In “Convergence or Divergence? The Impacts of Globalisation on Growth and
Inequality in Less Developed Countries,” Michelle Baddeley explores the impacts
of globalization on growth and development. Some of the key parts of theoretical
section include effects of trade and capital flows as well as computerization. The
empirical evidence presented indicates that globalization has been associated
with increasing trade and financial flows to less developed countries. She also
notes globalization has also “coincided with increasing penetration of the
Internet suggesting that increases in informational flows have complemented
economic and financial linkages, but the empirical evidence also shows that the
current era of globalization has not been associated with convergence in
economic outcomes” (392). She finds that “less‐developed countries have
suffered from increases in international income inequality.” (392).
In Cypher's "The Process of Economic Development," he writes about the development of ideas
of development and looking at the contemporary ones that are influential in
development, we find the Solow growth model where total output is a function of
technology, capital, and labor, with diminishing returns to capital and labor.
In the model, technology comes from outside, and “it is this exogeneous
technology which is basic to higher levels of income per capita over time”
(150). The model predicts two important things. The first is that there is a
steady state equilibrium that can be attained, and that there is a convergence
between similar countries. Where there is a ceiling on levels of income per the
rate of savings (151), so the model intuits that the way to growth is the
increase the savings rate of the nation to raise that ceiling. Or we see the
Harrod-Domar growth model. Unlike the Solow model which looked at the savings
rate, the Harrod-Domar model sees the rate of growth as a function of both the
savings ratio as well as the capital / output ratio (152). Cypher notes that all
the theories lead to the same basic idea: “an expansion of total physical
capital goods as a share of total output, that is higher levels of investment,
that create higher income levels” (153).
One thing about this model is that instead of a steady state, there’s a
real chance in the model for instability.
Ultimately, what we want to see is what these models
look like when we take them from paper to the real world. Models are
necessarily simplifications that exist to concentrate our thought, but what I could
not stop thinking when I was reading about the more contemporary models was
that the frameworks that are put down are not just simplifications, but something
that we could look at and decide if they were true or not. The Solow model is
the most attractive because it assumes that if the model is correct, then there
are not that many levers we need to be able to pull to make less developed countries
meet their peers so that the people in these countries have better lives.
Baddeley’s examination sheds some doubt on the validity
of the Solow model. What she finds is that the data does not fully bear out Solow
and suggest that something closer to Harrod-Domar is right – the targets are
not as easy to hit as suggested, and if you miss them, there are negative
consequences: “there has been limited convergence and limited equalization in
the distribution of international income and / or that population growth has
been too high” (396). The world has become more open, and globalization has allowed
technology to be exogenous to other countries in that they have access to technology
in unprecedented ways, but there is still a lack of convergence (406-7). Considering
findings that trade, and globalization heighten volatility and do not lead to
convergence, what do we do? Baddeley suggest that the answer is if we “more carefully
regulated and monitored” the financial system as to “moderate the impacts of
adverse selection and moral hazard on effective financial decision making” (407).
There is a lot of heaving lifting built into that line, as it would include boarder
global coordination, an outcome that feels much less likely now than when she
was writing.
For me, if the models are not working, we perhaps need
to build new modes of thinking, or to find ones that were once ascendant, but were
somehow eclipsed. These neoclassical models are still in people’s heads as
their guiding background of how the world is structured and how it works. Since
I’ve been in this class, the things I read have taken on development angle, so
when I see David Malpass, the current US nominee to lead the World Bank say, “Finally,
the bank should also facilitate the adoption of best practices for encouraging
broadly shared growth and prosperity. Developing nations can benefit from
lessons learnt all over the world. Nations that foster innovation and freer
markets, and that have lower taxes, fewer regulatory burdens, and stable
currencies, tend to alleviate poverty faster than others. If more countries
adopt pro-growth economic environments, the global economy will be stronger” (“What
I would do as the next president of the World Bank”), it makes me worry for the
future of development strategies as empirical work like Baddeley’s shows we
need different strategies because global catchup is happening, and we keep
doing the same thing based on outdated frameworks.
Works Cited
Cypher,
J. M. (2014). The process of economic development. London: Routledge, Taylor
& Francis Group.
Malpass,
David. “What I Would Do as the next President of the World Bank.” Financial
Times, Financial Times, 7 Feb. 2019,
www.ft.com/content/ec9a6924-2acb-11e9-9222-7024d72222bc.
Michelle
Baddeley (2006) Convergence or Divergence? The Impacts of
Globalisation on Growth and Inequality in Less Developed Countries,
International Review of Applied Economics, 20:3, 391-410, DOI:
10.1080/02692170600736250
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