THE WEST AND THE REST Free trade imperialism (1850-1914) The West was the most dynamic

part The growth and the absence of wars had a stimulating effect on the Rest, even with the colonialism Technical progress was fast in shipping and increased international trade, reinforced by the creation of channels Suez and Panama The leading imperialist country UK, followed a policy of 0 tariffs

Defensive autarchy (1914-1950) The liberal world disappeared after WWI The economy of the US, leading capitalist country, went through a major depression Proliferation of trade barriers, debt default and collapse of international investment; protectionist trading systems were extended The democratic political systems were replaced with fascist dictatorships Latin America defaulted on debt, switched to import substitutes high tariffs, exchange controls The WWII was even more damaging for Asia and Africa, which turned to a state economy of the Soviet Union

Emergence of a Neoliberal World Order the Marshall Plan changed the suspicious attitude towards market forces; aid was offered to Europe on the condition that they drop the barriers and avoid the beggar-thy-neighbor policies - Europe experienced a high investment boom, low inflation and high employment until early 1970s. - The advanced capitalist countries grew very fast and gave an impetus to world economic growth as well a) Trade - Successive rounds of negotiation and creation of GATT - Huge increase in world trade volume, progress in shipping technology, communications, improved international division of labor - The advanced capitalist countries were favoring fair, not free trade. Their trade unions pressured the poorer countries wrt the low wages, regarded as unfair competition. Protectionist policies for agriculture meant a waste of resources for the West and a serious obstacle to faster growth in the Rest. Free trade imperialism was more liberal. b) Private capital flows - The most useful from the viewpoint of development was direct investment, drawn especially to Asia by the dynamism of growth and the availability of skilled labor at much lower wages. This investment supplemented the domestic saving, but was more important for the transfer of knowledge and skills -

A large part of the flows were speculative; the Asian and Russian crises sparked off large reversals of flows; this prompted Stiglitz to assert that financial liberalization has gone too far and that the IMF offers excessive protection c) Migration - Huge immigration from Asia and Africa into Western Europe in 1950-1998; because of the fall in the costs of communication, migrants now maintain closer relationships with countries of origin -> flow of remittances from the advanced countries to developing countries, together with a transmission of know-how and skills; bloom of the information technology industry in Asia, which benefitted from a return flow of skills and entrepreneurship d) Slowdown in growth 1973-2001 - From the 1970 onwards the pace of growth slowed in Europe and Japan (partly because of the maturing of the economies and the fact that the growth opportunities have been seized) - Western Europe was faced with a high level of unemployment which would have created a major depression had not received income support from social security - Inflationary pressure, accelerated by the OPEC shocks; the objectives of full employment and economic growth became less important in the face of achieving price stability - Western European countries were very determined to achieve the convergence obligations of membership in the EMU (especially the countries with the biggest problems with inflation and exchange rate instability); the ECB is deflationary, it does not have a mandate for unemployment or economic growth, only for price stability - The American policy after 1973 has been much more successful than that of Western Europe; US has been less inhibited to operate at high levels of demand, having the worlds major currency and the freedom to use international capital markets, treating the exchange rate with neglect; the Reagan administration cut taxes and deregulated, hoping to boost supply such that to offset potential inflationary consequences. The US operated with more flexible labor markets, better equipped capital markets for venture funds for innovators; demand buoyancy was sustained by a stock market boom in the 1990s; the ROW helped sustain the long American boom and financed the large US payment deficit. e) Future prospects - Asia: the most buoyant part of the world economy since the early 1970s (excluding Japan); these economies caught up with the West through high levels of investment and rapid GDP growth; high ratio of employment (due to falling fertility and a rising share of population of working age); high rates of education and improvement of human capital; rapid growth of exports and willingness to attract FDIs as a vehicle for assimilation of foreign technology - Latin America: most countries here did not try to observe the fixed rate discipline of Bretton Woods, national currencies were repeteadly devalued, IMF advices were ignored and high rates of inflation became endemic. Latin America tended to treat with neglect the explosion of worldwide prices, but together with the change to restrictive monetary policy pursued by Fed, the interest rates were pushed up significantly; the creditworthiness of LA was damaged, the flow of voluntary private lending stopped abruptly, creating the room for subsidies, controls and widespread interventionism; the debt default most LA resorted to in the 1930 was not attractive in the 1980s; the attempts to resolve the problems brought major changes in the economic

policy and eventually most countries embraced the neoliberal mix pioneered by Chile they moved towards greater openness to financial markets, trade liberalization, less govnmnt intervention, less distorted exchange rates, better fiscal equilibrium; the cost of this transition was a decade of falling per capita income Africa: worlds poorest region, more volatile because export earnings are concentrated on a few primary commodities and extremes of weather (droughts or floods) are more severe and have a heavy impact; rapid population growth -> age structure very different from that in Western Europe (in WE more than 2/3 are of working age, in Africa a little more than half); almost half of the adult population is illiterate, with a high incidence of diseases; quantity and quality of labor is much lower than in other parts of the world; in many African states, rulers have sought to keep their positions for life. In most states, rulers relied for support on a narrow group who shared the spoils of office; corruption became widespread, property rights insecure, business decisions risky; the challenger to development in Africa are greater than in any other continent, the deficiencies in health, education and nutrition most extreme; it is the continent with the greatest need for financial aid and technical assistance. Eastern Europe: the transition from a command to a market economy was difficult; much of the old capital stock became junk, the labor force needed to acquire new skills and work habits, the legal and administrative systems had to be transformed, the banking sectors had to be rebuilt from scratch; some of these countries have been integrated in the EU, but some of the structural deficiencies still underlay their functioning and need to be tackled. Former USSR: the new market economy is grossly inefficient and unfair in allocating resources; the legislation meant to enforce Western property rights failed, in practice accountancy is opaque and government interpretation of property rights is arbitrary; shareholders and investors are uncertain whether their rights will be honored and workers are not sure if their wages will be paid

GROWTH IN THEORY AND PRACTICE Endogeneous growth: economies are subject to economies of scale, which allow the most advanced to be more productive than the others, engendering a cumulative effect to their advantage (the richer a country, the more productive it is). This means there is no end of growth, no steady state, as suggested by JSM. It also means that globalization is a process of market enlargement, favorable to economic growth. This is bad news for the poor countries: rising inequality. Depending on a number of factors, it seems possible for some countries to catch up with the rich ones. Paul Krugman: what poor countries need is more perspiration than inspiration. To be able to catch up, they first need to accumulate the same production factors (physical and human capital). Conditional convergence: countries may hope to catch up with the rich ones if they are at least as well educated as them. However, the straightforward argument here would be that, given a set of countries with the same level of education, the poorest ones will grow the fastest, which is not necessarily true. Conditional convergence does not imply absolute convergence.

Educational levels will not stay unchanged in the rich countries. It is also the absolute difference that explains the relative difference between the incomes of 2 countries Perspiration over inspiration: in the case of Singapore - investment in education , but no progress in TFP (the A inspiration) The poverty of nations can be interpreted as the product of a series of handicaps, in terms of resources and TFP. Each of these is moderate (individually, none would suffice to explain the poverty of developing countries). It is the fact that they are combined that makes them so difficult to overcome development trap. By tackling each of these handicaps, a country can rise out of poverty, but it is extremely difficult to tackle all of them. In addition to individual efforts of a country, its international environment plays a vital role (convergence clubs) The countries that choose an open trade policy grow more rapidly; a countrys geography also influences trade to varying degress (depending on the countrys access to sea, main commercial centres etc); these exogeneous factors have an influence on the economic growth of a country; the openness variable is highly relevant when it is combined with the education variable: an open economy increases the returns on human capital (openness increases the productive use of the knowledge in a country); closed economies do not make productive use of their human capital, but employ it in unproductive activities that siphon off wealth. Institutions: an open economy will probably have fewer degrees of freedom to engage in predatory activities; factors best able to reduce corruption (the role of public opinion, an entrepreneurial class free of government control, simplified legislation) All in all, the task of catching up requires policies to promote the transmission of technical progress, savings and human capital formation and to develop an institutional framework that is conducive of growth