1. ECONOMIC DEVELOPMENT VERSUS
DEPENDENCY
Neoliberal Policy Brief
Coauthored by:
Laura Aguilera and Vanessa Avila

2. 1
Executive Summary
“Give a man a fish and you feed him for a day; teach a man how to
fish and you feed him for a lifetime.” But what if said man could
not afford a fishing pole? What if an intermediary buys his fish for
a small sum and keeps all the profit because the man cannot
determine the market price? Do you continue providing the man
with a fish every time he is hungry? Many who fear that the US is
simply giving developing countries abroad the proverbial ‘fish’
minus the ‘fishing lesson’ are criticizing economic development.
Economic development has shifted to economic dependence in
many developing nations. This policy brief will outline the role of:
neoliberalism, investment, trade, aid, fiscal austerity, and the
importance of human capital. The brief will conclude with policy
recommendations geared towards reforming economic development
and reducing dependency.
Statement of the Problem
There are a multitude of problems with the existent paradigm of
economic development. In short, economic development is not
effective in its current state, resulting in dependency. Economic
development is defined as being the sustained increase in the
economic standard of living of a country's population.i Aid
bureaucracies like the IMF and World Bank aim to encourage
economic growth in developing countries, however their initiatives
have not been successful. Achievement stories like South Korea and
Taiwan are being projected as examples of the benefits of economic
development, yet these countries may just be exceptions to the rule.
More than 2.3 trillion dollars has been poured into Africa and other
r e g i o n s ii. T h e m a j o r i t y o f c o u n t r i e s t h a t h a v e h a d t h e m o s t
financially assistance are in fact no better off, or even worse off,
from when they first started. The existent development model is not
sustainable for growth and it is time to take a critical look at what
measures we need to take for reformation. As policy makers it is
vital to implement purposeful fiscal efforts that do not result in
dependency.
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Development versus Dependency
In order to analyze the efficacy of economic growth we must peel
back each layer that has played a role in the struggle between
development versus dependency:
A. NEOLIBERALISM
B. INVESTMENT
C. TRADE
D. AID
E. FISCAL AUSTERITY
F. HUMAN CAPITAL
A. NEOLIBERALISM
"Remember, aid cannot achieve the end of poverty. Only homegrown
development base on the dynamism of individuals and firms in free
markets can do that."-William Easterly
The free world economy is thought to be a beneficial factor in
economic development according to the neoliberal economic
i d e o l o g y iii. E c o n o m i c c o n n e c t i o n s b e t w e e n a d v a n c e d e c o n o m i e s w i t h
less developed economies are thought to be helping the developing
societies through elements of trade, international aid, and foreign
direct investment. In some cases economies that are from countries
that are less developed attain the export markets, capital, and
technology required for economic growth. The problem is that the
ideology regarding trade, capital, and free movement assumes that a
market exists. For many developing countries, like those in Africa,
this prescription may be unfeasible due to lack of capacity. For
neoliberal economists, economic development requires the removal
of political and social obstacles to the functioning and effectiveness
o f a m a r k e t s y s t e m iv. I n t h e 1 9 8 0 s a n d 1 9 9 0 s t h e W o r l d B a n k a n d t h e
International Monetary Fund prescribed a neoliberal agenda for
Africa’s economic development, which resulted in devastating
results. The IMF and World Bank provide financial assistance, yet
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they also apply a neoliberal economic agenda as a precondition to
receiving the financial assistance. They prescribe cutbacks on social
spending, liberalization of the economy, and resource extraction that
is export-oriented to open markets as part of their structural
adjustment. The role of the state is minimized and privatization is
encouraged with reduced protection of domestic industries. Other
neoliberal adjustment policies also include currency devaluation,
increased interest rates, flexibility of the labor market, and the
elimination of subsidies. To be attractive to foreign investors
various regulations and standards are reduced or removed, also
known as ‘the race to the bottom’. This neoliberal agenda has not
been successful in reformation of these developing economies and
therefore has resulted in increased dependency.
B. INVESTMENT
As early as 1989 the World Bank endorsed the view that financing
was vital to economic growth "by improving the productivity of
i n v e s t m e n t " v. T h e i n v e s t m e n t m e t h o d w a s s i m p l e : s a v i n g s l e a d s t o
investment, investment leads to growth, and growth in the end would
lead to reduction in poverty. The Marshall Plan was built on this
premise and is a successful example of programs that were short and
limited. Critics would argue that the ‘100 billion dollars over five
years’ is different than the current investment system we see in
Africa. The economic development strategies are no longer short and
limited, they are instead long and consistent, resulting in
dependency. Many African governments see investment as just
another source of income. Investment made sense when African
nations were coming out of colonialism because they did not have
the money to capitalize and grow. Investment ideally was intended
to increase growth and reduce poverty so that developing economies
can be independently sustainable.
Conversely, Sachs would argue that investment is vital in capital
accumulation and economic growth. Economist Sachs notes that “the
public sector should be focused on five kind of investments: human
capital, infrastructure, natural capital, public institutional capital,
a n d p a r t s o f k n o w l e d g e c a p i t a l ” . vi T h e s e i n v e s t m e n t s p a i r e d w i t h
private capital lead to financial growth. This model, however, is not
feasible for developing countries who’s IMF conditionalities require
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them to cut spending in private and public investments due to
Structural Adjustment Policies (SAPs) that have been imposed to
ensure debt repayment. SAPs have required developing countries to
reduce spending on things like health, education and development,
while debt repayment and other economic policies have been made
the priority. In effect, the IMF and World Bank have demanded that
poor nations lower the standard of living of their people. Some may
argue that this is a poverty trap in which the developing countries
cannot invest to build capital and therefore will remain in debt as a
result of their loan conditionalities. To escape the paradoxical trap
there must be investment across the board on all elements of private
and public investment. Examples of this can be seen with the “Green
Revolution” in Asia and global efforts like the eradication of
s m a l l p o x a n d p o l i o vii.
Figure:1 Private and Public Investment in Capital
Infrastructure
Business
Capital
Natural Human
Human Capital Capital
Capital
Knowledge
Capital Knowlege
Capital
Household Income Public Budget
C. TRADE
Developing nations are at a disadvantage in their market interactions
with industrialized developed nations. Developing nations' economic
trade consists of exports and imports from developed nations. The
problem with this dynamic is that only a small proportion of the
economic activity of the developed nations consists of trade with the
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developing nations because a developed nation's trade consists
mostly of internal trade and trade with other developed nations we
have seen this with the implementation of regional trade agreements
(RTAs). If developing countries like those in Africa wanted to trade
with one another it is nearly impossible due to high tariffs. Trade
between African countries is in the double digits, sometimes almost
3 0 % viii. T h i s a s y m m e t r i c r e l a t i o n s h i p p u t s a d e v e l o p i n g n a t i o n i n a
weak trading position face to face with a developed nation. Many
developing countries are rich in natural resources but many
neoliberal practices prevent developing countries from competing in
the global market through the imposition of tariffs.
D. AID
Developing countries currently find themselves struggling to
overcome their poor economic situations. The fact is that neoliberal
theories will not bring prosperity to poor countries. On the contrary,
Neoliberal guidelines make developing countries more dependent on
the rich countries because it does not allow development growth. For
example, a short-term fix is foreign aid. When wealthy countries
give food aid to starving communities, they create a long-term
dependency. The problem is that communities receiving aid then
expect the food donations to continue. Furthermore, local farmers
are struggling to grow and sell their crops and have a higher chance
of discontinuing their crops and eventually falling into the group
receiving food donations, also known as dependency. Aid becomes a
form of income to the country and its citizens, when aid should be
used to create employment opportunities that will be long-term
s o l u t i o n s ix. T h e a b s e n c e o f d e v e l o p m e n t s i m p l y m e a n s m o r e a i d .
More aid without strategic implementation will lead to more loans
that will be added to the debt. Therefore, aid introduces poor
countries to a cycle of dependency. The lack of developmental
growth leads to more aid. More aid leads to more debt.
The IMF’s goal is to “foster global growth and economic stability. It
provides policy advice and financing to members in economic
difficulties and also works with developing nations to help them
a c h i e v e m a c r o e c o n o m i c s t a b i l i t y a n d r e d u c e p o v e r t y . ” x. P r o v i d i n g
international aid for development to developing countries is a main
goal of the IMF. Nonetheless, such international organizations such
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as the IMF will not bring prosperity to developing countries because
the powerful countries influence international politics for their own
national interests. Furthermore, the IMF easily loans money to
developing countries. However, these loans come with SAPs that
make the borrowers more dependent on the lenders. For example, the
high interest rates on these loans make it difficult for countries to
repay.
Unfortunately, many times the aid given to developing countries has
fallen in the hands of corrupt governments. Take Africa for example.
Africa has consistently received aid. Yet countries in the African
continent have shown no major progress. On the contrary, Africa’s
GDP decreased despite the trillion dollars in aid. African countries
did financially better during the time of their independence from
c o l o n i a l p o w e r s xi. D o n o r s n e e d t o b e s t r i c t w h e n p r o v i d i n g a i d .
According to Sachs, a country that has fallen into an economic
crisis, almost always needs some external assistance. One example is
t h e f o r g i v e n e s s o f a c o u n t r y ’ s d e b t xii.
E. FISCAL AUSTERITY
Countries that cannot honor their debt obligations practice fiscal
austerity. Many times we see this dynamic with developing countries
that have borrowed money from intergovernmental institutions like
the IMF who will demand austerity measures. IMF conditionality’s
are problematic because they make countries cut their social
spending on educational, welfare, and development projects. Some
types of fiscal austerity not only fail to bring growth, but they may
n o t e v e n b r i n g a d j u s t m e n t i n t h e l o n g r u n xiii. T h e s e a u s t e r i t y
measures have a negative impact on the country’s standard of living.
In 2009 and 2010, workers and students in Greece and other
European countries protested against cuts to pensions, public
services and education spending as a result of government austerity
m e a s u r e s xiv. O p p o n e n t s a r g u e t h a t a u s t e r i t y m e a s u r e s t e n d t o d a m p e n
economic growth, which ultimately causes governments to lose more
money in tax revenues. In countries that had weak economic growth
to begin with, austerity can cause deflation, which inflates existing
debt. Another hazardous result would be a liquidity trap, causing
credit markets to freeze up and unemployment to increase.
Challengers of austerity measures outline the cases in Ireland and
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Spain in which austerity measures instituted in response to financial
crises in 2009 proved ineffective in combating public debt, and
p l a c i n g t h o s e c o u n t r i e s a t r i s k o f d e f a u l t i n g i n l a t e 2 0 1 0 xv.
F. HUMAN CAPITAL
The World Bank defines Economic Development as: “Qualitative
change and restructuring in a country's economy in connection with
technological and social progress. The main indicator of economic
development is increasing GNP per capita, reflecting an increase in
the economic productivity and average material wellbeing of a
c o u n t r y ' s p o p u l a t i o n . ” xvi I n t h e o r y e c o n o m i c d e v e l o p m e n t c o n s i s t s o f
social progress and results in the wellbeing of a country’s
population, however in practice how important is human capital to
agrarian and industrialized societies?
Human capital is compromised when developing countries are
adhering to structural adjustment policies. Spending that is centered
around the well being of human capital like: health, education, and
development are suppressed. The ideology behind the tightening of
costs of human capital is done on the premise that once GNP/GDP
increases there will be an automatic increase human capital.
Needless to say, this premise is not what we are seeing in
industrialized and agrarian societies. Human capital is not at the
forefront of their economic developmental measures. This is
problematic due to the hindrance of growth.
Recommendations
There is no ‘one size fits all’ policy approach to the following
recommendations. The subsequent proposals should be tailored on a
case-by-case basis. In application of these policy measures one must
use “clinical economics” and take into consideration corruption,
gender inequality, diseases, and geographic barriers.
Easterly notes that development is not about solutions, it is about
p r o b l e m s o l v i n g s y s t e m s . xvii T h e m a i n ‘ p r o b l e m s o l v i n g s y s t e m ’ t h a t
should be implemented is for funds granted in aid to phase out over
time. The amount of time is dependent on the conditions and
feasibility of each individual country. Giving money to countries
without a date of finalization is problematic. The funding should be
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explicitly and transparently given with the premise of finality.
There should be exit strategies implemented to foreign aid in order
to systematically work the countries out of reliance. Rwanda is a
great example of this policy recommendation, they refuse to rely on
aid because they know it is not economically sustainable. Rwanda
was ranked by the World Bank the most improved in 2010. Due to
kleptocracy donor countries should also enforce rules and make sure
their aid money is being strategically spent with goals attached and
a s k f o r p r o g r e s s r e p o r t s xviii . T h i s i s k e y i n i n c o r p o r a t i n g a s e n s e o f
accountability to the recipients. The cutting of the provorbial
umbilical cord between donors and recievers is key in eliminating
dependency. Implementing a time frame in which the reciever is
cognizant of termination of aid, will allow the country to explore
other avenues of economic growth.
The next recommendation calls for the modification of structural
adjustment policies (SAPs) imposed by international lending
institutions. These SAPs are inefficient and have been criticized for
creating a cyclical dynamic of poverty. As outlined in this brief,
investment is vital for growth and investment is repressed by
lending institutions who want to tighten social spending and relief
debt. The SAPs are currently designed to adhere to a short-term
dynamic with a ‘one size fits all’ approach. The SAPs need a
strategic reformation in which investment in the countries’ public
sector is adhered to. Investment should be recognized as a form of
debt relief for lending institutions. In order for countries to pay off
their debt they need strategic ways to obtain capital and through
investment these countries can grow.
In essence, the current neoliberal structure is paradoxically creating
a poverty trap for developing nations. After years of following
neoliberal policies, the world has seen no improvements among
developing nations. The rich kept getting richer and the poor,
poorer. The benefits of neoliberal policies are questionable; many
developing countries are worse off from when they started economic
developmental measures. It is time that policy makers,
intergovernmental lending institutions, and governments modify the
way they are doing business.
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ihttp://www-personal.umich.edu/~alandear/glossary/e.html -
EconomicDevelopment
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ii
ii E a s t e r t o
Efforts ly, AWd l t i a mR e2 0 0H . v e h eo n eh s t e M uacn ' sI lB u rn d n :o W hty lteh G o o d s,t 'T h e
i i lhe . st 6a “T D W i o M h l a de s Li t e We' s
Efforts to Aid the Rest Have Done so Much Ill and so Little Good', The
Penguin Press, New York.
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vi
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Sachs, Jeffrey D. 2005. The end of poverty. New York: Penguin
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Dambisa Moyo. 2009. Dead aid: Why aid is not working and how
viii
there is another way for Africa.
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x http://www.imf.org/external/about/overview.htm
Dowden, Richard. 2005. Aid ‘is no solution’ for Africa. BBC News.
xi
http://news.bbc.co.uk/2/hi/programmes/if/4105140.stm
xiiSachs, Jeffrey D. 2005. The end of poverty. New York: Penguin
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xiii
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xiv
http://www.nytimes.com/interactive/2010/09/23/business/global/201009
23-europenow.html?ref=global#/0
xvhttp://www.bloomberg.com/news/2010-11-11/stiglitz-says-ireland-has-
bleak-prospect-of-cutting-deficit-saving-banks.html
xvi
http://www.worldbank.org/depweb/english/beyond/global/glossary.html
xvii http://aidwatchers.com/2010/07/the-answer-is-42/
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Stiglitz, Joseph E. "The end of the beginning: Debt relief alone
xviii
won't relieve third-world poverty." The Guardian, 12 Jul 2005
www.guardian.co.uk/world/2005/jul/.../debtrelief.development
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