Abstract
Since the 1970s, developing countries across the world have collectively experienced a series of economic upswings and downturns. Existing theories of international development, which mostly focus on country-specific factors that facilitate or hinder growth, cannot explain this across-the-board cycle. We argue that the cycle is driven by changes in the global supply of the US dollar, the default currency of transaction and foreign exchange reserves in the world economy. Based on a time-series—cross-section analysis with fixed effects on 170 developing countries from 1973 to 2017, we find that an increase in the global dollar supply brings lower borrowing costs and greater availability of external financial resources, enabling higher growth rates in the developing world. Conversely, a contraction in the global dollar supply increases borrowing costs and dries up financial resources, slowing down growth in developing countries. The vagaries of the dollar supply, determined largely by the domestic political economy of the USA, have formed the context for international development contributing to the “golden age of development” in the 1970s, the international debt crisis of the 1980s, the Asian Financial Crisis of 1997–1998, and the beginning and end of rapid growth in the 2000s, among others.
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Source: Bank of International Settlements Triannual Survey
Source: IMF COFER
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09 December 2021
A Correction to this paper has been published: https://doi.org/10.1007/s12116-021-09348-3
Notes
For developing countries that succeeded in becoming wealthy, we do not include the time periods after they firmly attained high-income status in our dataset. We consider a former middle-income country to have firmly attained high-income status when it retained its high-income status until 2017. There are cases where a developing country briefly attained high-income status but then slid back to its former state. In these cases, we still include in our dataset the period when the country held high income status, though it was lost later.
Inverse hyperbolic sine is defined by the equation: arsinh x = ln (x + √(x2 + 1)).
As Kentor and Boswell (2003) show, the concentration of trading partners and trading sectors is significant in shaping development. But as these variables mainly show cross-country variation and do not vary a lot over time, they should be absorbed by the fixed effect intercept already in the model.
This is corroborated by the bureaucratic quality index and statehistn05, which many social scientists use to measure state capacity. Data for these two indicators show much variation across countries but little variation over time. We attempted to incorporate these variables in our model, but as expected, their effects were absorbed in the fixed effect intercepts.
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Acknowledgements
We thank the participants of the Institute of Sociology Colloquium at Taiwan’s Academia Sinica and UCLA’s Theory and Research in Comparative Social Analysis seminar for their comments on different versions of the paper. We also thank Julia Burdick-Will, the editors of SCID, and the anonymous reviewers for their suggestions. They are not responsible for any mistakes herein.
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Appendix
Appendix
Scatter plots and fitted line plots of USD index and GDP per capita growth rate for selected countries, 1973–2017
Residual plots of regression models 2–5
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Hung, Hf., Liu, M. The Dollar Cycle of International Development, 1973–2017. St Comp Int Dev 57, 1–35 (2022). https://doi.org/10.1007/s12116-021-09346-5
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DOI: https://doi.org/10.1007/s12116-021-09346-5