local solutions can’t always solve local problems

Advait Arun

Maybe every US-based student of development economics learns some version of the following belief about Global South countries: that the institutions that these governments create to provide services—healthcare, education, and welfare—often fail to do what they’re supposed to. As the story goes, there’s usually some combination of misalignment of bureaucratic incentives and unenforced property rights that enables the corruption and state capture that keep these good things out of the hands of citizens.

Taken at face value, this ahistorical story of “imperfect institutions” has troubling policy implications; the World Bank and the IMF, among other development institutions, have used its logic to push institutional reforms onto developing countries. These reforms, which often include privatization, market liberalization, and the enforcement of Global North notions of private property, follow from the assumption that developing countries’ economic problems are merely the result of their imperfect institutions. Today, it’s commonly acknowledged, even by World Bank/IMF leaders, that these imposed solutions can in fact be pretty counterproductive, even harmful—but I haven’t seen much pushback against the “imperfect institutions” diagnosis of developing countries’ problems in the first place. 

In February, applying for the Carnegie Endowment’s Junior Fellowship for its International Political Economy practice group, I had to write an analytical essay demonstrating that I knew something about all this. The essay prompt was an age-old political economy question: “What factors explain why, in many democracies, poor people continue to receive poor public services, despite accounting for a large share of the population?”

Essentially, why can’t democracies do what most people want?

The essay I wrote for the Carnegie Endowment serves as my challenge to the orthodoxy that a country’s economic problems are merely domestic institutional failures. In reality, “imperfect” domestic institutions are only one part of a much larger, global story.

I’ve adapted my essay below to highlight the kinds of issues that I believe a better, more truthful, more global development economics research agenda should consider. And I have ended this post with a brief set of suggestions of how I think economics instruction ought to change to accommodate such a research agenda.

(I didn’t end up getting the Carnegie position, but I’m super okay with that. I learned during the interview that I wouldn’t have done as much political economy work there as I would have wanted, anyway. And, compared to similar jobs, the pay was seriously wanting: just $43k a year, in Washington, DC?! Yikes.)

[Bracketed and italicized inserts below are clarifications on my part.]

a better research agenda for economic development

“What factors explain why, in many democracies, poor people continue to receive poor public services, despite accounting for a large share of the population?”

Development practitioners too often ignore the harms that skewed trade arrangements, austerity measures, compelled dependence on private finance, and other global macroeconomic constraints inflict on public service provision. Too many governments can’t provide their lower-income citizens the public services they demand at their ballot boxes—not necessarily because they failed at crafting domestic policy reforms, but because they participate in a global economic system that restricts what governments can offer their citizens. These harmful economic conditions burden lower-income residents of Global North democracies, but more severely test Global South democracies, where most of the world’s poorest people live. Challenging these global systems of impoverishment therefore requires focusing on how they leave the Global South underdeveloped. That underdevelopment, in turn, fuels crises that everyone in both the Global North and Global South suffers from.

Policymakers often blame domestic institutional failures for a country’s poverty and underdevelopment while letting international economic factors off the hook. To be sure, the Global North is not responsible for all the world’s poverty; elite corruption and government mismanagement do siphon away resources that Global South democracies could otherwise allocate to public services and development. Take India, for example: both its pre- and post-liberalization regulatory regimes enabled elite groups to advance their interests through the state while depriving most Indian citizens of adequate healthcare and education. Though competition and transparency reforms could, in theory, channel more services to citizens, World Economic Forum research suggests that countries that fight corruption do not actually develop much faster than countries that stay corrupt. Reforming corrupt or “misaligned” institutions might not do much to address Global South governments’ overall budget, debt, or credit constraints—all of which are, in the past few decades of financial globalization, macroeconomic factors influenced more by international institutions and Global North investors than by any petty bureaucrat. This isn’t to say that these domestic reforms shouldn’t happen. It’s just that they won’t solve the underlying problem: that global economic arrangements disadvantage the Global South.

Though Global North countries claim that their rule-based global economic order levels the playing field for all countries, their rules can be profoundly hypocritical. For example, despite the fact that the United States forged its pharmaceutical giants through state subsidies, the U.S.-led World Trade Organization (WTO) essentially prohibits other governments from offering their industries similar help. Such rules have created a world where Global North pharmaceutical giants now hold the fate of global public health in their hands. Right now, the public service that the global poor need most is a COVID-19 vaccination: the New York Times reported in January that only one percent of all vaccine doses had been administered in low-income countries, home to around 700 million people. [As of June 12, 2022, only 18 percent of this population had received at least one dose.] Yet the WTO’s overprotective patent laws prevent accomplished pharmaceutical firms in India and South Africa from mass-producing mRNA vaccines for the Global South without patent waivers, which Global North governments and pharmaceutical firms fiercely oppose granting despite the lives it could quickly save. [The WTO recently granted a waiver, though it appears not to accede to key Indian and South African demands.] 

This unjust distribution of economic power often compels the Global South to rely on foreign aid to make ends meet. Aid from the Global North, however, usually comes tied to policy reforms that force recipient governments to cut spending on services. The Global North-led International Monetary Fund (IMF) helps countries, like Georgia, Mongolia, Peru, and Colombia, escape economic crises. But the IMF’s prescribed cures are worse than the disease. For one, the IMF required each of these aid recipients to pare down its social spending programs—during a pandemic. The IMF can also require aid recipients to liberalize financial markets and bolster central bank independence. This latter measure is an indirect form of austerity: a recent World Bank research paper argues that central bank independence has actually constrained social spending and worsened inequality across 144 countries. 

Prevented by imposed IMF rules from spending on poor voters’ priorities, many Global South democracies cajole private financiers to kickstart the development that they cannot. But persuading private investment to fill public spending gaps in transportation, energy, and health services is another Faustian bargain: governments give all sorts of concessions to minimize investors’ risks and losses. This “derisking” of investment means guaranteeing investors a predetermined profit, protections from expropriation, and management rights—thereby transferring both capital for and control over public services from states to private actors, with dangerous consequences. For instance, the firms that helped build Ghana’s Sankofa gas plant required Ghana’s state-owned gas company to buy 90 percent of its output, regardless of how much gas Ghanaians could actually consume; now Ghana wastes over $500 million annually—over half its healthcare budget—for power that its citizens and corporations can’t use, preventing social spending and worsening debt sustainability. Public-private partnerships in Kenya and Nigeria face similar fates, demonstrating that derisking for the private sector only risks states’ abilities to provide for their poor citizens.

Rather than raising global standards of living, Global North-led economic institutions and arrangements have only served to lock Global South democracies into deleterious dependence on foreign aid and investment. It’s clear that these economic arrangements do not benefit the Global South’s poor. Economists have also observed that the Global South’s underdevelopment actually furthers unsustainable financialization in the Global North: elites in the Global South, unwilling to save or invest in their domestic currency, park their money in Global North financial markets for stable returns and dollar access—sometimes with catastrophic consequences. Before 2008, the United States held up to 70 percent of the world’s savings, fueling a sharp rise in US household debt, including mortgage debt. Following the 2008 financial crisis (the consequence of that debt buildup), the IMF and World Bank compelled governments to tighten their belts even as global poverty rates shot up. Should Global South democracies continue to participate in these economic systems of dependency, crisis, and austerity, their poor citizens won’t soon see the adequate public services they deserve.

implications for the academy

Up front, I acknowledge there’s a lot that my essay fails to do. It doesn’t openly discuss the root causes of Global South countries’ dependence on the Global North: namely, imperialism, racialized capitalism, and their modern neoliberal incarnations. These are concepts that I believe no international economist should ignore, ever, and I’m excited to engage with those topics in future posts. The essay’s brief examples also generalize the experience of Global South countries to create a lexically coherent argument. In the future, I’d like to dive deeper into each of the problems I’ve presented. I’ll come armed with more data, freed from the constraints of an “analytical” job application essay. (Although, I do love the five-paragraph format. Maybe I’ll talk about why it’s the best in another post.)

Shortcomings aside, the arguments I’m making strain against a key assumption in many of my political economy classes, that local economic problems are locally caused and can be locally solved. That can be true. But it’s no basis for a more truthful development economics. The past five hundred years, if nothing else, provide abundant evidence that political and economic institutions originating in and defended (often violently) by the Global North have conditioned development around the world, for better and for worse. The above essay merely highlights how those dynamics operate today. 

A better economics curriculum, in my opinion, would make sure students (perhaps future policymakers) never neglect the effects of global systems on local outcomes. I had to teach that to myself, for the most part. My international trade class did not explain how intellectual property protection restricts comparative advantages; my international finance class did not break down what IMF-led “structural adjustment” actually entails for real people; my political economy of development class assumed that mobilizing international private capital is the best way for developing countries to achieve their local welfare and climate goals. (Hardly the only examples of my classes failing to engage truthfully with reality.)

Without recognizing and helping Global South policymakers respond to economic forces shaped by policymakers and investors in the Global North, development practitioners might end up feeling like they’re fighting a losing battle. The economic problems countries face were never just domestic problems. They were, and continue to be, global because they originate from global systems of imperialism and capitalism. 

Reframing the problem like this, of course, only goes so far. We must critique the global economy for the skewed, unjust, and democracy-denying system that it is—and teach others how to do the same. Honesty, about the economy and our place within it, is literally the best policy. Economists won’t solve anyone’s problems without it.