Political Economy of

Development
University of Hargeisa IPCS
2017
 Political Economy

• Political Economy is interdisciplinary studies

drawing upon:
– economies,
– sociology, and
– political science

 Explaining how political institutions, the political

environment, and the economic system influence each
other.
 National Differences in Political Economy
 How do political, economic systems of a
country:

– Differ among countries?

– Influence economic progress?

 National Differences in Political
Economy
 Political System:
– System of National Government
– Varies by country on the basis of
values and beliefs about
 Collectivism and Individualism

 Democracy and Totalitarianism

 Collectivism

Primacy of collectivist over individual

goals
Emphasis: “good of society”, “common
good”
Plato,427-347 BC, to Socialists, Marx,
1818 - 83
Communists-revolution, Social
Democrats
 Individualism

 Individual freedom over economic and

political action
– Individual diversity and private
ownership are desirable
– Private property is more productive
whereas communal property receives
little care
Democracy:
- Government is by the people, exercised either directly or
through elected representatives
Totalitarianism:
One person/party exercises absolute control over all spheres
of human life
– Communist totalitarianism (PRC, Vietnam, Laos, N. Korea,
Cuba)
– Theocratic totalitarianism (Iran, S. Arabia)
– Tribal totalitarianism (Zimbabwe, Tanzania)
 Economic Systems

 Market economy: what is produced in what quantity

determined by supply/demand and through a price system
 Command economy: Planned by government

 State-Directed economy: state directly influences investment

activities of private enterprise through “industrial policy.”
 Conceptions of Development

Amartya Sen: development

– Should be assessed by material output

measures
– Is an economic and a political process that
requires “democratization”
– Freedom is considered as development
 Cont…
• Human Development Index (HDI) =
f{life expectancy, educational attainment,
based annual incomes sufficient to meet basic
needs}

• His development thought influence the

institution like UN.
 Political Economy and Economic
Progress

 Innovation is an Engine for Growth

 Innovation requires:-
– market economy
– strong property rights
– the “right” political system

 Economic progress is related to democracy but

other clam it is not necessary
 Implications for International Business

 Country’s political, economic, and legal environment

– influence attractiveness
 Country attractiveness
– balance long-term risks with short-term benefits for business
– benefits depend on: size, wealth, future economic growth
 first mover advantages
 identify “star” future economies
– costs are affected by:
 economic sophistication (may be more costly to operate in LDCs,
no infrastructure)
 legal framework impact on costs
 political payoffs
Political and Economic Theories

Part II
 Mercantilism
 Was economic theory and practice dominant in
many parts of Europe during the 16th to the 18th
century.
 Mercantilism emerged in the year of 1498 and
lasted 1763.
 Mercantilism was the dominant school of economic
thought in Europe throughout the late renaissance
and early modern period (from the 15th to the 18th
century).
 The mercantilism simplest form is bullionism.
Meaning to accumulate the gold and precious
materials.
 Cont…
Mercantilism was economic warfare, and was
well suited to an era of military warfare.
Mercantilism was the source of the
Europeans intra-wars and their expansion to
the other parts of the world
Many states practiced this system including,
France, England, the Netherlands which was
the center of the European financial system the
Spanish, and the Portuguese
 Cont’d…
 Spain and Portugal were the center of the
internationalization of mercantilism.

• The trade of gold and silver across the Atlantic to India

and China.

• New rich overseas merchants became manufactures

and created the first large factories employed hundreds
of people.
 Classical economics
• Classical economics asserts that markets function
best without government interference.

• It was developed in the late 18th and early 19th

century by:

– David Ricardo and

– Adam Smith
 Capitalist Expansion
• Conceptualization of the term: “is an economic system based
on private ownership of the means of production and their
operation for profit.
• Characteristics central to capitalism include:
– Private Property,
– Capital Accumulation,
– Wage labor,
– A price system, and competitive markets
– Free market economy or liassez-faire – separation
of the state from the economy
 Cont…
• Capitalism emerged in 1763
• This system gave form to the internationalization
process and the beginning of Industrial Revolution.
• England became the heart of the economy of the
world
• England is were the industrial revolution took
place and took shape.
• The colonies became the markets of the European
productions.
 Cont’d……
Marxist Economics – Marxist economics is a
school of thought in economics which has
developed from the writings of Karl Marx
(1818-1883).
It is very different to orthodox economics,
providing a critical analysis of capitalism.
The Marxism theory is fundamentally
different from the liberal conception.
It is nothing else than an instrument of
exploitation and oppression of one class over
others.
 Multinational Corporations
• MNCs emerged in 1883,
• The first MNC was Standard Oil Trust (1863)
as the third internationalization of the
economy.
• This was the second industrial revolution
powered by petroleum and electricity.
• At the end of the 19th and 20th century,
America became the most important industrial
power.
• Britain remained the main trading power.
International Trade System

Part III
 Cont…
• International trade is buying and selling
between/among nations.
– A trade carried out within a country is referred as
national trade
– International trade market consists the follow of
goods and services across the national boundaries
• This follow is determined both economic and
political conditions.
 Cont…
• International trade can be traced back during
the emergence of modern statehood – with
well defined boundaries and functional
central authority .

 All economies, regardless of their size, depend

to some extent on other economies and are
affected by events outside their borders.
 Reasons for International Trade
 Sell something we don’t need or have made for
trade and buy something that we need
 There are many benefits associated with Int’l Trade:
◦ Trade creates jobs, attracts investment, attracts
new technology and materials, and offers
countries a wider choice in products and services
◦ Range of choice provides more competition in the
marketplace
 Result – competitive pricing, technological
advances, improved services – including the
education and training of foreign employees.
 Cont…

• David Ricardo’s theory of comparative

advantage, states that free trade will benefit all
trading partners.

• A country enjoys an absolute advantage over

another country in the production of a product:

– When it uses fewer resources to produce that

product than the other country does.
 The Sources of
Comparative Advantage
• Factor endowments refer to the quantity and
quality of labor, land, and natural resources of
a country.

• Factor endowments seem to explain a

significant portion of actual world trade
patterns.
 Exchange Rate
• An exchange rate is the ratio at which two
currencies are traded, or the price of one
currency in terms of another.

• For any pair of countries, there is a range of

exchange rates that can lead automatically to
both countries realizing the gains from
specialization and comparative advantage.
 Trade Barriers

• Governments restrict international trade to

protect domestic producers from competition
by using three main tools:
1. Tariffs
2. Subsidies
3. Quotas
 Cont’d…..
• Protection is the practice of shielding a sector of the
economy from foreign competition.
• A tariff is a tax that is imposed by the importing
country when an imported.
• A quota is a limit on the quantity of a good that may
be imported.
• Export subsidies are government payments made to
domestic firms to encourage exports.
• Dumping refers to a firm or industry that sells
products on the world market at prices below the cost
of production.
Advantages and Disadvantages of International
Trade
Advantages
• Create Jobs
• Attract Investment
• New Technology and Material
• Diverse Products and Services
– Disadvantages
• Cultural Identity Issues
• Environmental Issues
• Political Issues
 Some Terminologies
• Imports are the goods and services that we buy from
people in other countries.
• Exports are the goods and services we sell to people
in other countries.
• An infant industry is a young industry that may need
temporary protection from competition from the
established industries of other countries to develop an
acquired comparative advantage.
• Closed Economy is an economy that does not trade
with the rest of the world
• Open Economy is an economy that trades with other
countries.
 Cont’d….
 Trade Surplus - When a country exports more than
it imports, it runs a trade surplus.
 Trade Deficit – is the situation when a country
imports more than it exports.
 Balance of payment – is the record of all
international economic transactions between the
residents of the country and the rest of the world
in a particular period.
 Negative balance of payments – means that more
money is flowing out of the country than coming
in, and vice versa.
 Assignment: Term Paper
Group1: Nexus between Democracy and
Development
Group2: Politics of Trade between South and
North and Among North
Group1: Somaliland Politics and Economic
Performance
Group2: Trade relation and performance between
Somaliland and Ethiopia
The World Trade Organization
WTO
 The World Trade Organization
• A rules-based, member-driven organization.
• “Its main function is to ensure that trade flows as
smoothly, predictably and freely as possible.”
• Created in 1995 by 120 nations
• Now:
– 148 member nations (over 97% of world trade)
 Origin: The General Agreement on
Tariffs and Trade (GATT)
• Before GATT: several joint declarations of free-
trade ideals and failed attempts to create an
international trade institution.
• Under US leadership, the GATT was created in
1947 as a step toward the “ITO.”

• Regulated trade in goods, only

 Uruguay Round
• 123 participating countries.
• Most difficult—and most ambitious—among
all rounds of negotiation.
• Created the WTO in 1995.
• Ultimately, very successful.
 GATT/WTO: Main Objective
• To provide a legal framework for incorporating the
results of negotiations directed toward

“reciprocal and mutually advantageous exchange

of market access commitments on a non-
discriminatory basis.”

• Typically, such an outcome is obtained through

reductions of tariffs and other barriers to trade.
 Why is There a Need for Trade
Negotiations?
• Typically, governments care primarily about
the residents of their own country.

Whenever possible, they try to shift the cost
of their policies to other countries.
• This is especially easy to do with trade
policies.
 How can governments enforce an agreement when
each individual country has an incentive to disrespect
what it had agreed upon?

• WTO has no police power to enforce the agreements:

– The WTO cannot send any country to ‘jail.’

• The WTO cannot even indirectly force countries to

abide by previous agreement.
– By suspending loans, for instance, as the IMF can do.

 Agreements need to be self-sustainable.

The Political Economy of
Regionalism
 Regionalism

• Since World War II there have been many efforts

towards regional integration around the world.
– European Union (EU), as a successful example

• In recent years the push for integration has

regained momentum.

• In the last decade many regional integration

arrangements have been formed or expanded.
 Cont’d…..

• The new regional arrangements are the product

of:
– World War II
– Cold War as well as the
– Decolonialization of many countries in the third world
countries
 Types of regionalism

– Formal regional integration and cooperation

arrangements vary widely in their:

• structure, objectives, sector coverage, and membership

– Regional integration agreements (RIAs)

generally are aimed at:
• removing discrimination between foreign and domestic
goods, services, and factors of production
 Economic Integration
– Free trade areas, in which member countries
reduce or eliminate trade barriers between each
other.
– While maintaining barriers for non-member
countries.
– Customs unions, in which member countries
reduce or eliminate barriers to trade between each
other.
 Cont…
– Adopt a common external tariff towards non-
member countries.

– Common markets, in which members expand the

basic customs union by reducing the barriers to
the movement of factors of production (labor and
capital).
 Cont…
• Economic unions, in which members aim to more
fully, harmonize national economic policies,
including:
• exchange rate and
• monetary policies (e.g., a monetary union)

• By definition, RIAs provide preferential treatment for

members and entail discrimination against non-
members.
 Political Integration

• Political integration is the ultimate stage of

integration, in which members become one
nation.
• National governments cede sovereignty over
economic and social policies to a supranational
authority.

• Establishing common institutions and judicial and

legislative processes-including a common
parliament.
 Cont…
• Countries can start with any of those
arrangements, but most begin by removing
impediments to trade among themselves.

• The political integration is the ultimate level of

any kind of integration.
• No integration beyond the political integration.
 African Union Objectives
• African Union are the 54 sovereign states
• To achieve greater unity and solidarity between the
African countries and the peoples of Africa;
• To defend the sovereignty, territorial integrity and
independence of its Member States;
• To accelerate the political and socio-economic
integration of the continent;
• To promote and defend African common positions on
issues of interest to the continent and its peoples;
• To encourage international cooperation, and;
• To promote peace, security, and stability on the
continent.
 The European Union
• Origin and evolution
– 1957: Treaty of Rome establishes the European Economic
Community (EEC)
[Belgium, France, W. Germany, Italy, Luxembourg, Netherlands]
– 1967: EEC becomes simply the European Communities (EC)
– Expansions:
 1973: Denmark, Ireland, UK
 1981: Greece
 1986: Portugal and Spain
 1995: Austria, Finland, Sweden
 2004: Czech Republic, Estonia, Cyprus, Latvia, Lithuania,
Hungary, Malta, Poland, Slovenia and Slovakia
 Bulgaria and Romania expected to join in 2007. Turkey has also
applied to become a member.
– Free trade agreements with many other countries.
 Cont…
• The Treaty of Maastricht (1992):
– Changes name to European Union.
– Aimed at establishing a monetary union.
• Development of a common currency (the euro):
– January 1, 1999: exchange rates fixed and euro
launched for financial transactions.
– January 1, 2002: euro notes and coins start to circulate.
– July 1, 2002: national currencies fully eliminated.
• Note: not all EU members have adopted the euro.
– Have not yet adopted it: UK, Sweden, Denmark.
 European Union Objectives
• The European Union has 28 member countries
• In 1951, only Belgium, Germany, France, Italy, Luxembourg
and the Netherlands started to cooperate economically.
 The promotion of peace and the well-being of the Union´s
citizens
 An area of freedom, security and justice without internal
frontiers
 Sustainable development based on balanced economic
growth and social justice
 A social market economy - highly competitive and aiming at
full employment and social progress
 A free single market
 Challenges
• Most countries belong to at least one regional
integration arrangement
• Many economies mostly from Africa suffer
from:-
– a lack of diversity in production and exports which
could be attributed to inadequate infrastructure,
– small physical and human capital stocks,
– Political instability and conflicts in turn erode
institutional capacity and worsen economic
performance, creating a vicious cycle.
 Cont’d……
– Africa’s poorest economic performance has a history
of conflict.
– Conflict can undermine an economy by destroying
physical and human resources, causing social
disorder, which increases the cost of doing business as
private citizens divert scarce resources to protection.

– And, self-insurance and the misallocation of financial

and human resources to war efforts rather than to
useful production activities.
The International Monetary Fund
 Introduction
• 1941 is a turning point in the history of global financial
arrangements
 British economist John Maynard Keynes write proposal
• Known as the Keynes Plan
 US Treasury official Harry Dexter White wrote a proposal for
an International Stabilization Fund (ISF)
• Known as the White Plan
• Two plans were taken up at the Bretton Woods Conference in July
1944
– White Plan gained prominence, resulting in creation of the
International Monetary Fund (IMF) and the International Bank
for Reconstruction and Development (the World Bank)

58
 Monetary History
• Throughout 20th century, countries struggled
with various arrangements for the conduct of
international finance.

• None proved satisfactory

– Appears international financial system had a

dynamic of its own

59
 The Gold Standards
• Late 19th and early 20th centuries were characterized
by a highly integrated world economy.

• Supported from approximately 1870 to 1914 by an

international financial arrangement known as the gold
standard.
– Each country defined the value of its currency in terms of
gold
– Most countries also held gold as official reserves

– Since value of each currency was defined in terms of gold,

rates of exchange among the currencies were fixed

60
 Cont…
• World War I began in 1914

• The countries involved in that conflict suspended the

convertibility of their currencies into gold.

– After the war, unsuccessful attempt to return to

gold standard
 Gold-Exchange Standard
• In 1922, there was an attempt to rebuild the pre-World
War I gold standard.

• New gold standard was different from the pre-war

standard due to current gold shortage.
– Countries that were not important financial centers
did not hold gold reserves but instead held gold-
convertible currencies
– For this reason, the new gold standard was known as
the gold-exchange standard
• Goal was to set major rates at their pre-war levels,
especially British pound
62
 Gold-Exchange Standard
• Overall standard was not a success
• Some international economists have even seen it as a
major contributor to Great Depression.

• Combination of both fixed and floating rates:

– Lack of international financial coordination helped contribute
to the economic crisis of the decade
– At the worst of times, countries engaged in a game of
competitive devaluation

63
 The Bretton Woods System
• During World War II, United States and Britain began
to plan for the post-war economic system.

• White and Keynes understood the contribution of

previous breakdown in international economic system
to war
– Hoped to avoid same mistake made after World War I
– White largely got his way during 1944 Bretton Woods
Conference
• Conference produced a plan that became known
as the Bretton Woods system
64
 The Bretton Woods System
• Essence of the system was an adjustable gold peg
– US dollar was to be pegged to gold at $35 per
ounce
– Other countries of the world were to peg to the
US dollar or directly to gold
Placed the dollar at the center of the new
international financial system.
• Countries were to make their currencies
convertible to US dollars as soon as possible
– But process did not happen quickly
65
 The Operation of the IMF
• IMF is an international financial organization comprised
of 183 member countries.
• Purposes,to
– Promote international monetary cooperation
– Facilitate the expansion of international trade
– Promote exchange stability and a multilateral system of
payments
– Make temporary financial resources available to members
under “adequate safeguards”
– Reduce the duration and degree of international payments
imbalances

66
 Cont…
• The IMF engages in four areas of activity
– Economic surveillance or monitoring
– Dispensing of policy advice
– Lending
• Perhaps most important
– Technical assistance

67
 Cont…
• IMF exercises a unique function for
developing countries.

– This function is known as ‘lender of last resort

• It is supposed to stop financial crises from

spreading, or even starting in the first place.
 Cont…
• Its governance and institutional design are
particularly vulnerable to political pressures.

• This is because it aggregate the interests and

preferences of 185 states.
 Cont…
• A heated debate exists between those that want
IFIs to become independent of political
influence.

• So they can make better and more consistent

decisions and those who assert that this is less
democratic.
 Cont…
• Existing policies have a profound effect on
borrowing countries.

• In recent years, the scope of conditionality has

expanded far beyond balance of payments
problems meaning political influence.
 Cont…
• IMF members are represented by its Board of
Governors.

• In the broadest sense possible, the Executive

Board is the Fund’s principal.

• Some members have always had more control.

 Cont…
• The IMF’s Executive Board (EB) consists of
24 Executive Directors (EDs).
• The five most powerful shareholders each
appoint a director and the Funds membership
elect the others.
• The US ED is the most powerful and controls
16.79% of the Fund, giving them the sole
power to veto decisions.
 Cont…
• EDs from developing countries do not
have access to the same level of resources,
officials, and advice as others.
• They are not as well prepared to defend their
position.
• European countries also have a great deal of
input into decisions.
– They traditionally appoint the Managing Director
and currently hold eight EDs out of 24.
 Cont…
• If European Union members reorganized into a
single seat at the Fund, they would hold over
30 percent of the votes.

• The EU Council of Ministers did not suggest

consolidation, implying that for the moment,
EU members prefer representation at national
level.
 Cont…
• The IMF’s institutional structure prevents
debtor countries from effectively forming
coalitions or bargaining with creditors.

• As the number of countries in a constituency

increases, it makes it much more difficult to
achieve a consensus on any particular issue.
 Cont…
• This institution mediates the interests and
preferences of 185 states.

• But the result is that the US and a smaller

group of creditors have the ability to exercise
control over decisions.
 Cont…
• IMF principals might also use the institution to
protect their political and economic interests.

• They have a range of tools at their disposal to

achieve this, including:
– policy conditions
– targets, and procedures to reward political alliance
 US Control
• The United States is undisputedly the most
powerful IMF member for a number of
reasons.
• The list of exclusive privileges held by the US
includes strong institutional links between the IMF:
– US Treasury Department
– US Congress,
 The ability to veto all decisions and adjust the
organisation’s budget and quota.
 Cont…
• The option to intervene if it needs to gives the
US a distinct advantage in negotiations.

• Simply having the ability to strategically

intervene or exercise veto power over a
decision conditions the behaviour of other
actors and the choices they make.
 Cont…
• US influence the content of IMF
arrangements.

• The existing literature has already documented

its influence over the:
– size,
– odds and frequency of IMF loans to developing
countries
The World Bank

82
 Cont…
• The origins dated back to the Bretton Woods
conference in 1944.

The birth of both the WB and the International

Monetary Fund.
• They are UN specialised agencies with the aim
of promoting:
 International economic cooperation
 development
 Cont…

• The World Bank is a vital source of financial and

technical assistance to developing countries around the
world.
• WB is not a bank in the common sense
• WB is made up of two unique development institutions
owned by 184 member countries
– the International Bank for Reconstruction and Development
(IBRD) and,
– The International Development Association (IDA).
• Each institution plays a different but supportive role

84
 Cont…
• WB mission is to
– Reduce poverty in the globe
– Improve the living standard
• The IBRD focuses on middle income
• IDA focuses on the poorest countries in the world.
• WB provides low-interest loans, interest-free credit
and grant to developing countries.

– These loans are for education, health, infrastructure,

communications and many other purposes.

85
 Cont…
• World Bank use model to provide a loan and follow up the
developmental projects.
• The blueprint approach and
• The process approach of the WB (the new approach) was
developed in 1994.
• Emphasis on the issue of participation

• Particularly relevant to projects where beneficiary

participation is critical.
 Traditional project cycle (the Blueprint Approach)

Identification

Evaluation Preparation

Implementation Appraisal

01.04.2024 Prepared by Kedir 87

 The Process Approach Project Cycle

Listening

Mainstreaming Piloting

Demonstrating

01.04.2024 Prepared by Kedir 88

 Cont…
• Listening
 Making the project idea or concept originate
From local communities and other project
beneficiaries
On the needs and priorities of the community
 Piloting:
• Starting small-scale projects with trials

01.04.2024 Prepared by Kedir 89

 Cont…
• Demonstrating:
• Conducting trials on representative scale (eg. village,
kebele ) through joint participation.

• Mainstreaming:
– This is the process of extending the project to a larger scale (eg.
District, region, etc).

01.04.2024 Prepared by Kedir 90

 Developing Economies to Grow
• Building Capacity
– Strengthen their governments and educate their
government officials
• Create Infrastructure
– Implement legal and judicial systems that
encourage business, protect individual and
property rights, and honor contracts
• Develop financial systems
– Support small business from micro credit to
financing larger corporate ventures
• Combat corruption
– If these can be achieved, businesses will be attracted, jobs created and
economy will grow
91
 How is World Bank Run?

• The five largest shareholders:

– France, Germany, Japan, the United Kingdom
and the United States appoint an executive director
• The other member countries are represented
by 19 executive directors.
– By tradition, the bank president is national of and is
nominated by the largest shareholder in the bank, the
United States.
• The President is elected by the Board of Governors
for a five-year, renewable term.

92
 Cont…

• The Executive Directors make up the Boards of Directors of

the World Bank.
• They normally meet at least twice a week to oversee the bank's
business,
– including approval of loans and guarantees,
– new policies,
– the administrative budget,
– country assistance strategies and
– borrowing and financial decisions

93
Recent Developmental
Achievement
 Rapid but uneven development progress

Health
• Over the past 40 years, life expectancy at
birth in developing countries increased by 20
years.

• The improvement resulted partly from higher

incomes and better education, particularly of
women and girls.
 Cont…
Education
• Over the past 30 years, illiteracy in the
developing world has been cut nearly in half,
from 47 percent to 25 percent of all adults.
• Steady expansion of school enrollments
worldwide.
• Increases in education quality made key
contributions to this improvement, as did better
infrastructure and nutrition.
 Cont…
Income poverty
• The number of people subsisting on less than $1
per day rose steadily for nearly two centuries,
but in the past 20 years it has begun to fall.

• This is partly as a result of better and more

market-oriented economic policies.
– China and India
 Cont…
• Since 1965, the per-capita gross domestic
product (GDP) of the developing world as a
whole has increased.
• By an average of some 2.2 percent per year

• It doubling the income of the average

developing-country resident.
 Fundamental Role of the Bank
• The first is the view that the World Bank is a
financial intermediary, the Bank-as-a-bank
model.
• Second agent in charge of changing the
behavior of governments in developing
countries.
• The third is the view that the World Bank is a
mechanism to transfer financial resources
from richer to poorer countries.
 Cont…
• From the Bank-as-bank perspective the World
Bank's role is, quite simply, to be a bank.

• Maintaining the institution's long-term

financial integrity is a crucial purpose on
which all other goals depend.
 Cont….
• The second model views the Bank as an
instrument for the advancement of the
national interest of the countries with more
influence on its decisions.
– In procurement goals for their companies in
projects financed by the Bank, or

– Even in expanding employment opportunities at

the Bank for their nationals.
 Cont…
• The third is the evangelical model
• A growing constituency sees the Bank's
combination of:
– money, access, knowledge, and expertise as a
powerful instrument to convert the souls of
governments implementing misguided public
policies.
 Cont…
• Increasing investment
• Attention to women,
• Environmental protection and
• Better governance in terms:
– human rights or
– accountability and
– transparency in government decisions
 Doing Business Project
• The Doing Business project takes a different
approach from perception surveys.

• It looks at domestic, primarily small and

mediumsize companies and measures the
regulations applying to them through their life
cycle.
 Cont…
• A fundamental premise of Doing Business is
that economic activity requires good rules.

• These include rules that establish and clarify

– property rights, and rules that increase the

predictability of economic interactions
 Cont…
• Doing Business in Hargeisa 2012 does not
measure all aspects of the business environment
that matter to firms or investors.
• It does not, for example, measure:
– security,
– macroeconomic stability,
– corruption,
– the labor skills of the population,
– the underlying strength of institutions or all aspects of
the quality of infrastructure
What Doing Business In Hargeisa Covers

• Quantitative measure of the national and local

regulations for starting a business.

• Dealing with construction permits, getting

electricity, registering property, getting credit,
protecting investors, paying taxes, trading
across borders, enforcing contracts.
Globalization and Economic
Performance
 Cont…
• Globalization is a multi-dimensional concept

• It covers a lot of areas; such as economic,

political and social areas.

– Defined as greater integration within the world

economy via increased openness.
 Cont…
It manifest via the following indicators:
 International trade
 International capital and labor movements
 International flow of technology
 International flow of information, knowledge,
and ideas
 Type of Globalization
1. Economic globalization generally refers to
expansion of international trade and
investment.
2. Political globalization the diffusion of liberal
political ideology and institutional forms.
3. Cultural globalization, often but not always,
to the spread of Western ideas and cultural
practices.
 Cont…
• The current debate is characterized by an dispute
between advocates and critics of globalization.
• The optimists underline the link between
increasing trade and economic growth.

– trade is good for growth and growth is good for the poor
– both in terms of job creation and poverty alleviation
• The pessimists show that globalization is the
negative counter-effects on the previously protected
sectors
 Cont...
• Growth is the Main Channel (filter) through which
Globalization Affects Inequality and Poverty.
• Other Channels through which Globalization can Produce
Winners and Losers:

 Capital and Labor Mobility

 The Nature of Technical Progress and Technological
Diffusion Process
 Globalization in SSA
 Africa is an Example that Openness is not
Sufficient to Generate Economic Growth.

 Negative P.C. GDP Growth Rates in 80’s and 90’s

Influenced by:

 Poor Governance and Institutions, Geography,

Fragmentation.
 FDI in Developing Countries
• Neo-classical regard FDI and international
capital flows as closing the savings gap in
developing countries.
• Capital to flow from capital rich to capital poor
countries
• Capital is scarce in developing countries
• This lead to profitable investment opportunities
for capital in developing countries.
• Why Africa so far receive only 1% of FDI flow?
Aid in Developing Countries
 Foreign Aid
Is private & public resource transfers ($) from DCs to
LDCs

 Promote economic development (e.g., education, health)

 Support their security, military, political & strategic interests

 Dispose of “surplus” grain/sell other products

 Encourage human rights, economics policy& democratic

reforms

 Respond to humanitarian disasters (Hurricane, famines,

earthquakes)
 Cont…
• Who Provides Foreign Aid ?

– Public sources
Major multilateral donors ($ from DCs to LDCs
via an international organization)
UN Agencies--FAO, WFP, UNDP, IFAD,
WHO, UNICEF
WB & IMF (big!), European Development
Fund
Regional Development Banks--Asian,
African, Inter-American Development Bank
 Cont…
Why? to promote development & economic
reforms

Why? Promote security, economic/political

reforms, dispose of agricultural surpluses
(i.e., US)
 Cont…
Major bilateral donors ($ from a DC to a govts.
& NGOs in LDCs)

Western DCs (especially to former colonies)

OPEC countries (especially to Arab world)
Japan (especially to Asia)
• May be now china to Africa
Is Foreign Aid a gift?

 Loans – made at commercial or subsidized

interest rates WB & International Monetary
Fund primarily make loans which must be
repaid

 Grants – no repayment required, bilateral aid is

mostly grants
The role of development assistance
• Development assistance encompasses both
financial and nonfinancial.
• It aimed at supporting the recipient country’s
efforts to accelerate growth and reduce
poverty.
• Resource transfer is an important part of
development assistance.
 Cont…
• Humanitarian assistance has always been a
highly political activity.

• It has always influenced the political economy

of recipient countries.

• Always been influenced by the political

considerations of donor governments.
 Geopolitical Changes
• Geopolitical changes have set the stage for the
reunification of humanitarian aid and
politics.
• The end of the Cold War resulted in the
political disengagement.
• Development and humanitarian actors as the
sole representatives of the Western powers in
different countries.
 New Definitions of Security
• The changing nature of conflict has
contributed to a new definition of security.
– Under-development is considered a threat to
international security.
• Domestic practices in recipient countries are
increasingly seen as potential security threats.

It can fuel drug-trafficking, the spread of

terrorism and increased refugee flows.
 Cont…
• Terrorist attack against US on September 11,
2001 was the turning point
• Western world give attention of the to
developing countries.
• US and other western countries recognize that
the weakest states around the world deserve
special attention.
• They believe that those states are the breeding
ground for transnational security threats.
 Cont…
• Weak states as countries that lack to fulfill four set of
critical governmental responsibilities:
(i) fostering an environment conducive to sustainable
and equitable economic growth;
(ii) establishing and maintaining legitimacy,
transparent and accountable political institutions;
(iii) securing their population from violent conflict and
controlling their territory; and
(iv) meeting the basic human needs of their
populations.
 The Coherence Agenda
• The drive for coherence dominates the new
humanitarianism.
• Under a coherence agenda humanitarian action
becomes part of a comprehensive political
strategy.
• Advocates of coherence believe that those
involved in:
– aid, politics, trade, diplomacy and military activities
should work together towards common interests of
liberal peace, stability and development.
 Cont…
• Thus:
– domestic economic policy,
– human rights,
– the status of women,
– poverty and
– psychosocial well-being, are open to monitoring
by, and the involvement of, donor states.
 Is Foreign Aid a Success or a Failure?
• Many accomplishments:
 Major improvements in LDCs
 infant mortality;
 life expectancy,
 literacy,
 health services,
 school enrollment improved
Infrastructure--roads, dams, universities
Agriculture--research, famine early warning,
new crop varieties
 Cont…
• But hard to measure foreign aids’ impact on
“economic development”
 AID has multiple objectives (security more than
development!)

 Problems facing LDCs are great, $ for foreign aid is

very small

 Many years are require to see the impact of a project

 Hard to sort out "other" factors (e.g., weather,

conflicts)
 Cont…
• What are Some Major Criticisms of Foreign Aid?

– AID goes to corrupt leaders in LDCs

Aid has been and still is given for political/security

reasons

Reforms have been made to increase

accountability/reduce corruption (e.g., Millennium
Challenge Account, new WB policies to combat
corruption)
 Cont…
AID benefits rich people in LDCs, not
the poor
– But
Aid is now being redirected to:
Preserve the environment, promote
health &nutrition
Support free market economic
reforms, promote democracy
Political Development
 Cont…
• There are four important perspectives of
political development:
– stability of the country
– gradual change of political development
– political participation and mass mobilization
– nation-building; and sense of national dignity in
international affairs
 Cont…
• Equality is noted as a first characteristic for
political development.

• Political development does involve mass

participation and popular involvement in
political activities.
– Participation like in democratic
– Being become active citizens
 Cont…
• The ideal of equality has insisted that men are
politically equal.
– All citizens are equally entitled to take part in
political life to run for and hold office.

• It has insisted that individuals shall be equal

before the law.
 Cont…
• Political development deals with the capacity
of a political system.

• Political systems can have an effect on society

and economy.
 Cont…
• Capacity is associated with government and
its performance.

• Capacity means effectiveness in the scope of

public policy execution.
• Capacity is related to rationality in
administration
Political and Economic
Inequality
Institution
 Cont…
• A large and growing academic literature
argues that economic inequality has adverse
effects on economic development.
• Most important economic inequality may be
associated with political inequality.
– Collective choices reflect the wishes and interests
of a small subsection of the society.
 Cont…
• Theoretically, economic inequality to lead to
political inequality.
 Economically powerful become politically
more influential.

 Political power helps to accumulate greater

economic wealth.
 Cont…
For example, Sub-Saharan Africa

 Political inequality has been severe with rule

by long-running autocrats.

 This led to disastrous development outcomes.

 Cont….
• But development in South Korea and Taiwan
seems to have taken place precisely in the
context of under dictatorial regimes.

• Political power concentrated in the hands of a

small elite.
Political systems and performance
• It has been argued that features of democracy
such as:
– political pluralism,
– institutional checks and balances, and
– periodic renewal of policy-makers through
elections
• This protect the economic system against
abusive or predatory behaviour typical of most
authoritative regimes.
 Cont…
• Democratic process is widely viewed as more
suitable to economic prosperity.
• Its secure property and contract rights

• It provides agents with incentives to

undertake investment and maximise welfare.
 Channels of the impact of politics on
growth
• Private capital accumulation is the relevant
factor for economic growth.
• Any political interference in the markets which
biases private incentives for capital
accumulation necessarily impacts on growth.
• It reduces the incentives to accumulate capital
through the tax distortions imposed on capital
owners.
 Cont…
• A low quality of institutions, such as a lack of
property rights, reduces incentives to invest.
• One of the fundamental determents of
economic growth and growth variation across
countries.
• There is no common definition for institutions
 Cont…
• Institutions are rules of the game of the society
– They are formal rules, common laws, regulations

• They are informal like norms of behaviors and

self imposed code of conduct and the
enforcement of both.
 Cont…
• Institutions are a framework in which various
economic activities are undertaken by the
interaction of economic participants.
 Cont…
• Institutions play an important role in economic
development and growth.
• It make economic environment more
conducive.
• Enable the market to function well, as
predicted by the neoclassical economists.
 Cont…
(1) property right institutions that give an
individual incentive to invest and accumulate
in the economy;
(2) regulatory institutions that regulate market
when the market fails to do so;
(3) institutions for macro stabilization which
include fiscal and monetary institutions that
perform stabilizing function
 Cont…
(4) Institutions of social insurance that insure
society against the social risks; and
(5) Institutions of conflict management that
manage conflict.
– These include institutions such as rule of law, high
quality judiciary, representative political
institutions, free election and social insurance.
 Cont…
• Economic institutions provide individuals
incentive to:

– invest in technology,
– human and physical capital thereby affecting
economic performance of a given country
 Cont…
• Institutional economic theory predicts:-

– societies with economic institutions that facilitate

and encourage factor accumulation and
innovation should prosper relative to societies
that do not have such institutions.
 Cont…
• The institutions hypothesis suggests that those
societies that have good institutions are
prosperous today and tend to be prosperous in
the future.
• In developing countries, states do too much in
the economy thereby create unproductive rent-
seeking activities and crowding out of
productive market.
 Cont…
• Economists in general agree that institutional
quality is one of the critical factors explaining
the divergence in performance across
countries.
• Developing countries have to focus on
improving the quality of political-economic
institutions.
 Cont…
• The failure of any policy in developing
countries is the failure of the country to
address the necessary governance
requirements that would be required to
accelerate growth and achieve more rapid.
 Expectation-related effects of politics
• The impact of the political environment on the
economic performance might work via the
expectations of the market participants.
• A change of the political environment, such
as:
– a change of government or
– an ideological shift of the legislature after an
election
– Policy shift
 Cont…
• The existence of such an indirect impact of the
political environment is probably most
apparent for business expectations.

• Expectations concerning the future political

actions play an important role.
 Partisan Theory
• Different party has different ambition in order
to implement policies.

• Party preference determine party policy

 Cont…
• Rational partisan theory’s focus on electoral
uncertainty
• It focus on the importance point about policy
uncertainty.
• When the outcome of an election is known,
there may still be uncertainty about what
economic policy the victors will implement.
 Cont…
• Partisan theory suggests that different parties
systematically choose different combinations
of:
– inflation,
– unemployment, and
– growth because they represent different interests in
the electorate
 Cont…
• Politicians differ in their competence to solving
economic problems.
• Voters prefer competent politician to incompetent
politicians.
• Competence of a politician is private information
• Rational voters try to reelect a competent
government
• To vote an incompetent government out of office.
Thank You

!!!!