POLI 227 Chapter Notes - Chapter 9: Planned Economy, Cystic Fibrosis Foundation, Redistribution Of Income And Wealth

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4.4 Political Economy of Development (March 22, April 3)
• Handelman, Challenges of the Developing World, ch.9.
Ch.9: The Political Economy of the Developing World
- General desire to promote economic development: economic growth + equitable income
o improved living standards increased popular support for government
o added tax revenues increased government capacity
o increase military strength, diplomatic influence international prestige
- political economy: how politics determines aspects of economy and how economic
insitutions determine the political process (dynamic interaction between P&E)
The Role of the State
16th and 17th C mercantilism: looked at a nation’s economic activities as a means of enhancing
the political power of the state and its monarch (government source and beneficiary of economic
growth) Smith minimal state participation Marx state’s dominant role in economy
Keynes active government economic intervention without state ownership and centralized
- rejection of fully planned economies post fall of USSR
- yet no government allows for full laissez-faire (completely free market forces)
- middle way: free market economy with government intervention (laws regulating
banking, international trade, and domestic commerce as well as environmental
regulations and work-safety rules)
LCD’s economy: higher levels of poverty, poor distribution of wealth and income, dependence
on international forces and unchecked damage to environment necessitates active role of
- lack strong entrepreneurial class and sufficient private capital investment
- overall higher degree of state intervention in economics
1980s spread of neoliberal economic policies: characterized by free trade, free markets, and
relatively unrestrained capitalism reduction of government role in economics in whole world
The Command Economy
- Marxist rejection of capitalist system promoting inequalities and exploitation of working
class promised increased economic equality and social justice
o Argued capitalism was anarchist in allowing funadamental decisions on allocation
of resources to volatile supply-and-demand forces ‘invisible (guiding) hand’
- Development short term intensifies economic inequality, so Marxism appealing to LCDs
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o Argue only a revolutionary political-economic system can free LCDs of
o Dependency based on exploitative relations with foreign powers through
- Command economy: communist policy on establishment of centralized, state controlled
o State owns and manages means of production (factories, banks, trade material…)
Limited private sector (except for China and Vietnam)
o State planners, rather than market forces, shape basic decisions about production
- Early successes:
o Dictating the movement of people and resources from one sector of the economy
to another, communist economies were able to jump-start their industrial
o 1920s-30s high increase in job opportunities (urban migration), wages, and
living standards
1930s-50s GDP annual growth rate of 5% (USSR)
1950s-80s GDP annual growth rate of 8.2% (China)
o great strides towards reducing inequalities: redistribution, land reform, subsidized
rents, free health care, greater educational opportunities and increased literacy
rates and advances towards social equality
i.e. Cuba transfer of income from 20% top 40% bottom
o perfect for building common projects of early stages of industrialization (steel
mills, heavy industry…)
- long-term weaknesses:
o no measures of consumer demand planners had little basis to estimate what and
how much to produce
o rewarded producers for meeting quantity of quotas but not quality of products
o gave way too much power to state planners large privileged class of party and
state bureaucrats apparatchiks (and corruption)
o initial economic growth stunted as economies became larger and more complex
harder to plan and control
o not apt to develop advanced sophisticated production techniques and production
quality consumer goods
i.e. USSR made space rocket but not good autos or washing machines
- Gorbachev and Xiaoping recognized need for economic decentralization and reduced
state economic control
o China market socialism (free market and socialist economics) 2nd largest
economy in the world
o USSR reforms economic collapse and end of USSR
E/C E fall of communism and command economies short term reduced
living standards took over a decade to surpass communist living
Latin American Statism
- Between WW1 and WW2: state-led industrialization accelerated during 1920s-30s
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Great Depression (difficulties finding raw material exports and markets to sell goods)
not enough foreign exchange accumulated for industrial imports
- State-led industrialization in Latin America:
o Private-sector ran most of the economic activity (no centralization)
o Government ownership of strategically important enterprises and investment in
industries failing to attract sufficient private capital
Most of region’s railroads, airlines, petroleum companies… state owned
- Nationalizations: transfer of private firms to state ownership
o Government takeovers usually supported by business community
Broadly popular and increased government legitimacy as ‘defender of
national interests’
o Usually only affected foreign corporations that built them, not local capitalists
o Post state control, state provision to country’s private-sector industries with
subsidized and inexpensive transportation, power and necessary resources
o nationalist, leftist, and conservative governments all likely to adapt policy
- import-substitution industrialization (ISI): mid-20th C government-initiated programs
aiming to replace imported consumer goods with domestically manufactured products
(import-substituting firms ‘privately’ owned by heavily dependent on government
government role in increase industrial growth of nation’s private-sector
- policy’s success
o 1945-70s successfulness of policies, higher rates of investment in Latin America
than developed West
o 1960-80 increased manufacturing output of regime and all Latin American
countries increased manufacturing of most basic goods (textiles, clothing,
packaged foods…) as well as heavy industries
created blue-collar jobs and increased size of middle class
massive rural-urban migration Latin America became most
urbanized region of developing world
i.e. Mexico 1930s-70s p.283
- policy’s failures
o policy promoted economic inefficiencies and income inequality
o initial necessary government control maintained too long long-term
protectionist measures and subsidies when industries were self-sufficient
became politically motivated economic policy
(united all sectors and groups of society as supporters of these
policies, so government unwilling to abandon them and loose
popular support)
excessive protection of inefficient domestic industries
o trade and fiscal policies promoting industrialization harmed agricultural exports
o widened income gaps between urban and rural population, and between skilled
and unskilled workers
- central weaknesses:
o large number of parastatals (state-owned enterprises) were overstaffed and poorly
incapable of political organization to run economics well in LCDs but
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