The liberal international economy created after 1945 and the increase in international finance and trade (discussed in previous sections) have helped produce unprecedented levels of national and global growth. Within this broad pattern of economic success, however, there are important variations. While some countries and people enjoy the highest standards of living in human history, many more remain mired in poverty.
Indeed, the gap between the richest and the poorest people on earth not only is large but also is growing wider every year. The richest one-fifth of the world’s population currently enjoys 86.0 percent of global consumption expenditures, while the world’s poorest one-fifth accounts for only 1.3 percent. And while the ratio between the income of the richest 20 percent and the poorest 20 percent of the world’s population was 30:1 in 1960, it grew to 45:1 in 1980 and then to 82:1 in 1995.
This pattern is replicated at the level of individual countries as well. Where all developing countries have seen their GNP per capita rise from 5.0 percent of the industrialized countries in 1960 to 7.0 percent in 1995, the “least” developed countries (those with a GNP per capita of $300 or less) fell from 3.5 percent to 1.8 percent. These income trends are repeated in the areas of trade, savings, and investment.1 While economic growth has increased over the post-1945 period, raising the average standard of living around the globe, the gaps between the world’s wealthiest and poorest societies have increased even faster. As Jeffrey A. Williamson points out in Reading 28, the comparisons between current trends—in income differentials both among countries and within them—and those of the nineteenth and early twentieth centuries is illuminating and potentially worrisome.
For decades, scholars and practitioners have debated the sources of economic growth and the best strategies for producing rapid increases in standards of living. Many analysts argue that development, at least in its initial stages, requires that the country insulate itself from more established economic powers and stimulate key industries at home through trade protection and government subsidies. Indeed, Alexander Hamilton, the first secretary of the treasury of the United States, argued for just such a policy in his famous Report on Manufactures, which he presented to the House of Representatives in 1791.
Starting in the 1930s with the collapse of the international economy in the Great Depression, many so-called developing countries began de facto strategies of import-substituting industrialization (ISI) in order to increase domestic production to fill the gap created by the decrease in foreign trade. After World War II, especially in Latin America but elsewhere as well, this de facto strategy was institutionalized de jure in high tariffs and explicit governmental policies of industrial promotion. Behind protective walls, countries sought to substitute domestic manufactures for foreign imports, first in light manufactures, such as textiles, apparel, and food processing, and later in intermediate and capital goods production.
Beginning in the 1960s, however, ISI started to come under increasing criticism. Government incentives for manufacturing benefited industry at the expense of agriculture—increasing rural-to-urban migration and often worsening income distribution—and produced many distortions and inefficiencies in the economy. The later stages of ISI, which focused on intermediate and capital goods production and were often more dependent on technology and economies of scale in production, also had the paradoxical effect of increasing national dependence on foreign firms and capital. Yet despite these criticisms, virtually all countries that have industrialized successfully have also adopted ISI for at least a brief period. While many economists argue that success occurs in spite of trade protection and government policies of industrial promotion, historical experience suggests that some degree of import substitution may be a necessary prerequisite for economic development.
In the 1980s, ISI generally gave way to policies of export-led growth. Many developing countries came to recognize the economic inefficiencies introduced by protectionist policies. The debt crisis of the early 1980s and the subsequent decline in new foreign lending increased the importance of exports as a means of earning foreign exchange. Rapid technological changes made “self-reliance” less attractive. There were also important political pressures to abandon ISI. The World Bank and International Monetary Fund (IMF), important sources of capital for developing countries, pressed vigorously for more liberal international economic policies. Proclaiming the “magic of the marketplace,” the United States also pushed for more liberal economic policies in the developing world.
Particularly important in reorienting development policy was the success of the newly industrializing countries (NICs) of East Asia: South Korea, Taiwan, Hong Kong, and Singapore. All these states achieved impressive rates of economic growth and industrialization through strategies of aggressive export promotion. While they all adopted ISI during their initial stages of development, the NICs generally sought to work with, rather than against, international market forces. With well-educated labor forces but limited raw materials, the NICs exploited their comparative advantage in light manufactures and, over time, diversified into more capital-intensive production. Today, the NICs are among the most rapidly growing countries in the world, and they have achieved this result with relatively egalitarian income distributions.
The sources of this success remain controversial. Some analysts, especially neoclassical economists, point to the market-oriented policies of the NICs. This view is represented in the article by Joseph E.Stiglitz and Lyn Squire, two prominent officials of the World Bank (Reading 25). Others argue, however, that unique domestic political factors were important prerequisites for successful policies of export-led growth—in particular, weak labor movements and leftist parties; strong, developmentally oriented bureaucracies; and, to varying degrees, authoritarian political regimes. These conditions, it is averred, facilitated market-oriented policies that are not feasible politically in other circumstances. Relatedly, critics of export-led growth have suggested that the success enjoyed by the NICs cannot be repeated. The number of countries that can, at any moment in time, specialize profitably in labor-intensive manufacturing is limited, and the industrial states have consistently protected their domestic markets when threatened with “too much” competition from the NICs, thus creating a barrier to further upward movements in the international division of labor. As a result, they argue, the path blazed by the NICs is no longer open to other developing countries. This critical perspective is developed in the essay by Robin Broad, John Cavanagh, and Walden Bello (Reading 26).
Macroeconomic policy in developing countries is central to both perspectives on development. For proponents of export-led growth, successful stabilization policies are a cornerstone of economic advancement; high inflation and rapidly changing fiscal and monetary policies undermine incentives for private investment. For skeptics, such policies are merely an artifact of underlying political factors; the same conditions that allow export-led growth also facilitate stable macroeconomic policies. The problems and politics of inflation and stabilization are addressed by Stephan Haggard (Reading 28).
The former centrally planned economies—most notably the former Soviet Union and its allies in Eastern and Central Europe, and China—are something of a special case in the political economy of development. With the collapse of communist rule in Eastern Europe and the former Soviet Union and with rapid economic reforms in China and Vietnam, the former “socialist bloc” has ceased to represent a recognizable and distinct economic order. Almost all its members have abandoned central planning, state ownership of productive assets, and economic insularity and have sought to join the liberal international economy; most have moved to join the IMF and the WTO. However, these attempts have had varying success.
Most of the former centrally planned economies have gone in one of two directions. Some of the more advanced nations, especially in Central Europe and the Baltic, have been very successful at turning toward the market. They are on-track for membership in the European Union at some point in the next twenty years and, more generally, appear to be converging on existing European economic and political patterns. The Czech Republic and Slovenia, for example, are probably most usefully compared to Portugal or Greece for the purposes of political economy. They have largely eliminated the vestiges of central planning, and the problems they face today are similar to those faced by other relatively poor industrial nations—especially those of determining how to move into the ranks of the most developed states.
Most of the other former centrally planned economies, however, look quite different from the rapidly advancing nations of Central Europe. This group includes most of the former Soviet Union, China, Vietnam, and the Balkans. This group possesses one or two characteristics, and sometimes both. First, the societies in question started at a relatively low level of socioeconomic development, and second, the transition from central planning to the market has been less successful. China and Vietnam suffer from the first problem, which is a starting point of general underdevelopment; Russia and Ukraine are especially plagued by the second problem—a troubled transition; and Central Asia and the Balkans have both problems.
It is not too much of an exaggeration to say that by now, these formerly socialist economies have simply joined the ranks of the so-called developing world. To be sure, they continue to have some features that differentiate them from the other less developed countries (LDCs), but their problems are very similar to those of other nations in Africa, Asia, and Latin America. While many achieved high rates of industrialization under communist rule, their economies are not competitive in current international markets; indeed, the system of centralized planning and intrabloc trade that arose under the old regimes can be understood as an extreme case of ISI, with all the problems that strategy entails. In addition, state ownership of most of the productive assets and the absence of effective internal markets created further economic distortions. Today, the former centrally planned economies must compete with other developing countries on international markets, even as they attempt to put their economies on sounder foundations.
The difficult process of political and economic reform that both the developing and the former communist states have undertaken is virtually unprecedented. This is especially true for the countries moving away from central planning. While similar to Western Europe’s transition from mercantilism to liberalism in the eighteenth and, especially, nineteenth centuries (see Kindleberger, Reading 5), the jump from a command to a market economy is farther, and states have attempted to traverse this chasm more quickly than ever before. This transition, and the problem of development more generally, raises questions central to the study of international political economy. How, and under what circumstances, should countries seek to integrate themselves into the international market? How can the international economy be structured so as to fulfill the needs of separate nation-states? How does the international economy affect politics within states?
An examination of the historical and contemporary international political economy can shed important light on these questions and produce essential insights into the future of the economies in development and transition. Nonetheless, the final outcome of this process will not be known for many years and depends fundamentally on the weight of decades of past developments. As Karl Marx wrote in 1852: “Men make their own history, but they do not make it just as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered, given and transmitted from the past.”2
1. These figures are from United Nations Development Programme (UNDP), Human Development Report 1992 (New York: Oxford University Press, 1992), pp. 35, 141; and UNDP, Human Development Report 1998 (New York: Oxford University Press, 1998), pp. 2, 29–30, 206.
2. Karl Marx, The Eighteenth Brumaire of Louis Napoleon, 1852.