One of the most dramatic political-economic changes over the past 15 years has been the shift in patterns of international finance. At the beginning of the 1980s, a select group of prosperous third world nations had privileged access to an enormous volume of commercial bank credit. They could also attract fairly important levels of direct investment. For all practical purposes, finance was no longer a binding constraint on the development strategies of this group of countries. Although poorer developing nations could not rely on private credit or investment, many of them had access to substantial amounts of funds via bilateral donors and the international financial institutions (IFIs). The industrial world, to a much greater extent, relied on its own domestic capital markets to meet its financial requirements.

By the latter half of the 1980s, in contrast, third world countries from Latin America and Africa had become largely marginalized from global capital flows, which were increasingly circulating among industrial nations. Insofar as they were still available to developing countries, capital inflows were swamped by amortization and especially by burgeoning interest payments. Indeed, a significant number of developing countries had become capital exporters. The result was a reversal of what development theorists had traditionally argued were the appropriate roles for developed and developing economies. The former were supposed to save more than they spent and export more than they imported, while the latter were supposed to consume more than they were able to save and import more than they exported.

The East Asian newly industrialized countries (EANICs) – Hong Kong, Singapore, South Korea, and Taiwan – occupy a distinctive position in the international system. In the 1960s and 1970s, they were the chosen few that seized the structural opportunities for upward mobility in the international political-economic system. During the second half of the 1970s and early 1980s, they launched effective economic adjustment programs that enabled their economies to ward off the looming competition from the “second-tier NICs” of Southeast Asia and to moderate the new protectionist pressures in the OECD countries. As a result, in the mid-1990s, the EANICs are poised to become the first group of postcolonial states to join the ranks of the developed countries in the postwar era.

Since the mid-1980s, however, the EANICs have been facing a new set of challenges that threatened their established modes of capital accumulation and patterns of state intervention. Beginning in the early 1980s, both economic officials and business leaders in the EANICs found themselves operating in a very different international environment due to the epic changes in the global political system, the tumult in the international monetary regime, and the discord in the management of multilateral economic relations. To strike a balance between the need to harmonize their economic relations with their major trading partners and the need to facilitate the structural adjustment of their economies, EANIC governments were compelled to reset their policy priorities and retool their policy instruments.

Over the past several decades, the world economy has undergone a fundamental shift toward an integrated and coordinated global division of labor in production and trade. In the 1950s and 1960s, production tended to be organized within national boundaries. International trade consisted, to a large degree, of raw materials flowing from the periphery to the industrialized core of the world economy, while manufactured exports were sent by U.S., European, and Japanese firms from their home bases to all corners of the globe. Direct foreign investment in manufacturing emerged as a response to the protectionist policies implemented by core and peripheral nations alike that wished to diminish the foreign exchange drain of an excessive reliance on imports and augment the employment benefits from locally based production.

Today the most dynamic industries are transnational in scope. Modern industrialization is the result of an integrated system of global trade and production. Open international trade has encouraged nations to specialize in different branches of manufacturing and even in different stages of production within a specific industry. This process, fueled by the explosion of new products and technologies since World War II, has led to the emergence of a global manufacturing system in which production capacity is dispersed to an unprecedented number of developing as well as industrialized countries.

New patterns of specialization between countries entail the fragmentation and geographic relocation of manufacturing processes on a global scale in ways that slice through national boundaries.

The earthquake that hit the international system at the end of the 1980s is conventionally summarized in one phrase: “the end of the cold war.” In reality, however, it involved at least four distinct elements: the end of the East–West conflict; the breakup of the Soviet Union and its alliance system; the collapse of communism as a global challenge to the West; and the triumph, in ideology if not in practice, of a political and economic model of liberal capitalism. The first three are historical processes that have important implications for the third world. The fourth is more a postulate than a reality, posing as many questions for the future of the third world as it provides answers about the end of the cold war.

The end of the East–West conflict has removed the bipolar contest that fueled most third world conflicts, when it did not generate them, and served as the framework for many North–South financial and military flows. While the end of the cold war has made great power military conflict seem less likely than at anytime in the past century, new strategic issues have emerged, born of the breakup of the USSR, with regard to the regional impact of postcommunist rivalries and to nuclear proliferation. One very important concomitant of the end of communist hegemony has been the breakup of multinational states, ending the understanding in place since 1945 whereby the existing map of the world, unjust and arbitrary as it was, should prevail.

Dramatic international changes are forcing third world countries to adapt their agendas and institutions to become part of a new global political economy. In the case of Latin America, massive shifts in international financial flows, the muting of East–West conflict and renewal of U.S. hegemony, the new primacy of markets, and the return to competitive political systems have been the most significant international changes. Accommodation to these changes is producing multiple tensions and conflicts, and it is not yet clear whether the adjustment will produce competitive economies.

During the post–World War II period, Latin American countries' inward-oriented development strategies – the import-substitution industrialization model – determined their main domestic policies and foreign relations. Now the region is facing new systemic conditions, following a decade of severe economic weakness during the 1980s. Looking back at the “lost decade” and comparing it with the success of the Asian economies, most Latin American leaders have concluded that they have no alternative but to accommodate their domestic policies to the new international context. Their initial success in doing so can be seen in recent economic data: inflation is under control in most countries; financial resource flows and investments have increased, despite the turbulence following Mexico's peso devaluation; and growth is beginning to resume. Nonetheless, Latin America lags behind its East Asian rivals in terms of growth and technological progress.

The end of the cold war and the disappearance of socialism as a major political-economic force opened the way for important changes in the capitalist world. These changes were of at least two types. On the one hand, the cessation of cold war hostilities between the United States and the Soviet Union downgraded the role of military in favor of economic power. This shift, in turn, increased the international standing of Europe and Japan at the expense of the United States, since the former are much stronger economically than militarily. On the other hand, the disappearance of socialism as an economic system focused attention on the differences among models of capitalism. In the 1990s, much more heed is being paid to variations in the ways of doing business in the United States, Europe, and Japan. While neither of these trends is totally new, the changed international panorama since the fall of the Berlin Wall greatly increased their salience.

For theorists and practitioners alike, a major question concerns the characteristics of the post–cold war international political economy. At the macro structural level, debate centers on whether the emerging system will be a multilateral, interdependent one, with close cooperation among capitalist powers, or a regionalized one consisting of trade and investment “blocs” in North America, Europe, and Asia. Our argument is that both of these processes are happening and will continue to do so. This simultaneity, which we call “nonhegemonic interdependence,” results in an unstable situation.

Since the beginning of the 1980s most of the developing world has moved unevenly but undeniably toward liberal, market-oriented economic reforms. The 1960s and 1970s were decades of unprecedented economic nationalism, a growing role for state intervention in the economy, and experimentation with variants of socialism and self-reliance. Comprehensive development planning was widespread, and the prevailing model of development throughout much of Latin America, Asia, and Africa was a variant of a statist, largely inward-oriented import-substitution industrialization. It was also socially redistributive, at least in rhetoric. The 1980s and 1990s, by contrast, have provided a nearly complete reversal in economic policy. Virtually everywhere, developing countries have begun restructuring the nature of their intervention in the domestic economy, liberalizing their domestic trade and investment regimes, privatizing state-owned enterprises, and pursuing a variety of economic reforms.

Behind these policy changes was a new set of ideas. According to some observers, the striking convergence in the pattern of economic (and political) reform efforts reflects a “triumph” of liberalism on a global scale. It is the “end of history,” ushering in a new period of liberal ascendance. This theme has been popularly restated by the U.S. media during the past several years. The extent to which this vision of the new world order is globally shared is subject to serious debate and will be considered in further detail later in this chapter. Nevertheless, there is little doubt that there has been a major change in the language used, the distinctions promulgated, and issues considered important during the past fifteen years.

After nearly three decades of steady economic growth, the six capitalist countries of Southeast Asia today constitute the world's fastest-growing regional economy. The six (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Brunei) form the Association of Southeast Asian Nations, known as ASEAN. In contrast to their relatively homogeneous Northeast Asian neighbors, the ASEAN countries are characterized by extreme ethnic, cultural, and religious diversity. Their European colonial heritage is equally diverse. Yet unlike other ethnically diverse, European-colonized developing regions such as Africa, the Middle East, and South Asia, the ASEAN countries have maintained ethnic harmony and political peace for decades. Their sustained economic success challenges popular ideologies that, for example, Confucianism is conducive to capitalist economic development while Islam is not, or that colonialism is the primary cause of economic development failure in postcolonial societies. In contrast to ASEAN's success, the four socialist countries of Southeast Asia – Vietnam, Cambodia, Laos, and Burma (Myanmar) – have been counted among the world's poorest and least successful economies, with their 120 million citizens suffering decades of war and civil strife. Tables 8.1 and 8.2 document the economic contrasts between these two groups of countries.

The ASEAN countries' economic success is particularly distinctive for its heavy dependence on the world economy, continuing the region's more than 1,000-year history of widespread participation in maritime-based trade. This is the result of Southeast Asia's distinctive geography, which consists of peninsular and archipelagic territories lying astride the major world sea-trading route between the great empires of China to the north and India to the west.

The 1980s and early 1990s witnessed historic changes in the patterns of economic development that had prevailed since the end of World War II. New winners and losers emerged within what had traditionally been called the “third world.” Thus, as the new century approaches, East Asia's newly industrialized countries (NICs) are on the verge of joining the developed world. At the other extreme, a large part of the African continent has experienced an absolute decline in living standards, and its future prospects appear dim. In between, other countries in Asia, Latin America, and the Middle East are trying – with various degrees of success – to reposition themselves to take advantage of new global dynamics. Finally, a new group of third world nations has appeared as a consequence of the collapse of communism. Eastern Europe and the former Soviet republics are now facing many of the same problems as other developing countries and competing with them for available resources.

There has been a great deal of debate about the reasons for the differential success in achieving economic development. In this book, the authors stress the importance of two sets of variables: international and regional. While not denying the role of domestic economic, political, and cultural factors, we believe that recent analysis has seriously underestimated the relevance of international variables and overlooked the importance of geographic location. Moreover, there has been an interaction between international and regional factors in ways that skew an individual nation's chances of achieving rapid growth with a measure of equity.