Dani Rodrik's Book the New Global Economy and Developing Countries Term Paper

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New Dictionary of Global Literacy (2002) a global economy is the international spread of capitalism, and capitalism-based economic system, especially in recent decades, across national boundaries and with minimal restrictions by governments. For many reasons the global economy has become hotly controversial, and there are as many critics as supporters of this recent wave of economic evolution. Critics allege that the mechanism by which global economy operates, which are the free markets and free trade, take jobs away from well-paid workers in the wealthy nations while creating sweatshops in the poor ones. Supporters of a global economy insist that the free movement by nations toward capital stimulates investment in poor nations and creates jobs in them. While this may be a temporary shift of investment from established countries to developing nations, the result is a global sharing of wealth which inevitably lifts all peoples, like an oncoming tide lifts all the ships in the harbor.

In his book, The New Global Economy and Developing Countries, author Dani Rodrik tries to look beyond the controversy, and uncover the theoretical underpinnings which are enabling the global economy to take hold in nations which have diverse governments, and widely varying amounts of investment capitol. The barriers which once stood in the way of developing a global economy, such as transportation, communication, and currency conversion, have now been taken down by the airline companies, the internet and the IMF and WTO, respectively. As a result developing nations are seeking to jump into the global commerce stream in order to build wealth, and their own country's future.

Large differences in growth curves exist between developing nations over the past decade. Many countries, such as those in the Pacific Rim, that pursued macroeconomic stability, liberalized trade, and implemented market-based reforms in the early to mid-1980s are now well-established as the high performers in the developing world. Their policies have enabled them to better withstand adverse external developments and unpredictable market variables. More recently, many other developing countries have adopted similar policy frameworks and have, in turn, made substantial progress in fostering macroeconomic stability. For many of these countries growth has exceeded expectations, and their prospects are better than they have been for some time.

Growth in a number of other developing countries remains weak, however, and there are at present relatively few indications of improvement. Although policy differences do not fully explain the growth experiences among developing countries or within an individual country when compared to its neighbor, over time the lack of economic stability, inadequate and distorted financial markets, unproductive state intrusion, and inward-oriented trade policies all act to restrain growth. Although simple comparisons with the strong performers point to relatively straightforward explanations for the difficulties of low-growth countries, a closer look at their experiences suggests that their failure to grow at more satisfactory rates is attributable to a complex set of interactions among policy failures, poor governance, lack of incentives for reform, and adverse external developments.

Rodrik identifies three individual factors which he believes are responsible for sustained economic growth among developing countries. The first is economic investment. No country can increase its ability to product simply based on the profits earned by small enterprises. The economic engines of the nation need investment capitol in order to increase their production capacity at a rate faster than the advancing costs of doing business. Rodrik points out that there are no single ways to encourage investment in private business. In some cases, government as been the source of investment loans, subsidies, and incentives. In other cased private individuals provide the investment capitol, while the option of securing capitol from negotiated agreements with other companies is also a successful approach. Regardless of the source, and because of the varied sources, Rodrik begins to make the point for one of the main themes of the book. He insists that openness and recognizing the benefits of an open approach, as opposed to closed and territorial, is a paradigm which will open other doors for success in developing countries.

The second factor he identifies which governs economic expansion in developing countries is for the government, business and society to develop and strengthen institutions for conflict management. In a growing economy, the ability to manage conflict which will inevitably erupt will often be the key to whether a growing economic base can be maintained, or if it will collapse under its own weight. According to the author, since 1975, the growing diversity in the marketplace has created additional levels of strain on the growth patterns of a developing nation.

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According to the author's theories, many of the collapsed economic engines of socialist and communist states which have occurred in the past 20 years have been the result of long-term inflexibility, and ongoing conflict within the economic systems themselves.

In the situation of the developing nation, these societies "with deeper cleavages (along ethnic, income, or regional lines) are particularly susceptible to policy paralysis of this sort, making institutions of conflict management all the more important... Evidence shows that participatory political institutions, civil and political liberties, high - quality bureaucracies, the rule of law, and mechanisms of social insurance such as social safety nets can bridge these cleavages." (Rodrik, 1999) In other words, when a nation is growing, the stresses of growth and change will bring to the surface of the functional relationships stresses and fears which normally would not be disruptive to the progress path. AS a result when the stakeholders involved feel the additional stress of growth and change, they are likely to create strife in the process of reinforcing their own positions. The mechanisms mentioned by Rodrik form a legal framework around the growing economic community by which the rights of the individuals and organizations can be guaranteed, or protected from harm. When the stakeholders operate within the boundaries of protected freedoms / assets / resources, they are able to weather the change forces, and continue to devote their efforts toward economic growth.

An example of this has been repeated in the African continent many times, and illustrates the socio-economic difficulties faces by developing third world nations. Entrenched ethnic divisions permeate most developing countries, and these divisions bear a potentially subversive relationship to the project of economic growth, and democratization. In First World countries, markets tended to be built upon the economic dominance of a perceived ethnic majority, by the same group. In the developing nation, however, the ethno-economic dynamic tends to be just the reverse: (Chua, 1998) Markets often reinforce the economic dominance of certain ethnic minorities. In the First World, democracy posed no challenge to economically dominant ethnic groups. By contrast, in the developing country, democracy characteristically pits a politically powerful but impoverished "indigenous" majority against an economically dominant ethnic minority. Far from having the civilizing effect, mercerization in the developing country is often destabilizing, leading to long established patterns, thus fomenting ethnic envy and hatred among often chronically poor majorities. Another pressure in developing nations is that rather than reinforcing the market's efficiency and wealth-producing effects, democratization ordinarily will lead to powerful concentration of economic power in the hand of a few who are elected to lead in the government change over. This also ultimately creates anti-market pressures. These ethnic divisions in the developing word cannot be regarded as another aspect of underdevelopment, which is curable by the universal prescription of free-market democracy and larger World Bank loans. On the contrary, the combined pursuit of mercerization and democratization in the developing world is likely to catalyze ethnic tensions, which affects and subverts both markets and democracy. (Chua, 1998)

The third factor needed in building a global contributory economy in a developing nation is a contribution of the developing nation toward international governance. While there is no one perfect model by which capitalist economies become successful, the emerging country and economic influence must contribute in the world marketplace governmentally in order to develop its own unique flavor of capitalist enterprise. Germany, Japan Europe and the U.S.A. all have evolved their own unique blends of interaction between government, private sector businesses, and labor. The developing nation must have a stable government which can interact with other governments in order to facilitate and reinforce policy which can stabilize the nation.

At this point, Rodrik again stressed the idea of openness. While never really defining the term, the author describes examples of open, and non-open economies, and points to the benefits of each. He says that the priority of establishing an import to export ratio which favors the exporting nation is no longer an effective goal for building economic power. "One dollar of economic activity created through exports does no more for an economy than any other dollar of economic activity" (p. 24) Rodrik points to this guideline, and defines it in terms of a territorialism of the exporting nation, rather than an engine of economic growth. The desire to have a high export to import ratio was to be 'in control' of the export - import marketplace, and….....

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