1.3 Historical Trends and Current Challenges in Global Development

Global economic development has undergone significant shifts since the Industrial Revolution. The Great Divergence 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 poverty traps, inequality, and environmental sustainability. The impact of globalization on trade, finance, and migration adds complexity. International organizations play crucial roles in addressing these issues and promoting sustainable development worldwide.

Global Economic Development Trends

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 industrialization
• 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 Washington Consensus 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 trade liberalization, privatization, deregulation, and fiscal austerity, often implemented through structural adjustment programs as conditions for financial assistance
• Import substitution industrialization 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 East Asian miracle 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
• Gender inequality 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 middle-income trap 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
• Premature deindustrialization 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 resource curse explains the paradox of many resource-rich developing countries having worse development outcomes
• Factors include Dutch disease (exchange rate appreciation hurting other exports), commodity price volatility, rent-seeking, corruption, and violent conflict surrounding control of resources
• Effective natural resource management 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 climate change 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
• Global value chains 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

• Financial globalization 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 capital flows 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 (remittances, 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 globalization trilemma (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 World Bank Group 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 International Monetary Fund (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 Sustainable Development Goals (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 World Trade Organization (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 special and differential treatment 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

• Regional development banks 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
• South-South cooperation 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