Glossary

1.3 Historical Trends and Current Challenges in Global Development

6 min read•july 30, 2024

Global economic development has undergone significant shifts since the Industrial Revolution. led to vast inequality between developed and developing nations, shaping today's global economic landscape. This disparity persists despite evolving development strategies.

Developing countries face numerous challenges, including , inequality, and . The impact of globalization on trade, finance, and adds complexity. International organizations play crucial roles in addressing these issues and promoting worldwide.

The Great Divergence and Global Inequality

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  • The Great Divergence refers to the period starting in the late 18th century when Western European economies began to grow much faster than the rest of the world due to
  • This led to vast global economic inequality that persists today, with a wide gap in living standards between developed and developing countries
  • Factors contributing to the Great Divergence included technological advances, colonial exploitation, and unequal terms of trade
  • The divergence accelerated in the 20th century with the rise of the United States as a global economic superpower

Evolving Development Strategies

  • The was a set of free market economic policy prescriptions promoted for crisis-wracked developing countries by Washington, D.C.-based institutions (IMF, World Bank, U.S. Treasury Department) starting in the 1980s
  • Policies included , , , and , often implemented through as conditions for financial assistance
  • was a trade and economic policy adopted by many developing nations from the 1930s to the 1960s
  • It aimed to reduce dependence on foreign imports and promote domestic industries through high tariff barriers, subsidies, and direct government investment
  • The refers to the rapid economic growth and industrialization achieved by Hong Kong, Singapore, South Korea and Taiwan (the "Four Asian Tigers") from the early 1960s to 1990s
  • Their success was driven by export-oriented policies, strategic state interventions, investments in human capital, and sound macroeconomic management

Challenges for Developing Countries

Poverty and Inequality

  • Poverty traps occur when individuals or countries lack sufficient resources to escape conditions of extreme poverty, perpetuating a cycle of underdevelopment
  • Factors contributing to poverty traps include low savings rates, poor infrastructure, weak institutions, high population growth rates, and vulnerability to shocks
  • Many developing countries also face high levels of income and wealth inequality, which can hamper poverty reduction efforts and lead to social tensions
  • remains a major challenge, with women often facing discrimination in access to education, healthcare, employment, and political representation

Structural Transformation and the Middle-Income Trap

  • The refers to the difficulty middle-income economies face in transitioning to high-income status
  • Countries can get "stuck" due to rising wages, declining cost competitiveness, slow productivity growth, and inability to keep up with technological advancements
  • is the trend of developing economies reaching peak manufacturing employment and output shares at lower levels of per capita income compared to early industrializers
  • This raises concerns about the feasibility of manufacturing-led development strategies in the face of automation and global value chain changes

Resource Management Challenges

  • The explains the paradox of many resource-rich developing countries having worse development outcomes
  • Factors include (exchange rate appreciation hurting other exports), commodity price volatility, rent-seeking, corruption, and violent conflict surrounding control of resources
  • Effective requires robust institutions, transparency, and strategies for diversification and investing resource revenues
  • Many developing countries face challenges in providing adequate access to clean water, sanitation, and reliable electricity, which are critical for human development and economic growth

Environmental Sustainability and Climate Change

  • Developing economies are highly vulnerable to impacts such as rising sea levels, extreme weather events, and agricultural disruptions
  • These impacts threaten to exacerbate poverty, food insecurity, and inequality, undoing hard-won development gains
  • Addressing climate change requires costly investments in mitigation and adaptation, putting pressure on limited budgets
  • Developing countries have contributed the least to global carbon emissions but stand to face some of the most severe consequences
  • Promoting sustainable development requires balancing economic, social and environmental objectives, which can involve complex trade-offs

Globalization's Impact on Development

International Trade and Global Value Chains

  • Trade liberalization through reduction of tariffs and non-tariff barriers has accelerated under globalization, promoted by WTO negotiations and regional trade agreements
  • While this can improve efficiency and promote growth, there are concerns about adverse impacts on infant industries, unemployment, and inequality in developing economies
  • have proliferated, with production processes spread across multiple countries
  • Developing economy firms can access new markets and technologies by participating in GVCs, but may be stuck in low value-added activities and vulnerable to trade shocks

Financial Globalization and Capital Flows

  • through capital account liberalization and cross-border financial flows can provide developing economies with much-needed investment capital
  • However, it also exposes them to risks of sudden stops, capital flight, and balance-of-payments crises, as seen in the Latin American and Asian financial crises of the 1990s
  • Developing economies can face challenges in managing volatile while maintaining monetary policy autonomy and exchange rate stability (the "impossible trinity")
  • Excessive foreign currency denominated debt can lead to financial fragility and limit policy space during downturns

Migration and Remittances

  • Globalization of labor through migration offers benefits to destination countries (filling labor shortages) and origin countries (, skill acquisition)
  • However, exploitation of migrant workers, "brain drain" of high-skilled workers from developing to developed countries, and social tensions are key issues
  • Remittances from migrant workers are an important source of foreign exchange and poverty alleviation for many developing economies (ex. Nepal, El Salvador)
  • The COVID-19 pandemic led to a sharp decline in remittances, highlighting the vulnerability of these flows to global shocks

The Globalization Trilemma

  • The (or "impossible trinity") suggests countries cannot simultaneously maintain independent monetary policies, fixed exchange rates, and open capital accounts
  • This complicates macroeconomic management for developing economies in a globalized world, as they may desire to use monetary policy to manage business cycles, maintain competitive exchange rates, and attract foreign capital
  • Many developing economies have adopted intermediate regimes such as managed floats or capital flow management measures
  • The Eurozone crisis illustrated the challenges of maintaining a common currency without fiscal integration or sufficient labor mobility

International Organizations for Development

The Bretton Woods Institutions

  • The provides financing, technical assistance and policy advice to developing countries, with the stated mission of reducing poverty
  • Its activities include development project lending (infrastructure, human capital, etc.), macroeconomic policy support, and knowledge sharing
  • The (IMF) oversees the global financial system and provides balance of payments support and technical assistance to countries
  • Its role in attaching policy conditionalities to crisis lending to developing economies (ex. structural adjustment programs) is controversial

The United Nations System

  • United Nations development agencies like the UN Development Programme (UNDP), UNICEF, and the World Food Programme deliver humanitarian aid, support provision of global public goods, and assist countries in achieving the (SDGs)
  • The SDGs are a set of 17 global goals adopted by the UN in 2015, covering poverty reduction, health, education, gender equality, clean energy, and other key development objectives
  • The UN also supports technical assistance and capacity building in areas like public administration, statistical systems, and climate change adaptation planning
  • UN agencies often work in partnership with governments, civil society, and other international organizations at the country level

The Multilateral Trading System

  • The (WTO) oversees the multilateral trading system, serving as a forum for trade negotiations and dispute settlement
  • Developing countries have sought more favorable treatment and flexibility under WTO rules through provisions
  • Issues of particular concern for developing countries in trade negotiations include agricultural subsidies, intellectual property rights, and trade in services
  • Regional and bilateral trade agreements have proliferated alongside the WTO, with varying development impacts

Regional Institutions and South-South Cooperation

  • like the African Development Bank, Asian Development Bank and Inter-American Development Bank provide project financing and technical assistance to promote development in their respective regions
  • These banks can better understand local contexts and may be seen as more responsive to borrower country priorities compared to global institutions
  • Regional economic communities (ex. ASEAN, Mercosur, ECOWAS) promote economic integration and address shared challenges, though implementation is often challenging
  • through forums like the BRICS (Brazil, Russia, India, China, South Africa) and the Belt and Road Initiative seeks to promote trade, investment, and knowledge sharing among developing countries
  • However, there are also concerns about debt sustainability, environmental impacts, and local community benefits of some South-South infrastructure financing

Key Terms to Review (38)

Bretton Woods Institutions: The Bretton Woods Institutions refer to the International Monetary Fund (IMF) and the World Bank, established in 1944 during the United Nations Bretton Woods Conference in New Hampshire. These institutions were created to promote international economic cooperation, provide financial stability, and facilitate post-World War II reconstruction and development. They play crucial roles in shaping global economic policies and addressing current challenges in global development, especially in times of financial crises and economic disparities.
Capital flows: Capital flows refer to the movement of money for the purpose of investment, trade, or business production across international borders. This flow can be in the form of foreign direct investment (FDI), portfolio investment, and other financial transactions. Understanding capital flows is crucial as they play a significant role in shaping economies, influencing development policies, and responding to global economic trends.
Climate change: Climate change refers to long-term shifts and alterations in temperature and weather patterns, primarily driven by human activities such as burning fossil fuels, deforestation, and industrial processes. This phenomenon poses significant challenges to global development by impacting agricultural productivity, food security, and overall economic stability, while also exacerbating existing inequalities and vulnerabilities in different regions.
Deregulation: Deregulation refers to the process of removing or reducing government rules and restrictions on industries and markets, allowing for more free-market operations. This shift often aims to promote competition, increase efficiency, and lower prices for consumers by minimizing state control over various sectors of the economy. However, while deregulation can encourage growth and innovation, it can also lead to challenges such as market failures and increased inequality.
Dutch Disease: Dutch Disease refers to the economic phenomenon where an increase in wealth from natural resources, such as oil or gas, leads to a decline in other sectors of the economy, particularly manufacturing and agriculture. This occurs because the resource boom causes currency appreciation, making exports more expensive and imports cheaper, ultimately harming the competitiveness of other industries. The concept highlights the paradox of resource wealth, where a country can suffer from its own resource abundance rather than thrive.
East Asian Miracle: The East Asian Miracle refers to the rapid economic growth experienced by several East Asian economies, particularly South Korea, Taiwan, Hong Kong, and Singapore, during the latter half of the 20th century. This phenomenon is characterized by impressive industrialization, significant poverty reduction, and rising living standards, providing valuable lessons about economic development strategies and the role of governance in achieving growth.
Environmental Sustainability: Environmental sustainability refers to the responsible interaction with the planet to maintain natural resources and ecosystems while ensuring that the needs of the present are met without compromising the ability of future generations to meet their own needs. It emphasizes the importance of balancing economic growth, social equity, and environmental health, creating a holistic approach to development that avoids depleting resources and harming ecosystems. This concept is crucial in addressing historical trends and current challenges faced in global development, particularly as nations strive for growth while managing environmental impacts. Additionally, lessons from rapid growth in certain regions highlight how sustainability can be integrated into economic strategies to foster long-term resilience.
Financial globalization: Financial globalization refers to the integration of financial markets and institutions across the globe, allowing capital to flow freely between countries. This phenomenon has transformed how countries access funding and manage investments, significantly impacting global economic dynamics and development. As nations interact through increased trade, investment, and financial flows, financial globalization creates both opportunities and challenges for economic growth, stability, and regulation.
Fiscal Austerity: Fiscal austerity refers to a set of policies aimed at reducing government deficits through spending cuts, tax increases, or a combination of both. These measures are often implemented during periods of economic distress, where the government seeks to restore financial stability and reduce public debt. While proponents argue that fiscal austerity can lead to long-term economic growth and confidence, critics contend that it can exacerbate economic downturns and lead to social unrest.
Gender inequality: Gender inequality refers to the unequal treatment and opportunities afforded to individuals based on their gender, often resulting in disparities in areas like education, employment, health care, and political representation. This concept highlights how systemic barriers and societal norms can hinder equitable development, impacting women's empowerment and overall progress in society.
Global inequality: Global inequality refers to the disparities in wealth, resources, and opportunities that exist between countries and regions around the world. These differences often lead to unequal access to education, healthcare, and economic opportunities, impacting the quality of life for people in various nations. This term is crucial in understanding how historical trends and current challenges in development have shaped economic disparities globally.
Global value chains: Global value chains (GVCs) refer to the interconnected production processes in which goods and services are created, traded, and consumed across international borders. This concept emphasizes how different stages of production are distributed globally, allowing firms to optimize their operations by taking advantage of varying costs, skills, and resources available in different countries. GVCs highlight the complexities and interdependencies in the global economy, as well as the role of developing countries in participating in and benefiting from these networks.
Globalization Trilemma: The globalization trilemma is a concept that posits that it is impossible for countries to simultaneously achieve high levels of economic integration, political autonomy, and social cohesion. This means that nations often have to choose two of these three goals while sacrificing the third, leading to significant trade-offs in global development. The trilemma highlights the inherent challenges faced by countries as they navigate the complexities of globalization and its impacts on economic and social structures.
Import Substitution Industrialization: Import substitution industrialization (ISI) is an economic policy aimed at reducing a country's dependence on imported goods by fostering local production and industries. This approach often involves protective tariffs and government support to stimulate the growth of domestic industries, with the goal of achieving self-sufficiency and promoting economic development in developing countries.
Income Inequality: Income inequality refers to the unequal distribution of income within a population, highlighting the gap between those with high incomes and those with low incomes. This disparity can influence economic stability, social cohesion, and overall development in a society, affecting access to resources and opportunities.
Industrialization: Industrialization is the process by which an economy transforms from primarily agricultural to one based on the manufacturing of goods. This shift typically involves technological advancements, changes in labor markets, and urbanization, leading to increased productivity and economic growth.
International Monetary Fund: The International Monetary Fund (IMF) is an international financial institution that aims to promote global economic stability and growth by providing monetary cooperation and financial assistance to its member countries. It plays a critical role in stabilizing economies, especially in times of crisis, through lending programs and policy advice while monitoring exchange rates and international payments.
International Trade: International trade refers to the exchange of goods and services across international borders, allowing countries to access resources and markets beyond their own. This process plays a crucial role in economic development by fostering global interdependence, enhancing competition, and promoting innovation. As nations engage in international trade, they can specialize in the production of certain goods, leading to increased efficiency and economic growth.
Middle-income trap: The middle-income trap refers to a situation where countries that have achieved a certain level of economic development struggle to transition from middle-income status to high-income status. This phenomenon occurs when these countries face challenges such as declining growth rates, insufficient innovation, and inadequate investments in human capital, preventing them from moving forward in their economic journey.
Migration: Migration is the movement of people from one place to another, often across national borders, driven by factors such as economic opportunity, conflict, environmental changes, or social networks. This process has historical significance as it shapes demographic patterns and influences cultural exchanges, while also presenting current challenges related to integration, labor markets, and policy frameworks.
Natural Resource Management: Natural resource management refers to the sustainable and responsible utilization of natural resources, such as water, land, minerals, and forests, to meet current needs without compromising future generations. It involves balancing economic development with environmental protection and social equity, ensuring that resources are used efficiently while maintaining ecosystem health. This practice is crucial in addressing historical trends of over-exploitation and current challenges like climate change and biodiversity loss.
Poverty Traps: Poverty traps are self-reinforcing mechanisms that cause individuals, households, or communities to remain in a state of poverty over time. These traps often occur due to a combination of low income, lack of access to education and healthcare, and insufficient financial resources, creating barriers that make it difficult for people to escape poverty. Understanding these traps is crucial in recognizing the historical trends and ongoing challenges faced in global development efforts.
Premature deindustrialization: Premature deindustrialization refers to the phenomenon where countries experience a decline in manufacturing and industrial activities at an earlier stage of economic development than historically observed. This trend has significant implications for global development, as it can lead to slower economic growth, increased unemployment in industrial sectors, and greater dependence on services and informal economies.
Privatization: Privatization is the process of transferring ownership of a public service or property to private individuals or organizations. This shift often aims to increase efficiency, reduce government expenditures, and promote competition in the market. As governments face historical trends of economic challenges and seek solutions, privatization emerges as a significant strategy in global development, particularly in the context of structural adjustments in various regions.
Regional Development Banks: Regional Development Banks (RDBs) are financial institutions that provide funding and support for economic development projects within specific geographical regions. They play a critical role in addressing regional disparities in development, promoting sustainable economic growth, and fostering regional cooperation among member countries. RDBs often focus on sectors such as infrastructure, agriculture, and social development to improve the living standards of the populations in their respective areas.
Remittances: Remittances refer to the money that migrant workers send back to their home countries, typically to support family members and communities. These financial transfers play a vital role in the economies of developing nations, influencing poverty reduction, consumption patterns, and overall economic stability. The impact of remittances extends beyond individual households, contributing to national economic growth and development, as well as shaping migration trends and global interconnectedness.
Resource curse: The resource curse refers to the paradox where countries with abundant natural resources, such as oil, minerals, or gas, often experience less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources. This phenomenon highlights the challenges that arise when resource wealth leads to mismanagement, corruption, and an over-reliance on a single sector instead of fostering a diverse economy.
South-south cooperation: South-south cooperation refers to the collaboration between developing countries in the Global South to share knowledge, skills, and resources in order to achieve sustainable development and address common challenges. This type of cooperation emphasizes mutual benefit, solidarity, and the importance of local solutions tailored to specific contexts, contrasting with traditional North-South relationships that often involve aid from developed nations to developing ones.
Special and Differential Treatment: Special and differential treatment refers to a principle in international trade agreements that grants developing countries certain privileges and exemptions from standard obligations, recognizing their unique economic challenges. This approach aims to promote equitable trade practices and support economic growth in less developed nations, while balancing the interests of more developed countries. It plays a significant role in shaping global development strategies and trade policies.
Structural Adjustment Programs: Structural Adjustment Programs (SAPs) are economic policies implemented by countries, often under the guidance of international financial institutions, aimed at stabilizing and restructuring an economy to promote growth and development. These programs typically involve a mix of austerity measures, economic liberalization, and institutional reforms, often in response to external debt crises and economic challenges.
Sustainable development: Sustainable development is a holistic approach to economic growth that seeks to balance the needs of the present without compromising the ability of future generations to meet their own needs. It integrates economic, social, and environmental considerations to promote long-term prosperity and environmental stewardship.
Sustainable Development Goals: The Sustainable Development Goals (SDGs) are a universal call to action established by the United Nations in 2015, aiming to end poverty, protect the planet, and ensure prosperity for all by 2030. They consist of 17 interconnected goals that address global challenges, promoting inclusive and sustainable economic growth, social inclusion, and environmental protection.
The Great Divergence: The Great Divergence refers to the period starting in the late 18th century when Western Europe and parts of North America experienced rapid economic growth and technological advancement, leading to a significant gap between these regions and other parts of the world, particularly Asia. This divergence is crucial to understanding the historical trends in global development, highlighting how different regions developed at vastly different rates and the implications this has for contemporary economic inequalities.
Trade liberalization: Trade liberalization refers to the removal or reduction of trade barriers, such as tariffs and quotas, to facilitate increased international trade. This process aims to promote free trade by allowing goods and services to flow more freely across borders, thus enhancing economic growth and development.
United Nations Development Programme: The United Nations Development Programme (UNDP) is a global development network that aims to eradicate poverty and reduce inequalities through sustainable development initiatives. It connects countries to knowledge, experience, and resources to help people build a better life. The UNDP plays a critical role in addressing historical trends and current challenges in global development by promoting inclusive growth, good governance, and environmental sustainability.
Washington Consensus: The Washington Consensus refers to a set of ten economic policy prescriptions aimed at promoting economic growth in developing countries, emphasizing free-market principles, fiscal discipline, and liberalization. These guidelines emerged in the late 20th century, primarily promoted by institutions like the International Monetary Fund and the World Bank as solutions to economic crises, particularly in Latin America. This term highlights the tension between government intervention and market forces in shaping economic development and reflects historical shifts in global development strategies.
World Bank Group: The World Bank Group is a family of five international organizations that provide financial and technical assistance to developing countries with the goal of reducing poverty and promoting sustainable development. This group plays a vital role in global development by offering loans, grants, and expert advice to help countries implement projects that can improve infrastructure, education, health, and economic policies.
World Trade Organization: The World Trade Organization (WTO) is an international organization that regulates and facilitates trade between nations, aiming to ensure that trade flows as smoothly, predictably, and freely as possible. Established in 1995, the WTO plays a crucial role in shaping global trade policies, resolving trade disputes, and promoting economic growth through open markets. Its activities significantly impact historical trends in global development, the integration of developing countries into global value chains, the effects of economic globalization, and the relationship between trade policy and economic growth.
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