International Capital and Mexican Development: A System Dynamics Model

By Harvey, John T.; Klopfenstein, Kristin | Journal of Economic Issues, June 2001 | Go to article overview
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International Capital and Mexican Development: A System Dynamics Model


Harvey, John T., Klopfenstein, Kristin, Journal of Economic Issues


The proper role of portfolio capital in the development process is currently the subject of vigorous debate among both scholars and policy makers. One of the core elements of the disagreement is whether or not unregulated financial markets represent a more efficient means of allocating capital (especially in terms of attracting funds to the capital-scarce third world) or if in fact they add unnecessary instability to already weak economies and tend to promote policies and outcomes detrimental to the poorest members of those societies. It is the latter view, as argued by institutionalists (and especially Ilene Grabel [1999, 1996a, 1996b, 1995a, 1995b]), that we shall examine here.

The existing institutionalist research is primarily theoretical or descriptive. Our goal is to take these approaches to a new level by combining and formalizing their insights in a system dynamics model. In particular, we will highlight the impact of deregulated capital markets on income distribution in Mexico. Building such a model will not only allow us to present a more detailed and comprehensive view but also permit us to undertake some limited experiments by altering the historical inputs. This will, we hope, provide another avenue by which the current debate may be resolved.

The paper is organized as follows. In the next section, a brief survey of the work of institutionalist authors in this area is offered. Next, system dynamics modeling is explained. Then the model is specified and some brief policy experiments are conducted. Conclusions follow.

Mexico and the Institutionalist View of Economic Development: A Brief Introduction

One of the primary insights of the institutionalist approach is that economic progress is a function of the degree of social reliance on instrumental versus ceremonial valuing in guiding behavior. The former provides "the standards of judgment by which tools and skills are employed in the application of evidentially warranted knowledge to the problem-solving processes of the community," while the latter offers justification "for invidious distinctions, which prescribe status, differential privileges, and master-servant relationships" (Bush 1987, 1079-1080). The argument goes that social systems wherein instrumentality plays the greater role are the ones most likely to generate socially useful outcomes.

Many institutionalist authors have applied this tool to their analyses of economic development. Though it is difficult to generalize given the range of histories, cultures, and so on, there is nevertheless widespread evidence that developing economies are marked by a variety of forms and manifestations of invidious distinction. Dilmus James demonstrated that the context in which technology (a form of instrumental valuing, given certain caveats) is adopted in developing states is marked by "political myopia, inadequate incentive structures, and misguided attitudes" (1995, 155). Rather than technology being a locus for community problem solving, it has been perverted into a form of international conspicuous consumption for the benefit of the local elites. Scientific equipment may be acquired, for example, not because it is appropriate to address a particular domestic concern but for the status it bestows on the institution where it will be housed. Land tenure in developing nations is another issue that has bee n highlighted by institutionalists (among others) as tending to promote class barriers over social provisioning (and, therefore, ceremony over instrumentality). Ethnic strife, a hallmark of so many nations' struggles, fits these characterizations as well.

That Mexico suffers from all these problems is hardly a shocking revelation. Little real attention is paid to developing technology, income distributions are grossly uneven, and the caste system introduced by the colonial government still serves to separate the "haves" from the "have nots" (Cockcroft 1998).

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