to ensure the IMF was 'relevant, responsive, effective and legitimate' * she led Euro-area finance ministers in the design of the Greek, Portuguese and Irish bail-outs – with strong support from the IMF (^ they suck at money) * this suggests policy continuity The Chinese are sitting on the biggest stack of money in the world – they export a LOT more than they import and therefore, can lend money to other countries if it feels like it The previous Managing Director, Dominique Strauss-Kahn, changed the role of the IMF: for most of the 2000s the IMF appeared to be heading towards irrelevance, as fewer countries needed its assistance But the global economic crisis changed that: at the G20 meeting in April 2009 leaders agreed to • increase the Fund’s available resources from US$250 billion to US$750 billion • allow the Fund to increase its issuance of Special Drawing Rights (SDRs), the IMF’s quasi-money, to US$250 billion • allow the Fund to step up its monitoring of economies and financial systems in the North and the South, in order to better judge risks to the global economy The IMF is now playing a role that, in the 90’s, it seemed to be losing. But the bulk of IMF loans are currently directed towards European countries NOT developing countries This has been reinforced by the $111 billion it is lending Greece, Portugal and Ireland – twice the size of its lending to non-Euro-zone countries The IMF plays an important role in development: but it is not a development institution, it is a global financial institution The World Bank (International Bank for Reconstruction and Development) The World Bank was created at Bretton Woods to provide concessional long term finance to rebuild the economies of Europe emerging out of WWII It produced its first international development analysis of a country in 1949 (Colombia) and made its first loan to a poor country in 1957 (Iran) It now has 187 members, and has a staff of around 10000 from 160 countries, of whom 3000 work in developing countries The World Bank actually consists of 5 distinct organizations 1. International Bank for Reconstruction and Development (IBRD), the original World Bank 2. International Development Association (IDA), established in 1960 to provide interest-free loans and grants to the poorest countries 3. International Finance Corporation (IFC), created in 1956, provides investment and advisory services to build the private sector in developing countries 4. Multilateral Investment Guarantee Agency (MIGA), to facilitate foreign direct investment in developing countries 5. International Center for the Settlement of Investment Disputes (ICSID), a conciliation and arbitration body Isn’t used as often anymore – people usually go to the WTO The IBRD and IDA are the key organizations: but be clear of the difference! An Executive Board of 22 decides policy, and the permanent members of the Board come from North America, Europe and Japan The President of the World Bank is, by tradition, an American that is acceptable to the United States Treasury Department: currently, it is Robert Zoellick (counted the votes in Florida for George Bush. Very close to the family. Obviously, he’s an idiot then :D) Despite diverse memberships, then, managerial control of the IMF and the World Bank resides with groups from the North, who do not owe the institutions money Note too that the US controls 17% of the vote in the IMF: important decisions require a supermajority of 85%, giving the US a veto Washington Consensus In seeking financial assistance from the IMF and the World Bank to cope with the debt crisis, countries in the South agreed to major changes to their economic policies—the Washington Consensus The Washington Consensus is the tacit, implicit agreement between the IMF, the World Bank,
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