1. Week 5: Economic Stagnation
Fukuyama: History of ideological rivalry has ended
capitalism – dominant economic Ideology
What does the capitalist state seek to do?
= achieve economic growth based on capitalism
= source of legitimacy for capitalist state
(moral right to rule)
But …
enormous variation in the level of success
some states are more successful than others in achieving econ growth

2. Comparison of GNP Per Capita, 1962-86 (in 1986 US$)
1962
1986
Growth Rate
Indonesia
190
490
158%
Japan
2,005
16,200
708%
South Korea
330
2,345
611%
Malaysia
820
1,730
111%
Singapore
1,500
6,765
351%
Taiwan
505
3,790
650%
Thailand
345
760
120%
Philippines
495
540 9%
Source: James Boyce, The Philippines, p.2

3. Ferdinand Marcos President of the Philippines, 1965-86
Notorious for corruption & collusive ties to US
Overthrown in People’s Power “Revolution” (1986)

4. Week 05: Questions
Why do some states fail to achieve economic growth, while others succeed?　Why do some countries remain poor, while others prosper?
What are the causes of poor economic growth?
(1) external cause: unequal structure of world economy
dependency theory (Gilpin)
(2) internal (domestic) cause: corruption (= rent-seeking)
a) cultural – political culture (Robert Price)
b) game theory – collective action problem

5. “Third World” product of Cold War 1st World “developed” countries
capitalist & democracy
US & its Western allies (+ Japan) – end point for Fukuyama
2nd World
communist camp in the West led by USSR
3rd World
residual category
pejorative euphemism for “backward” countries
former colonies in Asia, Africa, LA, etc.
now called “(late-)developing countries”

6. Dependency Theory abject poverty only in 3rd World
radical Marxist theory of poverty/backwardness in 3rd World
originate in L. A. in 1950s-60s
A rare “indigenous” theory – represent views from 3rd world
e.g., Fernando Cardoso (President of Brazil, )
Andre Gunder Frank ( ):
Capitalism and Underdevelopment in Latin America (1969)
I popularized dependency theory in the West.

7. Dependency Theory (continued)
external explanation
= factor(s) external (exogenous) to individual countries
structure of world economy
= economic domination of 3rd World by developed countries
= economic dependence of 3rd World on developed countries
apply Marxist critique of capitalism to international level
Third World countries are NOT to blame for their backwardness. Outsiders are!

8. Marxist critique of capitalist society
bourgeoisie
master
lord
classless utopia
classless utopia
serf
proletariat
slave
primitive
ancient
feudal
capitalist
communist
an unfair economic hierarchy
A tiny minority (bourgeoisie) systematically dominates, oppresses, and exploits the vast majority (proletariat) by controlling the means of production

9. Extension to International Level
1st world
An economic hierarchy (pyramid) in the world
= structure of world economy
A tiny minority (1st World) systematically dominates, oppresses, and exploits the vast majority (3rd World) by controlling the means of production
3rd World

10. Dependency Theory (continued)
deep historical roots
created & perpetuated by colonialism
Lenin:
Imperialism: The Highest Stage of Capitalism
imperialism/colonialism = synonymous
= a solution to “crises of overproduction” in Europe
 too many products from Industrial Revolution
 small domestic market – saturated
 seek colonies abroad as outlets for unsold products
spread capitalism worldwide
= incorporate TW into world market economy
= a rigid international division of labor (IDL) imposed

11. International Division of Labor (IDL)
Let’s work hard to feed the Europeans. This is what we are good at …
Colonies “specialize” in production & export of cheap primary products
- raw materials (e.g., rubber)
- agric. products (e.g., rice)
West “specializes” in production of expensive industrial goods
Theoretical justification for IDL
“comparative advantage” theory
= A country should concentrate on producing the goods that it can produce most efficiently
We have machines, so we produce industrial goods.

12. After WWII …? Have things changed?
No! The fundamental structure of world economy has NOT changed, much to the benefit of Western capitalists!
decolonization
 political independence
BUT …
Not ECONOMIC independence
Political imperialism (= colonialism) ended,
but economic imperialism (= economic domination) has survived
IDL remains intact

13. 1st World TV
computer
cars
High value-added industrial products
Low value-added primary products or simple manufactured goods
3rd World
rice
fruits
sugar cane
shoes
clothes
chronic balance of trade deficit in 3rd World
 debt
 borrow loans from West (with interests)
 deeper debt
trapped in vicious cycle

14. Role of Multi-national Corporations (MNCs)?
orthodox non-Marxist view:
positive agents of economic growth
increase wages
 better access to education, health care, etc.
Dependency theory:
negative & critical
MNCs = agents of foreign capitalists’ domination in 3rd W
cheap labor in unsanitary conditions
minimal transfer of advanced industrial technology
 industrial upgrading limited
Most profits – remitted back to home countries
 little left in 3rd World
stunts growth of indigenous industrial capital
“happy” workers  false consciousness/”bought off”

15. Dependency Theory’s View of Third World Capitalists & States
negative
collude with, and pander to, foreign capitalists & foreign states
- share profits
- depress local wages
- repress local labor protests
(thru laws & by using force)
but still subordinate in international economic hierarchy
– not on equal footing
not autonomous from foreign capitalists & states
I’ll do anything to get rich!

16. Domestic (Third World)
I want to invest in the Philippines.
capitalists
I’ll tell Filipino president to repress labor strikes.
Foreign (First World)
foreign state
PROFITS
Great! We will get rich by exploiting Filipino workers!
Lower classes
capitalists
You are welcome. Let’s exploit our workers together! I’ll help you.
Domestic (Third World)
domestic state
Sure, I’ll do everything in my power to maximize profits for you. Help me stay in power in return.
Lower classes
All these people are complicit in keeping us down. No wonder we are always poor …

17. Philippines: support dependency theory
US colony  (political) independence on 4 July 1946
Bell (Trade) Act (1946)
Philippines – forced to ratify in exchange for independence
- grant U.S. companies equal access to ALL raw materials, minerals & other natural resources in Philippines
- no tariffs for Filipino agricultural products entering US
- no tariffs for US industrial products entering Philippines
= IDL – survive into post-colonial period
- US MNCs – unlimited funds transfer from Philippines to US
still an economic colony for US
result: stagnation of Filipino economy, esp. under Marcos

18. So, the upshot …? Pessimistic prognosis: 3rd W – stuck in poverty
1st W – get richer & richer
two sides of the same coin:
Prosperity for tiny minority (= 1st W) takes place at expense of miserable poverty for vast majority (= 3rd W)
Andre Gunder Frank:
sole blame
on asymmetrical structure of world economy, implanted by colonialism
There is only “development of underdevelopment” in the Third World!

19. Weaknesses of Dependency Theory
too deterministic
Some “dependent” countries in 3rd World have achieved rapid econ growth (week 06)
- Japan, Korea, Taiwan, Spore
- Alice Amsden, Stephen Haggard
one-sided (& dogmatic)
sole focus on external factors
complete neglect of domestic factors responsible for poor growth
any poor country  exploited by West
exaggerate the power & ill intentions of foreign capital

20. Domestic (or Internal) Explanations for Poor Economic Growth
Foreigners (alone) are not to blame
Rampant political corruption
is to blame
 wastes scarce resources
 poor growth
corruption = rent-seeking
If any country is poor, there must be something wrong with the politicians, society, culture, or system within that country!

21. What is rent or rent-seeking?
a form of “corruption”
an excess value (above the market value), created unnaturally & unfairly by a non-market political act that contributes little to economically productive activity
A preferential economic benefit from power holders that is sought by, and is given to, companies or individual capitalists in order to artificially & unfairly manipulate the otherwise free market forces in their favor
e.g.,
subsidy, bank loan
secret information
monopoly license
restrictive laws (e.g., tariff)

22. Microsoft Marcosoft 100 buyers
Politician
monopoly
Out of business
Microsoft
Marcosoft
S2,000
S1,000
100 buyers
S2,000 x 90 buyers
= $180,000
S1,000 x 10 buyers
= $10,000
Marcosoft acquired an excess value (above the market value) unnaturally & unfairly without conducting any economically productive activity, thanks to a non-market political act
S2,000 x 100 buyers
= $200,000 (profits soar)
The difference = rent acquired artificially through monopoly
= $190,000

23. Rent-seeking/giving is destructive
Third World politician
RENT
monopoly
subsidy
information
State resources wasted on unproductive activities
kickback
inefficient companies
Efficient companies go under  stifles healthy economic competition.
Social welfare for lower class – neglected
Not used to raise workers’ wages
Only inefficient companies & corrupt politician benefit from rents. Nobody else.

24. Then why is rent-seeking common in some countries and not in others
Then why is rent-seeking common in some countries and not in others? What causes rent-seeking?
(1) political culture (Robert Price)
(2) collective action problem (Olson)

25. Political Culture cultural context in which politics takes place
types of individual values, beliefs, and norms, which bear on patterns of individuals’ behavior, which in turn bear on the character of politics
Type/nature of politics
collective level
Patterns of individuals’ behavior
Individual level
values
beliefs
norms

26. Example: A political culture in the US
In a political culture like this, democracy will flourish. A leader must be accountible to citizens.
Type/nature of politics
So I follow political news by reading a newspaper every day, and I take part in political debates.
Patterns of behavior
I’m interested in politics. I believe each citizen should play an important part in politics.
Values/ beliefs/norms

27. What kind of political culture exists in Ghana?
e.g., Can jump the line if u know a civil servant in person
personal > public:
The interests of family members, friends, relatives & others take precedence over public interests
Power holders (are expected to) use their power in ways that suit the interests of family members, friends, and relatives

28. Max Weber: Patrimonialism
blurred division between public & private
(mis)use of public power for personal ends
transparent rule of law is absent or deficient
breeding ground of corruption (rent-seeking)
I came up with one concept for describing that kind of culture.

29. Excerpt on Patrimonialism from Weber, Economy & Society
“In general, the notion of an objectively defined official duty is unknown to the office that is based purely upon personal relations of subordination. … Instead of the bureaucratic impartiality and of the ideal – based on the abstract validity of one objective law for all – of administrating without respect of persons, the opposite principle prevails. Practically everything depends explicitly upon the personal considerations – upon the attitude toward the concrete applicant and his concrete request and upon purely personal connections, favors, promises, and privileges.”

30. illustration police officer, whose beloved son commits a crime
society with a sharp public-private division
 arrest the son
society with a blurred public-private division (patrimonialism)
 look the other way

31. Applicable to the behavior of politicians & bureaucrats who are in charge of economic activities
 rampant rents
Capitalist: “Please issue a license for our company. We went to the same school, didn’t we?”
Bureaucrat: “OK, why not? But give me 10% of your profits.”
Politician to Bureaucrat: “I’ll promote you in return for 5% of the kickback from that company.”
Bureaucrat: “Sure. After all, my daughter is married to your son.”

32. Rampant Corruption/Rent-seeking
norm, rather than exception in a patrimonial political culture
Power holders see it “natural” to use their public office for private gains
 little sense of guilt
Ordinary people expect power holders to do so
 little public criticism
Corruption for “us,” but normal for “them”

33. Weber’s Conclusion
Only one kind of capitalism can grow in a patrimonial society.
“politically oriented capitalism”
= crony capitalism
- deeply politicized
- Everything depends on personal ties
- Only a small no. of capitalists who are
personally close to power holders can get ahead
 economic inefficiency & stagnation

34. Another Domestic Explanation of Rent-seeking
Game Theory Explanation
Mancur Olson:
The Logic of Collective Action
collective action problem (dilemma)
Rational human beings choose NOT to cooperate in achieving the desired benefits of successful collective action
Human rationality is an obstacle to successful collective action

35. Applying Olson’s Model
Barbara Geddes,
Politician’s Dilemma
Case: Brazil
- democracy since 1970s  competitive elections
- but accompanied by pervasive corruption/rent-seeking
e.g., politicians dispense rents, accept bribes
Politicians are in a “catch 22” situation.
They know that corruption is a serious problem. They are committed to fighting it.
But paradoxically, those politicians end up being corrupt, even though they are committed to fighting corruption. They are in a dilemma.

36. Geddes (continued) eliminating political corruption
= a type of collective action
It will be successful only if & when all or most politicians cooperate (by refusing to engage in corruption)
torn between two interests
long-term collective interests
= build a clean Brazil for the
benefit of all Brazilians
short-term personal interests
= win an election

37. B C (a) I cooperate, so do others. (b) I cooperate, but others don’t.
(c) I don’t cooperate, but others cooperate.
(d) I don’t cooperate. Neither do others.
He doesn’t cooperate
Nobita
He cooperates
I cooperate
Fair election
No corruption
(= honest government) B
Doraemon
Status quo
Corruption continues C
I don’t cooperate

38. Scenario A Capitalist:
“Mr. Doraemon, please award that mega project to my company. I will then finance your campaign.”
Candidate Doraemon:
“No!! No matter how much you give me, I won’t award you the project. I will do my share to root out corruption in our country.”

39. BUT …
All politicians (candidates) are rational & self-centered utility-maximizers
make rational choice based on detached cost-benefit analysis
They think about potential costs …
Wait a sec ... Am I too rash?

40. potential costs … “What if I keep saying, ‘no’ to all the bribes?”
lose all capitalists’ support …
no campaign funds …
 no money to keep my clients/supporters happy …
 They will defect from my camp …

41. suspicious of other candidates’ intentions
How would I know that my rival candidate Nobita wouldn’t accept bribes …?
If he accepts bribes …
 He would use the money to finance his campaign
expand the number of his supporters
He would win the election, and I would lose …!!

42. Scenario B
= a sucker’s scenario for Doraemon
Nobita:
“Doraemon is a squeaky clean sucker! I become President without making any sacrifice.”
Doraemon:
“Not fair. It doesn’t pay to be honest.”
He would have to sacrifice his short-term personal goal (= getting elected) for the long-term collective goal (= eliminating pol. corruption)

43. Scenario C (opposite of B)
a sucker’s scenario for Nobita
Doraemon:
“All is fair in politics!”
Nobita:
“I can’t become President because I am honest …”
All politicians/candidates think along the same lines …
Outcome?

44. Scenario D D status quo Corruption continues unabated
Nobody cooperates
Everyone wants to avoid being a sucker
Everyone ends up in D
They cooperate
They don’t cooperate
I cooperate
I don’t cooperate D

45. Deep irony …
Political corruption persists because politicians are rational human beings …
All rational politicians choose NOT to cooperate in eliminating corruption, although they want to eliminate it …
Their actions are constrained by the need to attain & maintain power
They are compelled to put short-term individual interests (= get elected) above long-term collective interests (= no corruption for Brazil as a whole)

46. Questions
Singapore is unique among the late-developing countries for its economic efficiency. Scarce state resources, which in other countries would be appropriated by state officials, are channeled into economically productive activities. Simply, there is little corruption or rent-seeking.
What explains this phenomenon? Why do the politicians and bureaucrats in Singapore behave differently from their counterparts in Ghana, Indonesia, the Philippines, Thailand, and so forth? Why is the political culture different in Singapore? Or is it different?
What about the “developed” countries? US? Canada? England?

47. (continued)
Geddes’s argument leads us to believe that the more competitive an election is, the more corruption there will be.
Then why is there little corruption in the US, where the electoral competition is just as fierce as in Brazil?
How come American electoral candidates are not hampered by collective action dilemma?
Does her explanation apply to Singapore?

48. Feel free to contact me, via email or in person, if you have any question.