Chapter 4 Economics and International Development

Introduction Economics – Social science based on the study of resources Oikos meaning “household or basic social unit” Nomos meaning “a customary way of doing things” Contemporary definition of economics: – Wants are unlimited (human nature), but only limited resource to satisfy wants Many economic paradigms that do not necessarily recognize human nature assumptions

Liberal Economics First detailed in Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations in – Focused on the division of labor and use of resources Political liberalism – Liberty, political equality, and individual freedom Liberal economic theory – Very similar to political liberalism – Assumption: individuals more rational with resources – Little government interaction

Markets in Liberal Economics People seek to gain the highest possible utility at the least possible cost Humans have unlimited demands – Scarcity due to limited resources Opportunity costs account for the value of demands that are not met Marginal utility – The goal of businesses to increase point at which consumer satisfaction is gained Supply and Demand – Demand curve for prices at which people are willing to pay for a good – Supply curve for prices at which goods are produced – Equilibrium is the price at which supply and demand curves intersect

Economic Nationalism Mercantilism and Economic Nationalism – Opposing viewpoint to liberal economics – Well-being of a nation depends on its control of capital – Economy is not independent of a country’s social and political system Accomplishing mercantilist goals – Enforce protectionist policies such as tariffs, subsidies, and import quotas Economic nationalism tends to rise when there is concentration of wealth in the hands of increasingly few people

Marxism Karl Marx and Frederick Engels – Historical materialism analyzes the cause of change in society – Contradictions would lead to class struggle and eventually communism The owners of businesses own all – Capital and means of production – Working class never receives its true value of labor Relations between social class seen as relations of production Modern forms can be separated into two movements: – Social democracy – Marxism-Leninism

Microeconomics and Macroeconomics Microeconomics – Specific market systems on a small scale – Assumes a host of buyers and sellers, none of which can control the market price Macroeconomics – Combined performance of all markets in a defined market system – Gross Domestic Product (GDP) is a useful performance indicator in macroeconomics

Development Economics Concerned with the growth strategies in less- developed countries Trends toward economic growth through development of economic structures Many unexpected local consequences with development

Globalization Globalization refers to: – Expansion of global communication and market connections – Growing social and political interdependence – Development of a planetary awareness

Neoliberalism An adaption of liberal economic theory applied to a world economy Goals of neoliberalism: – Ease restrictions on trade between countries – Free the movement of goods and services – Maximize economic efficiency and profits – Open trade and privatize government positions

Globalization Thomas Friedman – Globalization as integration, driven by technological advancement World Trade Organization (WTO) – Praised and criticized for its part in globalization – Created in 1995 to lower tariffs on trade after the cold war – Some see it is a corporate-inspired agenda to rid protectionist policies

Non-Western Economics Marshall Sahlin Stone Age Economics – Economics is a category of culture – Multiple forms of rationality exist Different type of economics present in small non-Western countries – Western Happiness = wants, wealth – Non-Western Happiness = leisure, family, community

Sustainability Meet present needs without jeopardizing future needs – Awareness has come to the forefront in the past 50 years Carrying capacity – Limited resources on human economic growth

The Global Economic Crisis Sharp global economic downturn beginning in the U.S. in 2008 – Worst downturn since the Great Depression – Due largely in part to the decline of banking liquidity and housing bubble burst in 2007 The crisis effected the entire world, and fast! – Decrease in American spending meant decrease in production around the world

Eurozone and the Debt Crisis Sovereign debt increased in Europe due to bank bailouts in Greece, Ireland, and Portugal Greece received a bailout that failed to solve the problem – Problems resurfaced a year later with the refinancing of public debts in Greece

How Did Other Countries Fare? Iceland – Suffered the worst with an international banking collapse and led to the fall of the government Latin America – Due to economic reform after their debt crisis in the 1980’s and 1990’s they were much more resilient to the recession China and other Asian economies – Poorer countries suffered badly, but China, South Korea and India did not slip into recession Middle East – Generally did not suffer much due to oil holdings Africa – Suffering a full blown development crisis due to the recession