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POLI 474: Final Take-Home

April 22, 2014
L J de Gara
260406255
Question 1
Despite a more than twenty year gap between their emergence, Robert
Bates' 1981 volume Markets and States in Tropical Africa and Joseph
Stiglitz's 2003 publication Globalization and its Discontents are deeply
concerned with the same issue: the role of state influence in the
development of market economies. Broadly, these two books take opposite
stances on the role of institutional intervention in the markets of developing
states. Bates, examining the bloated, mid-century states in "tropical Africa,"
believes that the excessive protection of markets is hindering growth and
development of states, post-colonial emancipation.i Stiglitz, by contrast, is
examining the later phenomenon of globalization in the context of the world,
and how policies of trade and currency liberalization have hindered the
developing world more than they have helped.ii Of the two, Stiglitz makes a
more compelling case, because he has several significant advantages over
Bates-- the states he mentions are not isolated to one particular region (he
makes mention of China, Thailand, Russia, and Kenya, among others) which
implies generalizability. More crucially, he is examining the problem a full
twenty years and many policy decisions later; he has been able to examine
how the liberalizations that Bates proposed worked in practice.
One issue which both authors address in detail is the role of currency in
development. Like all financial institutions, national currencies have the
potential to be manipulated by governments and international institutions;
this was especially significant prior to the broad liberalization of currency in
the late twentieth century. Bates is deeply concerned with the artificially

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high currency rates used in many African states; paired with import
protections and high tariffsiii, artificially high-valued currency allows
monopolistic firms to accumulate far more revenue than they would in the
free market. In theory, this could have potentially increased available
revenue for development; in practice, firms and administrative bodies used
these artificially high currency rates to siphon money into their own
pockets.iv His proposal is that a more "competitive" currency rate would
inhibit corruption by rendering exchange market value. His contemporaries
agree with him: as Bates notes, a 1975 World Bank report on Kenya ruefully
notes that the relationship between financial institutions and governmentpreferred firms is so incestuous that "it would not be an exaggeration to
suggest that a limited number of firms have a license to print money." v By
Bates' approximation, liberalizing exchange rates would make it harder for
monopolies to maintain their stranglehold on developing states, and would
also inhibit corruption.
Stiglitz, however, observed some twenty-five years later, after currency
rates had largely been liberalized-- often by force, at the IMF's insistence. A
wave of currency liberalization in the 1990s, spurred by the simplistic
libertarian philosophy that "free markets are more efficient. More efficient
markets produce more growth."vi Yet another example of an economic
principle which was better in theory than in practice, allowing total market
freedom of currency had a series of catastrophic consequences. Among
these: political instabilityvii, contagion of market failure following the collapse
of the Thai baht in 1998viii and ultimately an "increase in inequality across the
world."ixAs some small concession to the economies and states thrown into
turmoil by thoughtless currency liberalization, even the IMF acknowledges
that it "went too far in the 90s."x For an organization which is notorious for
never going back on its word-- it still demands that citizens of the

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Democratic Republic of the Congo pay back the loan which was squandered
by the infamous dictator Mobutu Sese Seko during his three decade reign xi-this is an unparalleled admission of failure.
As far as currency regulation or liberalization is concerned, states and
international institutions are between a rock and a hard place. Utterly
constrained currency prices have negative effects for developing nations, in
the form of corruption and market stagnation.xii Completely liberated
currency markets create massive volatility, which may improve the state
whose currency has been liberalized, but are much more likely to increase
inequality and diminish the standard of living if that volatility does not work
in the state's favour. Neither situation is ideal, but given the option most
people would prefer to live in a state with limited growth and high interest
rates rather than an anarchic state with political violence, strife, high
unemployment, and other consequences of currency liberalization. xiii Having
been able to observe these effects in a way that Bates could not, Stiglitz's
argument in favour of currency regulation-- or, at least, a gradualist
approach to currency liberalization, as taken by China-- is preferable to
Bates' free market approach. China's success is at least partially attributable
to its prioritization of market needs: "while China recognized the importance
of macrostabilization, it never confused ends with means."xiv The
involvement of the state in the regulation or deregulation of its currency
allows for greater stability and security; this is preferable for development.
Beyond currency, state involvement in industry and commerce is
another point of contention among development scholars. Should states
open their borders and allow imports and exports to flow freely at market
price, or should they protect their "infant," developing industries and
businesses to ensure their potential for maturation? In the 1970s, some of
the African states observed by Bates were protecting 90% of their industries

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from external competition through tariffs and trade barriers.xv These were
reminiscent of the earlier colonial practice of the "marketing board," wherein
agricultural product prices would be set by the arm of the colonial
government. All small-packet farmers sold their goods to the marketing
board-- a single buyer, the "monopsony,"-- who then sold the products on to
international buyers at the behest of the marketing board. Indeed, even after
independence, many of these boards remained as essential structures of the
post-colonial state.xvi
As is usually true of government fixing of agricultural prices, these
boards set price floors much higher than the international market price to
subsidize farmers; when food prices increased for urban workers as a result,
the government subsidized them too.xvii Unfortunately, this doublesubsidizing of the states' most major business comes at a major price-extremely high cost to government to sustain even the simplest of
industries, limited capacity for revenue, low growth, and potential for urban
riots if subsistence crops fail and heavy subsidizing is less viable.xviii His
suggestion: reduce the tariffs and open the "tropical states'" markets to the
world outside of the restrictive monopsonies.xix Lessen the role of the state,
increase the role of businesses, and development will flourish.
Interestingly, despite their widely variable position on most issues,
Stiglitz is inclined to agree with this position, rightly noting that China has
reduced those living in abject poverty by the hundreds of millions over the
last few decades as a direct result of free trade.xx However, for every success
story there is a cautionary tale, and while China's transition from restrictive
communism has been extremely lucrative, Russia's transition has been an
abject failure. This is partially a consequence of "shock therapy" economic
transitioning, as proposed by the IMF.xxi In the mad scramble to transform
communist state enterprises into capitalist businesses, very little effort was

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made to develop an economy of multiple, competitive firms, or the

institutions necessary to support a capitalist economy. Most firms currently
operating within Russia are essentially government monopolies with a new
coat of paint-- and without the social values and safety nets that kept the
economy reasonably equitable, even under communism.xxii After the
dissolution of the USSR and the subsequent trade liberalization of Russia, it
became obvious that globalization had given Russia "the worst of all possible
worlds-- an enormous decline in output with increased inequality." xxiii
In essence, both Stiglitz and Bates are in opposition to monopoly, and
the almost inevitable corruption which accompanies it. While Bates is
concerned with government corruption, and Stiglitz is concerned with
corruption by business leaders and oligarchs, their criticisms are the same.
States which do not allow for trade by multiple firms, either by law or by
design, will inevitably harm the interests of their citizens. The policy
prescription implied by both cases is one of moderation: a state should step
in to ensure that the market is truly free... Which includes protections against
all monopolies, be they public or private alike. Again, because Stiglitz's work
includes more examples across a longer time period, his case is more
compelling; however, he and Bates are clearly supporting a similar position.
To compare Markets and States in Tropical Africa with Globalization and
its Discontents is perhaps not to do justice to the former. Because of its focus
on "tropical" African states during a very particular period in post-colonial
development, Bates' work is inherently less generalizable to both other
regions of the world and other eras of global development. In 1981, when the
book was published, many of the policies which encompass and typify
globalization had yet to be enacted. It is understandable, then, that Stiglitz's
2003 book is much more accurate and persuasive in 2014, knowing what we
know about the dissolution of the USSR and Russia's (arguably) failed leap

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into capitalism, about the disastrous impacts that liberalization has had on
South East Asia, and most crucially, about how globalization devastated
African states far more than it ever enriched them. Now that the IMF's zeal
for liberalization has given way to remorse over "going too far," one thing
has become clear: the libertarian fantasy of Adam Smith's invisible hand
brushing away povertyxxiv has proven to be just that-- a fantasy. As Stiglitz
argues, governments of developing states have a crucial role to play in their
markets; not as bystanders to anarchic markets or autocratic monopolisers,
but as regulators of the economy to serve the needs of their people.
Governments are not in a position to take an all-or-none position on their
economies anymore, and now even international institutions such as the IMF
and the World Bank are being forced to reconsider their positions on debt.
Globalization bears its share of discontents, but it need not do so forever.

Question 2
Over the last few decades, world governance has undergone a very
significant paradigm shift: the welfare-state policies of the mid-twentieth
century rapidly gave way to the neoliberalism of the late-twentieth and early
twenty-first centuries.xxv The scaling-back of government assistance to
billions of people across the world has created a gap-- an ever-widening
chasm between the rich and poor, marked by lack of healthcare, education,
and opportunities. In the absence of government programs, non-government
organizations (NGOs) have flourished; in theory, these grassroots efforts at
alleviating poverty are truly selfless and a blessing to the world's poor. In
practice, the unregulated nature of NGOs means that they often do more
harm than good. From Bangladesh's Grameen Bank (allegedly "saving" rural

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women from poverty with loans at a 15%+ interest ratexxvi) to inconsistent

service provision inadvertently uprooting families and creating transient,
mobile poverty, NGOs are less innocent than their brochures may suggest.
By design, and according to their mission statements, these organizations
ought to be helping the world's poor. However, NGOs are fundamentally
problematic.
As mentioned, NGOs have flourished in a period of global
neoliberalism. The fantasy of a libertarian free market creating equality and
prosperity for all (widely endorsed by major institutions such as the IMFxxvii)
has resulted in a world plagued with more inequality than a generation ago,
not less.xxviii Ostensibly, the "trickle-down" of wealth generated by industry
would eventually go on to help the poor; in practice, these policies have
largely only succeeded at generating wealth for industry, while the poor
continue to suffer. NGOs have made efforts to rise to the challenge of global
poverty and fill this gap. In India, there is notably one NGO for every 400
peoplexxix, which means that NGOs vastly outnumber primary schools and
health centres in the country. Most of these NGOs focus on the
aforementioned services of health and primary education:xxx services which,
by all accounts, ought to be the sole providence of government.
The extremely high prevalence of NGOs highlights two fundamental
problems with neoliberalism in India: a pronounced lack of health and
education services provided by the government, and that an incredible
volume of those said-same services are being provided by unregulated, noncentralized organizations. Even if all of those NGOs were run equitably,
audited regularly, and were fundamentally not corrupt-- which, unfortunately,
is probably overly optimistic-- the fact that small, decentralized organizations
are providing these essential services means that there is a huge variability

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in quality of service provision. For India's poor, the difference between

escaping poverty and sinking further into it could be as incidental as living
nearer to one of the country's top NGOs, which are overwhelmingly located
in Mumbai.xxxi This has had an unintended impact on the demographics of
India: if the poor and struggling are not provided access to essential services
in their home state, then they may travel hundreds, if not thousands of
kilometres to states where NGOs are providing what they need. Migrants are
already an incredibly vulnerable and populous group within India; if NGOs are
inadvertently encouraging those in extreme poverty to become migrants in
search of essential services, then they are setting those people up for failure
in the long term.xxxii NGOs do not have the resources necessary to serve an
entire country, but what they fail to account for is that, in the most
desperate of situations, their services may actually be a draw towards
mobility. And given how financially unstable NGOs can be-- by comparison
with state governments, which are much more stable-- this draw may be
leading India's most disadvantaged to more unstable and more dangerous
situations, like moths to a flame.
In other words, the grassroots quality of NGOs (often celebrated as one
of their most commendable qualitiesxxxiii) can be both a blessing and a curse.
While they are not burdened by the sluggishness of larger government
bureaucracies, or the limited funds available to states for welfare purposes,
NGOs also often lack accountability. NGOs reliance on private support
through donors and funds also creates a potential for unreliability if support
ends abruptly; government money can dry up, too, but only after a
legislative process. Regardless of the touted benefits of individual NGOs to

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human welfare, these are fundamental flaws with a model which relies on
NGOs to provide essential services.
While the "NGO model" of service provision is inherently flawed for
these logistical reasons, more specific types of NGOs are also flawed in
specific ways. The much-lauded practice of "microfinance," typified by the
lending programs of Bangladesh's Nobel Prize-winning Grameen Bank, is
widely perceived as a godsend for the world's poor, particularly women.
Unfortunately, as recent works such as Lamia Karim's 2011 Microfinance and
its Discontents have shown, "microfinance" and "microcredit" are not a
universal boon.
The most problematic element of microfinance-- coincidentally its
driving force-- is that it is unlike traditional charitable efforts. Microfinance
NGOs such as Grameen Bank and its imitators lend small sums of money to
their clients. Those clients are supposed to use the money to start small
businesses with the expectation that, upon the success of the business, the
money will be paid back to the lender, with interest. Hypothetically this
structure is incredibly innovative because it is unlike traditional charity; its
clients are not destitute beggars in need of a "hand out," but would-be
business-people simply looking for start-up money. The borrowers receive not
just money but dignity and agency as equal partners in a business
transaction; at least, this is the NGO's narrative. What actually occurs is less
like start-up industry and more like loan-sharking. While the sums loaned are
small (the average Grameen Bank loan in 2007 was 5,000 taka,
approximately $75xxxiv), the payment plans are aggressive, demanding the
full amount be repaid within 44 weeks on averagexxxv and at a 10% interest
rate or higher. Unfortunately, starting a successful, profitable business with
such a paltry sum of money is nearly impossible, and many microfinance

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borrowers were forced into a "cycle of borrowing": visiting one NGO after the
other to receive enough money to pay interest on loans owed to another
NGO.xxxvi All of the microfinancial institutions benefit from the shuffling of
money, while the borrowers sink deeper into debt, ultimately ending up
worse off financially than they were to begin with. If the aim of microfinance
NGOs is genuinely to reduce poverty, then perpetuating the cycle of poverty
seems to be utterly contrary to their aims-- and yet it is integral to their
business model.
Aside from the profiteering and exploitation practiced by the Grameen
Bank, many of the cases which Karim studied in Bangladesh involved
unforeseen social consequences for the women to whom the loans were
awarded. For instance: the Grameen Bank's policy of awarding loans almost
exclusively to womenxxxvii-- because of their disadvantaged position in
Bangladesh's deeply gender inequitable society-- was seemingly developed
from a position of integrity and good intentions. However, because of a
fundamentally patriarchal attitude towards women and business, many
female loan recipients became unwitting participants in an "economy of
shame."xxxviii "Shaming" has long been commonplace in rural Bangladesh,
where women suspected of infidelity or other ills are harassed, shunned,
flogged or otherwise abused by members of their community into "behaving
appropriately." For all of their bluster about empowering women, the
Grameen Bank and its competitors are quite content to use similar tactics on
women who are unable to pay their loans on time; women report being so
extensively harassed by NGO lenders that their husbands divorced them for
"bringing shame upon their households."xxxix It is evident, then, that the
failure of the microfinance NGOs is two-fold: it has not made the poor more

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wealthy or stable, and it has not made the oppressed women more
empowered and independent. The Grameen Bank has done the opposite,
trapping Bangladesh's poorest citizens in a cycle of borrowing and abuse to
protect their bottom line. Government institutions may be slow, inadequate,
and even corrupt, but in the case of Bangladesh, at least they do not
condone the violent harassment of their most vulnerable citizens.
Contrary to the hopeful, naive perception of non-government
organizations as the saviours of the developing world, NGOs are not perfect,
and not without their flaws. They are prone to unreliability because of their
frequently donation-based organizational structures. Much like governments,
they are plagued by scarce resources and seemingly infinite need. Worse
still, microfinance NGOs may act less like charities and more like financial
institutions, by exploiting the world's poorest individuals for their own
economic benefit. Because of a global trend towards neoliberalism, NGOs
have effectively been forced into their role of "filling the gap" between the
world's rich and poor, while government services fall by the wayside. This is
not an easy task and not one which is successfully accomplished all, or even
most, of the time. Still, these criticisms of NGOs are by no means a
condemnation of all NGOs all of the time-- on a fundamental level, NGOs are
based in a desire to improve the lives of the poor and suffering across the
world. (If the aim of their founders was to make money and nothing more,
there are far more secure and profitable industries to go into!) NGOs have
the potential to help the poor, but evidently, like all institutions, they are not
without their weaknesses. However, like governments, the work of NGOs
needs to be regulated, audited and transparent. If NGOs were treated more
like governments, some of their more problematic elements would fall by the

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wayside-- but how to make a non-government institution more like a

government is a challenge to which there is not yet a clear answer.

Endnotes: Question 1
Bates 1981: 27.

ii

Stiglitz 2003: 103.

iii

Bates 1981: 64.

iv

Bates 1981: 67.

Bates 1981: 104.

vi

Stiglitz 2003: 66.

vii

Stiglitz 2003: 15.

viii

Stiglitz 2003: 97, 99.

ix

Stiglitz 2003: 155.

Stiglitz 2003: 59.

xi

Stiglitz 2003: 238.

xii

Bates 1981: 28.

xiii

Stiglitz 2003: 101.

xiv

Stiglitz 2003: 104.

xv

Bates 1981: 64.

xvi

Bates 1981: 20.

xvii

Bates 1981: 31.

xviii

Bates 1981: 37.

xix

Bates 1981: 38.

xx

Stiglitz 2003: 186.

xxi

Stiglitz 2003: 185.

xxii

Stiglitz 2003: 139.

xxiii

Stiglitz 2003: 155.

xxiv

Stiglitz 2003: 232.

Endnotes: Question 2
xxv

Karim 2011: XIII.

xxvi

Karim 2011: 129.

xxvii

Stiglitz 2003: 232.

xxviii

Stiglitz 2003: 155.

OneWorld South Asia: http://southasia.oneworld.net/news/india-more-ngos-

xxix

than-schools-and-health-centres. Online.
xxx

OneWorld South Asia. http://southasia.oneworld.net/news/india-more-ngos-than-

schools-and-health-centres. Online.
xxxi

Top 10 NGOs in India. http://top10companiesinindia.com/2013/10/19/top-10-

ngo-in-india/. Online.
Panda 2012: "Top Down or Bottom Up?"

xxxii

http://jhm.sagepub.com/content/9/2/257.abstract. Online.
Panda 2012: "Top Down or Bottom Up?"

xxxiii

http://jhm.sagepub.com/content/9/2/257.abstract. Online.
xxxiv

Karim 2011: 65.

xxxv

Karim 2011: 66.

xxxvi

Karim 2011: 66.

xxxvii

Karim 2011: 83.

xxxviii

Karim 2011: 85.

xxxix

Karim 2011: 86.

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centres>.

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Panda, Biswambhar. "Top Down or Bottom Up? A Study of Grassroots NGOs'

Approach." Top

Down or Bottom Up? A Study of Grassroots NGOs' Approach.

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<http://jhm.sagepub.com/content/9/2/257.abstract.>.
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