Thursday
9 September
0800-0930 (IS)
"We are confronted with insurmountable opportunities."
Walt Kelly
Overview
In this final topic, we will be applying some of the knowledge acquired in the past few weeks to the real world of the strategist. Proceeding through the NWC core courses, there will be many occasions where economic problems are at the heart of high profile national security issues. The collapse of the Soviet Union, the Gulf War, and the economic crises of Indonesia and Thailand are only a few such examples.
Nearly 85 percent of the world's population live in countries classified as underdeveloped by the World Bank. Two-thirds of this group are in the poorest countries. What exactly does it mean when it is said that a country is underdeveloped? While there is not a simple answer to this question, there are some basic factors where agreement is nearly universal. An illustrative list of these includes: life expectancy at birth, the population growth rate, the number of children who survive until their first birthday, and adult literacy. A more controversial indicator is per capita GDP. The current statistic favored by the World Bank is the number of people whose income is less than $1 per day.
What causes such poverty and why haven't these problems been resolved after decades and billions of dollars of economic aid? There is no definitive answer to either question. The causes include government instability, corruption, bad/poorly administered economic policies and numerous other issues that defy generalization. Just as no two people and their problems are the same, country circumstances, while often conforming to established patterns, also are unique.
Economic crises - be they in countries as diverse as Indonesia, Mexico or Brazil - also have their individual characteristics. Nevertheless, there are important elements that many of these situations share, and it is useful to understand what they are. High among these issues is corruption, which can originate from a wide variety of sources (e.g., the president's family, influential businessmen criminal organizations). Also prominent are flawed economic policies, such as insufficient transparency in the banking system, costly protection of inefficient national industries (e.g., through subsidies or tariffs), and overvalued exchange rates. Eventually, the economic distortions created by such policies can undermine even the most successful economies.
There is a fairly wide variety of organizations that seek to address the problems of economic crisis and underdevelopment. These include several types of aid agencies (e.g. bilateral, multilateral, NGO) that, to some extent, implement programs that have identifiable differences. Among these organizations, the one that has achieved a particularly high profile in the past several years has been the International Monetary Fund (IMF). There are some misconceptions about the role of the Fund and its programs. Because of the increased significance of the Fund, it is important that you, the well-informed senior strategist, have a clear understanding of the functions that it performs.
Objectives
- Develop an informed understanding of the nature and causes of economic underdevelopment.
- Develop an informed understanding of the nature and causes of economic crises.
- Understand the variety of organizations that address development issues and the instruments that they use.
- Develop a working knowledge of the role and tools of the International Monetary Fund.
Issues for consideration
- Select an underdeveloped country. Analyze its development profile. What are the issues you will consider to: a) determine the extent of its underdevelopment, and b) the reasons for its underdevelopment?
- Consider three types of international development organizations: bilateral (e.g. USAID), multilateral (e.g. the United Nations Development Program), and NGOs (e.g.CARE). What are the similarities and differences between these programs with regard to their: a) institutional purpose, b) programmatic approach to development problems, and c) sources of funding? How do these organizations relate to one another?
- From what you understand, explain the probable causes of the economic crisis suffered by Indonesia. Draw parallels, both favorable and unfavorable, with other countries.
- What is the difference between the roles and programs of the IMF and the World Bank? Are they redundant or complimentary?
- What uniquely defines the role of the IMF? How would you change the IMF?
Required readings (55 pages)
* Baumol and Blinder: Chapter 37, pgs. 884-894 (11 pgs.)
* "The IMF and the World Bank: How Do They Differ?" David Driscoll, IMF, August 1996 (12 pgs.)
* "International Development: Is It Possible?" Stigliz/Squire, Foreign Policy, Washington, Spring 1998 (13 pgs.)
* "The Economic Consequences of the Peace: In 1999 & Beyond," Dr. Edward Yardeni, Deusche Bank Research, April 28, 1999 (18 pgs.)
* "Financial Indicators, International Aid," The Economist, July 6, 1999. (1 pg.)
Suggested readings
* "World Bank Mulls Reform," CNN Financial Network, February 22, 1999 (3 ps.)
* "Lender Without Limit," The Economist, October 13, 1998 (2 pgs.)
* "Making Aid Work," The Economist, November 13, 1998 (2 pgs.)
* "A Survey of the Third World: Poor Man's Burden," The Economist, September 23, 1989, by various authors, (58 pgs.)
* The Economic and Budget Outlook: Fiscal Years 2000-2009, January 1999
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