An Appraisal of Third World Development Strategies

An Appraisal
of
Third World Development Strategies



BY



Wisdom Iyekekpolo
PG/SSC9503248




A Seminar Paper presented in the Department of Political Science and Public Administration, University of Benin, Benin City, Nigeria

in partial fulfillment of the requirement for POL 866 (International Political Economy)



Lecturer- Dr. O. J. Offiong




October, 2011

ABSTRACT

The governments of the Less Developed Countries of the world have employed various strategies in attempts at developing or growing their economies. The level of success is far less than the efforts put in. the achievements of the Organization of Petroleum Exporting Countries (OPEC) in the 1970s sparked of advocacies for the Commodity Cartel strategy as a means of achieving the much needed economic development. This paper reviews these strategies with a special focus on OPEC and its challenges and successes. A conclusions is also reached about it suitability as a developmental strategy for the Less Developed Countries and recommendations on the suitability of the Newly Industrialized Countries model of Export-Led Industrialization.













INTRODUTION

The strategy for Economic Development remains crucial to the governments of the Less Developed Countries (LDCs) of the world and controversial amongst scholars of International Political Economy. Since the end of the Second World War in 1945 the LDCs have experimented with different developmental strategies in a combined attempt at reducing the poverty that has gripped their various countries. Joan Spero has categorized these strategies into three. These includes
1. attempts at excluding themselves from some aspects of the International Economic Order,
2. attempts at creating a New International Economic Order and
3. designing policies beneficial to them in their integration into the prevailing International Economic Order (Spero, 1997:151). Robert Gilpin in his work “The political Economy of International Relation” (1987:290) discussed four different Economic Development strategies advocated by the LDCs. These are the Autonomous or Self-Reliant Development, Economic Regionalism, the formation of Commodity Cartels and the demand for a New International Economic Order.
This essay will attempt a review of the various strategies of economic development tried out in the LDCs and then attempt a critique of the formation of Commodity Cartels as a means of achieving the New International Economic Order envisaged by the LDCs in the 1970s with a review of the Organization of Petroleum Exporting Countries (OPEC). In summarizing this essay, conclusions will be reached on the appropriateness of the Cartelization strategy as a means of LDCs Economic Development and then recommendations will be made using the strategy that has worked for the Newly Industrialized Countries of Asia focusing on China.

CONCEPTUAL CLARIFICATION

This essay has some key concepts that will be very consistent through out its analysis. These concepts need to be defined as used in this paper in order to avoid ambiguity. They are defined below.

Commodity Cartel: the conceptualization of commodity cartel as used in this essay will align with the definition put forward by the dictionary of Business Terms (2007) it puts that a Commodity Cartel is an “organization, usually of producing countries that tries to control the price and quantity supplied of a particular commodity (usually a raw material) Examples are OPEC (petroleum) and the international Coffee organization”.

New International Economic Order (NIEO): This is a set of proposals outlined by the LDCs in the 1970s to help in their economic development. It entailed the repositioning of the world economy to become more beneficial to the LDCs in relation to the DCs. These proposals were set forth at the United Nation Conference on trade and development (UNCTAD) to improve terms of trade, increase development assistance, reduce DCs tariff etc. in their relationship with the LDCs. (www.en.wikipedia.org retrieved 11-Oct-2011).

LDCs ECONOMIC DEVELOPMENT STRATEGIES

In their economic development bid, the LDCs have advocated and adopted various strategies. These strategies will be briefly explained under four categories.

1. Autonomous or Self-Reliant Development: This was based on an attempt by LDCs to exempt themselves from some parts of the present economic system. It is base on a strategy of self reliance. There has been mainly two strategies advocated towards LDCs self reliance. These are the Import-Substitution Industrialization (ISI) and the Domestic Social Transformation.
The Import-substitution Industrialization (ISI) involves an attempt at reducing importation by LDCs through local production of the previously imported products. This local production could be through national or foreign investment, for domestic or/and foreign consumption (www.en.wikipedia.org retrieved 11-Oct-2011). The ISI approach “substitutes externally produced goods and services, especially basic necessities such as energy, food and water with locally produced ones” (Basu 2005). The local producers or industries were protected from international competition by high tariff wall etc. The ISI strategy has been used by Latin American Countries like Brazil where it initially led to rapid industrialization but by the mid-1980s it had become obvious that a strategy of industrialization based on Import-Substitution was inadequate so that some of LDCs that had chosen it especially in Asia began to move towards Export-Led Industrialization strategy e.g. Taiwan and South Korea (Strange, 1985:252).
The alternative route of autonomous development advocated is via a domestic social transformation. It was chosen at different times by LDCs like Cuba, Tanzania and China. Self-styled socialist and communist countries, they wanted to minimize their involvement in what they regarded as hostile imperialist and capitalist world economy and to gain domestic social justice (Rydenfelt, 1985). The social transformation strategy has hardly resulted in any economic development in Cuba since its adoption.
The challenges inhibiting the LDCs from anticipated success adopting the Autonomous strategy includes: the smallness of their national markets, the quality of their manufactured product are below international standard resulting in low acceptability internationally and low foreign exchange etc. Gilpin, appraising the performance and the future of Autonomous strategy to economic development writes in the mid-1980s that,
“It is clear that the strategy of autonomous development advocated by the more extreme of the dependency theorists holds little promise for the less developed economies. If China, with its advantages of a strong state, abundant resources and a relatively large internal market for a LDC, could not be self-reliant, what hope is there for Tanzania?” (Gilpin, 1987:294)

2. Economic Regionalism: As a result of the challenges inherent in the Import-Substitution strategy, attempts were made to adopt a Regional approach to the economic development of the LDCs. Regional monopolies were encouraged in some industrial sectors, the creation of regional division of labour based on specialization and the formulation of guidelines for the relationship management between LDCs and Multi-National Corporation (MNCs).
Economic Regionalism was basically of three forms. Firstly was the formation of regional economic groups to enhance trade amongst the regional countries e.g. Economic Community of West African State (ECOWAS), East African Community (EAC) etc. The second form was the creation of special trading relations between Developed Countries (DCs) and particular groupings of LDCs e.g. the Lome Conventions between the European Economic Community and certain LDCs, President Reagan’s Caribbean Basin Initiative etc. The third form of regional economic grouping was the forging of trade links amongst the LDCs excluding the DCs. This is sometimes referred to as the South-South trade or cooperation. However a number of factors have hindered the economic development envisaged from Economic Regionalization strategy. These include regional conflicts and economic rivalries, intraregional competition for foreign investment and the ‘nationalistic tendencies’ as countries advanced their own interest at the expense of the Regional economy.

3. The Formation of Commodity Cartel: The Industrially developed countries of the North with their Capital technology and Military power have been primarily dependant on the raw materials from the LDCs of the South. The trade of these primary commodities between the South and the North has been very challenging. In resolving these challenges several agreements had been reached at various times on specific commodity or across board. For example, the 1954 International Sugar Agreement, the International Wheat Agreement and International Tin Agreement both held in 1956, the 1958 UN Conference on Lead and Zinc the International Agreement on Olive oil (Williams, 1981:102-4). The challenges in the Crude oil trade resulted in the formation of an Oil-Exporting Cartel called the Organization of Petroleum Exporting Countries (OPEC) in 1960.
“The success of the producers in the 1970s led to a revolution in the thinking of southern raw material producers. Suddenly it seemed that producer cartels could bring the end of dependence. Producer organizations in Copper, Bauxite, Iron ore, Bananas, and Coffee were either formed or took on new life after October 1973. In a variety of United Nations resolutions. The Third World supported the right of Southern exports to form producer associations…” (Spero, 1997:301)
This essay will review this in more details later.

4. The Demand For A New International Economic Order (NIEO): The inherent challenges of Autonomous Development and Economic Regionalization and the subsequent perceived achievements of the oil cartel-OPEC led to the clamour by the LDCs led by the OPEC members for a New International Economic Order. At the Sixth Special Session of the United Nations General Assembly in 1974, a Declaration and Action Programme on the Establishment of a New International Economic Order was made. Robert Gilpin captured the most important demands of the LDCs as.
(a) They should be able to control their natural resource or raw material
(b) Increased control over MNCs by LDCs
(c) Increased inflow of foreign aid and reduction in the cost of Western technology
(d) Alleviation of the crapping LDC debts.
(e) Increased influence in the Bretton Wood organization etc (Gilpin, 1987:299).
Further analysis will be captured later on this work.

RATIONALES FOR FORMING A COMMODITY CARTEL: THE CASE OF OPEC

The formation of OPEC was a process of reaction to the Arab countries increasing discontentment with low price of oil. The Iraqi government in 1960 invited Saudi Arabia, Kuwait Qatar and Venezuela to an oil producers’ conference in Baghdad to discuss the effect of the Multi-National Corporations unilateral oil price cut. At the conference it was resolved that all necessary measure should be taken to raise oil prices and limit production in a manner that will guarantee oil producing countries a stable and regular income (Williams 1981:81).
Commodity cartel are formed by producing countries are formed to enhance their economic benefit in the international trade of the commodity in question. There may be fluctuations in price and these fluctuations limit economic planning and therefore hinder sustainable economic development/growth. This effect is more evident in countries with mono-culture economies. Again the prices of these primary commodities may be very low in the international market when compared with the finish products from it. The low prices could also be a function of MNCs manipulations. So Commodity Cartels are formed to protect the interest of its members; check fluctuations in prices; check the activities of the MNCs when applicable, coordination and unification of a commodity policy across member countries and to enhance the economic development of the producing countries.
In the case of OPEC, the statute spells these rationale or missions out in Article 2(a) (b) & (c), it writes thus
(a) “The principal aim of the organization shall be the coordination and unification of the petroleum policies of member countries and the determination of the best means for safe guarding their interests, individually and collectively
(b) The organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.
(c) Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient economic and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry” (OPEC Statute 2008)

CARTELIZATION AS A STRATEGY FOR NEGOTIATING A NEW INTERNATIONAL ECONOMIC ORDER

The potentiality of OPEC became evident in 1971 when the call by OPEC for higher posted prices of crude oil led to a mammoth increase in oil payments to producers and a rise in the price of oil to the consumers (Williams, 1981:84). OPEC further issued a policy statement in 1973 seeking higher prices and the resources was to be used as the primary instrument in accelerating their economic development (Williams, 1981:86). “An increase of 70 percent was announced on 16 October. However the real shock to the DCs came on 23 December 1973 when the Shah of Iran announced that the six main oil producing nations in the Gulf intended to more than double the price of exported oil from January 1974, from about $5.10 to $11.65 a barrel” (Williams, 1981:86). Further price increases were done in 1976 and 1978.
The World Development Report (1983) captures that, the World crude oil prices rose from less than $5 to above $30 between 1973 and 1983. Exporting countries with large population like Nigeria and Indonesia, suddenly had the capital resources to finance development at a greatly expanded pace while exporters like Saudi Arabia, Kuwait and United Arab Emirates with relatively low populations not only could afford rags-to-riches luxuries at home, but also accumulated reserves with which they could influence even the great powers. Walters Jones (1985:217) writes that
“Saudi Arabia increased its international currency reserves 5,000 percent between 1970 and 1981 (and Kuwait and the United Arab Emirates had increased of 2,400 and 3,500 percent, respectively)…
Meanwhile, the annual trade balances of the principal industrial oil consumers went into deeper deficit. In the United State for example, oil imports alone added $10 billion to the trade deficit of 1979 and $14 billion more in 1980”.
At this point the LDCs sought to capitalize on this new found OPEC influence to negotiate a New International Economic Order to their benefit.
Prior to the early 1970s, attempts at evolving the LDCs as a political force has been largely unsuccessful owing to their differences and unrewarding negotiations for better positioning in the existing international economic order.
“Despite major declarations of solidarity at Bandung (Indonesia) in 1955, and Cairo (Egypt) in 1962, and the first three meetings of the United Nations Conference on Trade and Development (UNCTAD) in 1964, 1968 and 1972” (Jones 1985:174).
It was only at the Algiers (Algeria) Fourth Summit of the Non-aligned countries that showed great prospect for a concerted effort towards the achievement of the UNCTAD economic agenda. The summit also called for UN 6th Special Session on Development and Cooperation and the framework for the NIEO was outlined. Also, it called for LDCs meeting to decide strategy concerning primary products. Later that year, the oil embargo proved how politically influential OPEC could be. Jones (1985:174) writes that
“with the resulting control of world oil prices by the of OPEC, and more particularly by its Arab members, the Third World was able to force its economic agenda upon the UN in the form of the Sixth Special Session of the General Assembly, Which formally launched the NIEO”.
It is evident that the wish to effect a change to an international economic system that was perceived to be more favourable to the DCs by the LDCs was strengthened by the 1973 oil crisis. Philippe Braillard and Mohammed-Reza Djalili (1984:166) argues that the LDCs saw the event of the oil crisis and the resulting economic crisis of the DCs as a
“Proof that a united group of producers had the capacity to impose profound changes on the structure of the world market, by way of the fundamental demand of the Third World. A spectacular readjustment in the terms of trade was thus obtained by the oil producing countries”.
In the same vein, Spero (1997:276) has argued that the most successful effort of Southern countries to alter their dependent relationship with the North was the common action of OPEC in seizing control over the world’s oil markets by acting together in a producer cartel, the southern oil-exporting states were able to increase not only their economic rewards but also their political power”.

REPLICATING OPEC

The 1970s achievement of OPEC has led to the advocacy for more Commodity Cartels as an Economic Development strategy for the LDCs. It now seem as through the formation of cartels has been the missing link in the LDCs development bid. Different commodity cartels were formed to replicate OPEC achievement. Some of these cartels include the International Tin Council (representing Tin exporting countries), International Bauxite Association (representing Bauxite exporting countries), Union of Banana Exporting Countries or Union de Paises Exportadores de Banana (UPEB), Members of the International Committee of Copper Exporting Countries or Conseil Intergouvernmental des Pays Exportateurs de Cuivre (CIPEC) etc.
Although Commodity Cartels have had varying degrees of success in raising or maintaining prices there does not appear to be any other commodity with influence similar to that of petroleum. Substitutes for almost all other commodities are readily available, and the world demand for many commodities had declined due to dramatic reduction in the resource content of manufactured goods (Gilpins, 1987:298). Though the belief that commodity cartels were the much anticipated opportunity for the LDCs to redress the perceived global inequalities between them and the Developed Countries, it was soon obvious that no other commodity had the characteristics and potentialities of petroleum. Substitute for most other commodities were available. For example plastics were used in place of Bauxite/Aluminum in the automobile and container industries (Holloway, 1988:79-82), substitutes such as aluminium and plastics were used in place of Copper (Iwase, 1980:266-74), Tea in place of Coffee etc. Joan Spero (1997:305) argues that
“perhaps the most devastating blow to the producer association has been dealt by the stagnant-in some cases falling demand for their commodities in 1974 and 1975, as economic activity in the industrialized countries declined, the demand for industrial raw material fell precipitously. Since then there has been a steady decline in the Northern demand for Southern commodities”.
Other uses that challenged the success of emerging commodity cartels included conflicts among the producing countries as they were more in conflict than in cooperation, inability to manage supply as no other commodity had the sought of leadership control Saudi Arabia had in OPEC, and inability to also maintain export and production reduction like OPEC did. These Commodity cartels were generally unable to successfully manage prices or supply, there were price-cutting among fellow cartel members and only few producers agreed to supply control. These issue were evident in the International Bauxite Association (IBA) when Guinea in its eagerness to increase its share of the Bauxite market did not cooperate in price setting effort, in imposing a Bauxite levy, and in nationalization. This was also the case in Union of Banana Exporting Countries when Ecuador, Philippines and Colombia withheld their full support for cartel’s efforts. In the case of Copper and the CIPEC, Chile and Peru opposed export reduction. From these examples, it is also deducible that the failure in replicating OPEC for other commodities was the LDCs inability to give up self-interest for the common good of all LDCs. Charles Lerche and Abdul Aziz Said (1979:245) argues
“that cartels have a limited exporting power because the developed countries can in most instances use other raw materials (or synthetics) as substitutes. The development of production techniques would reduce the consumption of raw materials and the import of raw materials from countries not members of cartels.”
In the case of OPEC, its influence started dwindling as the recession in the developed countries and the over-production of oil in the mid-1980s led to a fall in the price of oil and cut in production. Saudi Arabia’s production dropped from about 9 million barrels per day in 1979 to about 2 million barrels per day in 1985 causing a drop in revenue from $108 billion to $47 billion per annum Like situation existed in all OPEC member countries though with different levels of effect and this was a bitter pill to swallow as it broke the unity that once existed in the cartel (Cammack P, Pool D & Tordoff W, 1988:302).

SUMMARY

Several strategies have been employed in an effort by the Less Developed Countries of the world to eradicate or minimize visible poverty in their countries and enhance their economic development. Of these strategies, the formation of the oil cartel called OPEC has been argued to be the most effective in redressing and renegotiating the trade imbalance and economic inequality between the Developed Countries of the North and the Less Developed Countries of the South. The success of the OPEC in the 1970s has resulted in the advocacy for the formation of more of OPEC-like Cartels for other commodities. In deed, some commodity cartels were formed but as these primary commodities lacked the specific qualities of crude oil and the producing countries lacked the OPEC member level of unity and production control.
The inability of to replicate the success of OPEC in other cartels makes the use of commodity cartel as a means of negotiating for a New International Economic Order inappropriate. Even the strength of OPEC in global influencing in both political and economic matters has declined over the years. This makes the utilization of these cartels as a means of enhancing economic development in the LDCs an inadequate strategy


RECOMMMENDATIONS

This essay has attempted an overview of the economic development strategies employed by the Less Developed Countries of the world in their effort at liberating their countries from the shackles of poverty and economic woes. A detailed analysis of the commodity cartel strategy has been attempted with its successes and challenges. The 1970s OPEC success could not be replicated by other commodities cartels and even the influence of OPEC took a downward slide in the 1980s. Based on the inability of replication the OPEC strength in other commodities and subsequent decline of OPEC strength, this paper is of the view that cartelization as an economic development strategy is not appropriate. Then the question is what strategy will be appropriate for LDCs development?
This paper advocates an Export-Led Industrialization strategy in combination with a purposeful leadership as a panacea to the economic challenges of the Less Developed Countries. This is the strategy employed by the New Industrialized Countries (NICs) of Asia. These countries were once regarded as LDCs but have been able to develop their economies to be as good as and sometimes better than Developed Countries. The experience of these new industrialized economies shows that developing countries could catch up with advanced countries by applying the Export-Led Industrialization (ELI) strategy.
Export-Led Industrialization is a trade and economic policy aiming to speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage. It involves the opening of domestic markets to foreign competition in exchange for market access in other countries (www.en.wikipedia.org retrieved 18-Oct-2011). LDCs that has transformed their economy through this process includes the Asians Tigers – Hong Kong, Singapore, South Korea and Taiwan. Other countries include India, Malaysia and China. In recent years, by comparing development experience within the LDCs, some studies shows that the ELI strategy is more successful than other strategies Xue Jinjun (1995:190) writes that
“of 41 nations experiences since the 1960s, nations which practiced an outward-oriented policy had much better performance in economic development than those which followed an inward-oriented policy. The nations that had good performance not only did much better with most indicators of development compared to other nations but also weathered better shocks to the world economy”.
The Chinese economy figures attest to this. China’s share of export in total world exports was 0.92% and ranked 14th in 1989, but has grown to become the worlds largest exporter and its share of world export has jumped to almost 10% in 2009 (The Economist, 2011). This proves that China has grown to an export-led economy. An IMF working paper published in 2009 calculated that if China remained as dependent on export as in recent years and then sustain an annual GDP growth of 8%; its share of world export would rise to about 17% by 2020 (The Economist, 2011).
Export growth played a very important role in the economic development of China. While pre-1978 China had seen annual growth of 6% per annum, post-1978 has witness a growth of more than 9% per annum with less fluctuation. In some recent years its growth had exceeded 13%. Also, the per capita income has nearly quadrupled in the last 15years. This kind of growth is also observed in the economies of the “Asian Tigers” (Hu and Khan, 1997)
Stephen Adei (2007:12) argues that the most important determinant of the rise and fall of nations is the quality of its leadership. This is what makes the difference between the Newly Industrialized Countries (NICs) and those countries still maintaining the statues of less developed. The driving force of economic development in the NICs and economic underdevelopment in the LDCs is the quality of leadership. Adei (2007:11-12) in emphasizing the importance of leadership in national development itemize its role to include:
i. Provision of direction: national mission, vision and goals, in short development agenda
ii. Strategy setting
iii. Empowerment of people and mobilization of resources – human, financial, etc.
iv. Management of the development process
v. Establishment of governance framework and atmosphere for other actors to operate
vi. Development of other leaders, institutions and capacity building.
This essay has reviewed different strategies advocated for the economic development of LDCs and argues that through the strength in forming commodity cartels as a means of negotiation a New International Economic Order, its limitations makes it inadequate for the much desired economic growth of the Third World countries. A much more adequate strategy will be that already proven by the NICs with great measure of achievement. This is the Export-Led Industrialization implemented by a strong and focused leadership.



















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