Obstacles to development in the global economic system

As the international community wades into the political discussions regarding the alternatives to the Millennium Development Goals (MDGs) after 2015 and the design of the Sustainable Development Goals (SDGs) as mandated by the Rio+20 conference, it is timely to consider the question of whether development is a matter mostly of individual effort on the part of nation-states or whether there are elements in the international economic system that could serve as significant obstacles to national development efforts. If there are obstacles in the international economic system, it is important that the post-2015 development agenda and the SDGs address the question of the elimination or the reduction of these obstacles.

The limited number of successfully developing countries since the 1950s has provoked a debate over whether the success of these countries required their success in eluding international obstacles to development. The following discussion does not have to take one position or the other. It evaluates features of the international system on the basis of how these features are conducive to enabling long-term investment toward economic diversification.

Terminologies of previous development orthodoxies litter the development literature - import substitution industrialization, basic needs, structural adjustment, Washington Consensus, and Millennium Development Goals (MDGs). Each of these orthodoxies tended to be a reaction to perceived weaknesses or missing elements from the immediately previous one. The most recent orthodoxy, as exemplified by the MDGs, is that development is about poverty eradication.

This paper takes as a starting point that poverty eradication is an overly narrow, possibly misleading, perspective on development. Poverty eradication is a desired outcome of development but its achievement is permanent only with the movement of a significant proportion of the population from traditional, subsistence jobs to productive, modern employment. The association of development with poverty reduction created for the donor community the pride of place in economic policy in developing countries. But this place can be at the cost of reducing the responsibility of donor countries in helping to maintain an enabling international environment for development in trade, finance, human resource development, and technology. In the MDGs, these issues are crammed into “MDG8,” the socalled global partnership for development, with a very selective and poorly defined set of targets.2

Development requires not just higher levels of income, nutrition, education, and health outcomes but in the first place involves higher levels of productivity and capabilities. Higher levels of productivity and capabilities are possible only with structural transformation of the economy. In turn, in most societies, such a structural transformation has been “associated with a shift of the population from rural to urban areas and a constant reallocation of labour within the urban economy to higher-productivity activities” (UNCTAD, 2011, p. 6). Structural transformation is only possible with substantial and sustained investment over decades in new activities and products, not just in anti-poverty programs.

Where the international economic system is hostile to investment in new, productivityenhancing economic activities is where its elements create obstacles to development. One example of an externally based obstacle is aid volatility which has been shown to have highly negative impacts on macroeconomic performance and domestic investment (Kharas, 2008). The mechanisms in which the international system is hostile to investment in new, productivity-enhancing economic activities are elaborated on in Section II of this paper entitled “Commodity Dependence and Instability in Trade and Finance.” This section discusses how patterns of economic interactions by developing countries with the international system undermine investment in new, productivity-enhancing economic activities. For example, it highlights recent trends in which the export structure in many developing countries have become less diversified, indicating investment being channeled into traditional sectors, instead of new activities.

The next three sections then group the nature of obstacles into three main areas: (1) mitigating the impact of external deficits and instability, (2) rebuilding domestic policy space, and (3) improving the development accountability of international governance. By recategorizing the manner in which the international system hinders or prevents investment in new, productivity-enhancing economic activities in sections III, IV, and V, it becomes possible to think about the obstacles in terms of defective institutions, missing mechanisms, and impediments to domestic policy which can be overcome with changes in the international economic system. Some of these obstacles have the nature of “unfinished business” of reforms generally understood to be required in the international system but have not come to pass because of resistance by powerful interests. Others, such as the loss of policy space, could represent the cumulative impact of wide-ranging liberalization reforms in the wake of the debt crises of previous decades which now appear to be misguided. For example, the 2007-2008 financial crisis, centered in the developed countries and eventually engulfing the global economy, shines a light on the folly of believing that private financial markets left to themselves will innately facilitate long-term investments. The loss of policy space in developing countries reduced the state’s ability to harness and channel the operations of private markets toward national development objectives. The details are in each of the sections.

Capital and technological investments are required to overcome the enormous productivity gap between developing and developed countries which characterises the world economy. In 2008, a ratio of the average Gross National Income (GNI) per worker in the OECD versus those in the least developed countries (LDCs) was 22:1 in favor of OECD (UNCTAD, 2010, p. 174). This imbalance has worsened by a factor of five in comparison to the earliest days of capitalist development. In the nineteenth century, taking the Netherlands and the United Kingdom (UK) as the richest countries and Finland and Japan as the poorest, the productivity gap was only between 2 to 1 and 4 to 1 (Chang, 2003).

Read the paper here.

By: Manuel F. Montes.

Source: South Centre.