Political Science 6 Week 5
Political Science 6 Week 5
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Date Created: 05/04/14
POL S 6 042814 3838 Ellison Hall Keynesianism vs Monetarism Iohn Maynard Keynes Market may revive naturally in the long run but this long run is a misleading guide to current affairs In the long run we are all dead States should use fiscal policy to revive economy during economic downturns Keynesianism Fiscal policy government budgetary policy the use of taxation and spending powers to in uence the economy In an economic downturn the problem is low demand If the state spends money to increase demand private spending will also increase and the economy will revive the government should borrow money to finance this spending deficit spending Once the economy recovers the state can cut spending below revenues and pay back the debts incurred Added benefit by reducing spending the state keeps demand from getting too high and thus lowers risk of in ation Monetarism Milton Friedman Monetarism states should in uence the economy by managing the amount of money in circulation often through interest rates Endorsement of limited government States determine how much money is in circulation If states add more money by printing it people won39t simply hid it under their mattress they will spend it Thus increasing money in circulation tends to increase demand which raises economic growth rates If states reduce money supply for instance by shredding it people will have less money to spend which reduces demand and lowers economic growth rates Increases the risk of in ation Interest rates are another means of in uencing how much money is spent thus affecting aggregate demand When interest rates go up people are more likely to save money and less likely to borrow spend money This reduces demand and lowers growth and in ation When interest rates go down people are more likely to borrowinvest spend money and less likely to save This is a form of stimulus to the economy and should increase growth rates By raising or lowering interest rates therefore states can affect people39s spending behavior and in uence economic growth What states should NOT do however is go beyond setting rules regarding money supply to engage in deficit spending a la Keynes Deficit spending negatively affects money supply and economic growth rates 0 Tempts governments to print too much money in ation o Crowds out private investment and raises interest rates if more for their loans or may not be able to get any there s only so much money after all Developmental state vs neoliberalism Development economics similar to Keynesianism envisions a role for the state in the economy the developmental state Much stronger than the Keynesian state the developmental state intervenes to promote domestic development and regulate interactions with trading partners Neoliberalism is a monetarist inspired model advocating a limited state role both domestically and internationally Use powers of the state to develop the economy 0 To limit and regulate trade Developmental State Managed capitalism for developing countries Developmental state intervenes in economy to stimulate rapid industrialization and growth Also protects domestic economy Failure to launch why was Latin America falling behind Problem most developing countries specialized in the export of agricultural products and raw materials The value of and demand for these products rose more slowly over time than the value of and demand for manufactured goods causing their economies to grow Import substitution industrialization ISI Like Germany ISI countries harnessed the power of the state to pool economic resources and redirect them toward industrial development However much stronger and parallel emphasis on the importance of limiting trade with the industrialized countries in order to protect new domestic industries Create tariffs to protect products domestically Under ISI states still had to import foreign technology Thus states incurred increasing debt In addition reliance on domestic consumers meant that sooner or later domestic industry ran out of customers and the economy began to slow down Unless new international markets could be reached by lowering costs and improving efficiency ISI reached a breaking point Debt crisis and economic stagnation triggered this policy shift Neoliberalism Monetarist inspired model embraced by World Bank in 1980 Partly based on success of East Asian Miracle countries Partly based on economic theories of Milton Friedman and the University of Chicago Chicago School of Economics IMF used structural adjustment programs Goals of neoliberalism through free trade less state intervention and less regulation of investment to allow comparative advantage and markets to maximize efficiency and economic growth By requiring balanced budgets IMF and World Bank also hoped to make it easier for states to meet their debt payment obligations to the international community POL S 6 043014 Brazil Economic model developmental state ISI changing to moderate neoliberal model in mid 1990s Industrialization under military modernizing authoritarian state o Existing ISI model intensifies expanding state involvement to create more state owned companies in heavy industry build more infrastructure reduce wages 0 State engaged in Keynesian deficit spending to finance ambitious development investment 0 Results rapid economic expansion growth of 9 10 per year and growing public debt by 1982 Brazil is the world39s biggest debtor Turn to neoliberalism in 1990s relatively late for Latin America scope of changes shallower than in some cases embrace of neoliberalism is only partial 0 Brazil blocked expansion of NAFTA to South America 0 Ends privatization programs after 2002 0 Highest tax rate in Latin America 0 State share of GDP much higher than US Development outcomes 0 Strong industrialization under ISI leading to classification of Brazil as a middle income economy 0 Defeat of in ation via neoliberal policies in the 1990s 0 Increased social spending and poverty reduction programs under the leftist PT governments from 2002 to present have also led to declining inequality with rapid growth until 201 1 0 Brazil is the B in BRIC s Nigeria Economic model developmental state ISI slow shift to neoliberalism from 1983 0 Efforts to industrialize have failed 0 Economy remains largely focused on oil with oil accounting for 95 of exports and 80 of govt revenue I Unable to use oil money to achieve its goals 0 70 of the population continues to work in agriculture 0 179th in the world in terms of GDPcapita 0 Failed to develop or industrialize At independence Nigeria is 0 Mostly an agricultural export economy with many competing small producers growing cacao cotton and palm oil British commercial firms bought product at low prices and sold on international market at much higher prices I No Nigerian middle class 0 Oil relatively insignificant 3 of exports 8 of govt revenue 0 Industry dominated by foreign capital only 10 Nigerian owned o Route to native Nigerian advancement lay mainly through participation in the colonial state 0 To be in power you had to be educated or had to join the military After independence state remains key to becoming wealthy o State controlled marketing boards replace British commercial firms in marketing agricultural exports o State owned industry replaces foreign owned industry 0 Nigerian investors usually government officials or related to government officials too close a connection led to high corruption insufficient provision of public goods 0 Had to control the state in order to get any source of wealth in Nigeria And then you add 0 Oil price increases resulting in oil rents that require state to invest virtually nothing to collect tons of money Political instability coups returns to democracy repeat Ethnic con ict and violence Weak state institutions o 9 One Hot Mess Shift to neoliberalism in Nigeria 0 Free trade privatization and lower regulation to encourage industries to become competitive and use comparative advantage o But Nigeria has few industries relies on oil 0 Given high corruption and political instability Nigeria is unlikely to attract additional foreign investment no matter what its economic policies I Too much of a risk to invest in Nigeria in contrast to Brazil which had stable political institutions o Nigeria has already been forgiven a major proportion of its foreign debt relies on oil exports to pay the rest OOO China Economic model Command economy 19481978 9 Developmental state with export oriented industrialization in portions of the country Development outcomes World39s greatest economic growth over past thirty years and significant poverty reduction Recent reform efforts Expanding private sector but continued role for state owned industries Great Leap Forward for mass mobilization but led to the Great Famine o Discouraged individual farming but collective farming Deng Xiao Ping 19781997 o Poverty is not socialism To be rich is glorious o It doesn39t matter if a cat is black or white as long as it catches mice I Let39s not get caught up if something is socialist or not but focus on what works Reforms under Deng Xiao Ping India 0 Household Responsibility Systems Rural families could produce what they wanted on farms and sell surplus 0 Township and Village Enterprises Small manufacturing usually owned by local governments 0 Special Economic Zones Regions open to international investment and international trade mostly along coast 0 State owned companies allowed to sell surplus over state set targets at market prices 0 China39s economy becomes dominated by the private sector Economic model developmental state and ISI with accelerating neoliberal reforms since 1991 High level of state regulation and intervention under ISI led to slow growth and inefficient industrialization Intervention by IMF in 1991 led first to recession but later growth and investment resumed and in the last decade India39s growth has approached that of China Conclusions Neoliberalism is the dominant paradigm in the contemporary world all of these countries belong to the WTO but is adopted with variations 0 China which escapes IMF scrutiny has grown the private sector rather than cutting the state owned sector and puts some areas of the country off limits 0 India maintains tariffs at a high level for modern world standards and has incompletely privatized 0 Brazil has adopted neoliberalism more thoroughly China or India but less than other Latin American countries such as Mexico 0 Nigeria has adopted neoliberalism but has seen few benefits since investors remain reluctant to invest in Nigeria and Nigeria39s comparative advantage oil continues in state control Most states today follow monetarist economic policies to manage the economy The US however continues to engage in Keynesian deficit spending as well as using monetarist policy tools largely because it can Developing countries under the supervision of the IMF can no longer follow such policies States vary in the extent to which they aspire to be involved in regulating markets and providing public goods States also vary in the extent to which they are capable of fulfilling the essential roles of maintaining the framework necessary for the proper functioning of markets
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