A historical and critical political economy perspective that explains the wealth and poverty of nations. Special attention is given to policy success and failures in development strategies from the 17th century to the present by highlighting the crucial importance of economic activity-specific and context-sensitive development strategies.
in Historical and Critical Political Economy Perspectives
Course on: GLOBALIZATION AND CHALLENGES TO THIRD WORLD DEVELOPMENT
Global Development Studies
Aalborg University, Denmark
18 February 2010
Development and International Relations
Department of History, International and Social Studies
Aalborg University, Denmark
Development - History - Critical Political Economy
? A Fundamental Development Question
? How rich countries got rich?
? Why poor countries stay poor?
? Why, in spite of being just as productive / efficient / hardworking as
their First World counterparts, people in the Third World are so
? History: the only laboratory in development studies,
economics, and the social sciences
? 500 years of development history
? Critical Political Economy: the politics behind the economy
? ?Social relations?: ?the political? & ?the economic? are organically
Why are there so few middle income nations?
South Korea - Somalia, GDP per Capita 1950-2001
Korea (Rep.) Somalia
Source: original data extracted from Angus Maddison, OECD, Paris, 2003
From Erik Reinert?s Presentation.
On the power of political-economic ideas....
John Maynard Keynes, concluding notes in
The General Theory of Employment, Interest and Money
?[T]he ideas of economists and political
philosophers, both when they are right and when
they are wrong, are more powerful than is
commonly understood. Indeed the world is ruled by
little else. Practical men, who believe themselves to be
quite exempt from any intellectual influences, are usually
the slaves of some defunct economist. Madmen in
authority, who hear voices in the air, are distilling their
frenzy from some academic scribbler of a few years back.
I am sure that the power of vested interests is vastly
exaggerated compared with the gradual encroachment of
ideas. Not, indeed, immediately, but after a certain
interval; for in the field of economic and political
philosophy there are not many who are influenced by new
theories after they are twenty-five or thirty years of age,
so that the ideas which civil servants and politicians and
even agitators apply to current events are not likely to be
the newest. But, soon or late, it is ideas, not vested
interests, which are dangerous for good or evil.?
Paul Samuelson?s Family Tree of Economics
Theory of Comparative Advantage in International Trade
? 2 x 2 model (2 economies,
? Labor theory of value
(bartering of labour hours)
? No transport costs
? Identical traded goods
? Perfectly mobile factors of
? No tariffs or other trade
? Perfect knowledge
Principles of Political Economy and Taxation (1817)
Two Types of Economic Theory
MAINSTREAM CANON THE OTHER CANON
(Standard Textbook (Renaissance / Reality
Origin of Wealth Material sources: from nature Immaterial sources: from
(land, physical labour, capital) culture (Man?s creativity and
Focus of Analysis Man the Trader and Consumer Man the Creative Producer
Unit of Analysis Atomistic; Mechanical analysis Holistic; Synthesis analysis
INDIVIDUAL COMMON WEAL
The Circular Flow of Economics
The real economy Financial/money
of goods Money/capital
Mode of production molds people....
?There is a startling difference
between the life of men in
the most civilised provinces
of Europe, and in the wildest
and most barbarous districts
of New India. This difference
comes not from the soil, not
from climate, not from race,
but from the arts.?
?Francis Bacon, 1620
in economic activities
Diminishing returns Increasing returns
? production ?costs ?returns ?production ?costs ?returns
Qualitative difference between
?Agriculture? and ?Manufacturing?
(some stylised facts/ideal types)
an increasing returns activity a diminishing returns activity
? Novelty (innovation and technological ? Few windows of opportunity for
change) innovation (until very recently)
? Diversity (heterogeneity ? large division ? Very little division of labour
? Increased population a problem
? Increased population a necessity in order because of diminishing returns
to create markets for manufactures
? Diminishing returns
? Scale (increasing returns)
? Perfect competition (commodity
? Dynamic imperfect competition competition)
? Synergy (manufacturing-agriculture- ? Few synergies
? Technological change leads mainly to
? Technological change leads to a ?Fordist lower prices in the consuming country
wage regime? (high wages, high profits,
? Generally creates a feudal class
high tax base)
? Creates a middle class and conditions for
Invisible Hand, Nature and Providence in Development
?The rich ... are led by an invisible hand to
make nearly the same distribution of the
necessaries of life, which would have been
made, had the earth been divided into
equal portions among all its inhabitants...
When Providence divided the earth
among a few lordly masters, it neither
forgot nor abandoned those who seemed to
have been left out in the partition. These
last too enjoy their share of all that it
produces. In what constitutes the real
happiness of human life, they are in no
respect inferior to those who would seem so
much above them. In ease of body and
peace of mind, all the different ranks of life
are nearly upon a level, and the beggar,
who suns himself by the side of the
highway, possesses that security which
kings are fighting for.?
-Adam Smith (1759), A Theory of Moral Sentiments
Mode of Production (Industry) in Development
?The bourgeoisie, by the rapid
improvement of all instruments of
production, by the immensely facilitated
means of communication, draws all, even
the most barbarian, nations into
- The Communist Manifesto (1848)
?Nature builds no machines, no locomotives,
railways, electric telegraphs, self-acting
mules etc. These are products of
human industry; natural material
transformed into organs of the human
will over nature, or of human
participation in nature. They are organs of
the human brain, created by the human
hand; the power of knowledge
- The Grundrisse: Critique of Political Economy (1858)
in the history of the wealth of nations
Antonio Serra (1613), Breve trattato delle cause che
possono far abbondare li regni d'oro, argento dove
non sono miniere. Con applicazione al Regno di
Naples: raw materials (poverty)
Venice: manufacturing (wealth)
Most important causes of the wealth of nations
1. quantity of industry (increasing returns)
2. the quality of the population
(People of rich Genoa, Florence, and Venice were ?by nature
industrious, or diligent and prone to inventions, and on the
watch for opportunities to apply their industry and build up
trade not only in their own country but in others.?)
A Brief Treatise on the Causes that can
make Gold and Silver plentiful in
Kingdoms where there are no
3. the extension of trading operations
(import raw materials, export manufactured goods)
Antonio Serra was 'the first to compose a scientific
4. the regulations of the sovereign (common good) treatise...on Economic Principles and Policy'
(Joseph Schumpeter, 1954)
Manufacturing as the real gold mine
?..such is the power of industry
that no mine of silver or gold in New
Spain or Peru can compare with it,
and the duties from the
merchandise of Milan are worth
more to the Catholic King than the
mines of Potosí and Jalisco.
Italy is a country in which there is
no important gold or silver mine,
and so is France: yet both countries
are rich in money and treasure
thanks to industry.?
?Giovanni Botero, Ragion di Stato (1588)
Britain?s 1721 Industrial Development Strategy:
Export manufactured goods, Import raw materials
Robert Walpole, through the King?s address to
Parliament, on 1721 legislation:
?...It is evident that nothing so
much contributes to promote
the public well-being as the
manufactured goods and
the importation of foreign
Sir Robert Walpole (1676-1745), Britain?s First Prime Minister
Industrial Policy, Infant Industry Protection/Creation in
1721 British Legislation
1. Import duties on raw materials used for manufactures were lowered or
2. Duty drawbacks on imported raw materials for exported manufactures were
3. Export duties on most manufactures were abolished.
4. Duties on imported foreign manufactured goods were raised.
5. Export subsidies (bounties) were extended to new export items, while the
existing export subsidies were increased.
6. Regulation was introduced to control the quality of manufactured products.
Colonialism as a Technology/Trade/Development Policy
?That all Negroes shall be prohibited from
weaving either Linnen or Woollen, or
spinning or combing of Wooll, or working
at any Manufacture of Iron, further than
making it into Pig or Bar iron:
That they be also prohibited from
manufacturing of Hats, Stockings, or
Leather of any Kind...
Indeed, if they set up Manufactures, and the
Government afterwards shall be under a
Necessity of stopping their Progress, we
must not expect that it will be done with
the same Ease that now it may.?
- Joshua Gee (1729),
Trade and Navigation of Great Britain Considered
EU to trade aid for raw materials
Politiken News in English, 4. Nov 2008
Europe needs raw materials for its
growing hi-tech industry. The EU
Commission wants to use aid as
leverage for supplies.
EU Industry Commissioner Günther Verheugen
A single mobile phone requires some 40 different raw
materials - some of them particularly rare.
"Many of the raw materials are found in Africa - a
continent that thanks to foreign and aid policy has Europe
as its most important partner?."
"We must use these instruments to ensure that we have
secure access to raw materials?."
Listian Principles vs Neoclassical Principles
1) Free trade is a goal per se, even
1) A nation first industrialises and is then
before the required stage of
gradually integrated economically into
industrialisation is achieved. (Risk of
nations at the same level of
lose/lose situation & factor-price
development. Symmetrical integration:
2) The preconditions for wealth,
2) All economic activities are
qualitatively alike, economic structure
democracy and political freedom are all
does not matter.
the same: a diversified manufacturing
sector subject to increasing returns.
3) ?There is no such thing as society?
3) Economic welfare is a result of synergy.
Margaret Thatcher (1987).
13 century Florentine Chancellor
Brunetto Latini (1210-1294) explains
the wealth of cities as a common weal
(?un ben comune?).
The United States as the Ideal Type of a
?Of course, free trade is the ideal, and the United States
will proclaim the true cosmopolitan principles
when the time is ripe. This will be when the United
States has a hundred million people and the seas are
covered with her ships; when American industry attains
the greatest perfection, and New York is the greatest
commercial emporium and Philadelphia the greatest
manufacturing city in the world; and when ?no earthly
power can longer resist the American stars.? Then ?our
children?s children will proclaim freedom of trade
throughout the world, by land and sea.?
?Joseph Dorfman, around 1830
Kicking away the ladder to development .....
?It is a very common clever device that when
anyone has attained the summit of greatness, he
kicks away the ladder by which he has climbed
up, in order to deprive others of the means of
climbing up after him. In this lies the secret of the
cosmopolitical doctrine of Adam Smith, and of
the cosmopolitical tendencies of his great
contemporary William Pitt, and of all his
successors in the British Government
?Any nation which by means of protective duties
and restrictions on navigation has raised her
manufacturing power and her navigation to such
a degree of development that no other nation
can sustain free competition with her, can do
The National System of Political Economy
nothing wiser than
to throw away these
Friedrich List (1885 )
of her greatness, to preach to other
nations the benefits of free trade, and to declare
in penitent tones that she has hitherto wandered
in the paths of error, and has now for the first
time succeeded in discovering the truth.?
Morgenthau Plan vs Marshall Plan
To deindustrialise, or to reindustrialise...
George C. Marshall
Henry Morgenthau, Jr
Secreta US Secretary of State, 1947-1949ry of the US Treasury
Nobel Peace Prize, 1953
Towards Equalisation or Polarisation?
Factor Price Equalisation World Income Polarisation
(free trade leads to convergence of prices and wages) (Free trade leads to world income polarisation ?
convergence of rich countries towards wealth and poor
countries towards poverty)
US economist Paul Samuelson, Nobel Prize 1970
"for the sc Swedish economist Gunnar Myrdal, Nobel Prize 1974ientific work through which he has
deve (with Friedrich August von Hayek)loped static and dynamic economic theory
and actively contributed to raising the level of
"for their pioneering work in the theory of money and
analysis in economic science"
economic fluctuations and for their penetrating
analysis of the interdependence of economic,
social and institutional phenomena"
Third World?s integration to the World Economy
The Case of Peru
Increasing Exports, Falling Wages
100 % 7
White collar wages
0 % Blue collar wages
-100 % 0
1960 1970 1980 1990 2000
INTRA-TRADE: Rich-to-Rich, Poor-to-Poor
Development Paradigm: State vs Market
(East Asian Miracle, 1965-1990)
(Washington Consensus, 1980s-present)
Industrial Policy and active role of state in
Privatisation, Liberalisation, Deregulation,
Open Market Economy, Competitiveness
High growth, high equity with state
intervention (8 HPAEs)
Culture shaping Development
is that it is culture,
not politics, that
success of a
The central liberal
truth is that politics
can change a
culture and save it
?Daniel Patrick Moynihan
Geography, Climate, Disease School
The Other Canon (Production-based School)
?The basic variables are as expected ? economic policy affects
growth rates, temperate/snow zone economies grow faster
than tropical countries, regions with falciparum malaria
grow less rapidly than regions without the disease, and
landlocked countries grow more slowly than countries with
a coastline.? - Jeffrey Sachs (2000)
?By stressing geography, climate and disease as
economic factors, focus is moved away from the
massive policy failures of the Washington Consensus
during the last decades. We should therefore not be
surprised that key proponents of past failed policies ?
like Jeffrey Sachs ? are now the key proponents of the
theories that bring in this new focus. When the
invisible hand fails to deliver growth, economics
seems to degenerate into a rather primitive belief that
the misery of this world is caused by fate, providence
and nature ? geography, climate and disease ? not by
mankind - Erik Reinert (2007).?
Development Aid and Millenium Development Goals as
? Palliative rather than DEVELOPMENTAL
? Treating symptoms rather than CAUSES of poverty
? Attacking the poor rather than POVERTY
? FINANCING FOR DEVELOPMENT problem
? Neglecting development of the PRODUCTIVE SECTOR and hence the prospects
? Increasing dependence of the poor rather than promoting LONG-TERM
Bad habits for, serious obstacle to,
?Ricardian Vice? ?Krugmanian Vice?
(piling a heavy load of strong policy
(theoretical models that explain the real
recommendations upon very shaky
world better than Ricardo?but not
applying them to actual economic policy)
2008 Nobel Prize ?for his analysis of trade pattern
Classical Ricardian School of Economics
and location of economic activity?
? Economists? trade-off:
? Nobel lecture conclusions (8 Dec 2008):
?The general reader will have to make up his mind,
? Increasing returns have been a powerful force
whether he wants simple answers to his shaping the world economy.
questions or useful ones?in this as in other
? That force may actually be in decline.
economic matters he cannot have both?. -
? But that decline itself is a key to understanding
Joseph Schumpeter, 1932)
much of what is happening in the world today.
SINCE 1990 THE WASHINGTON INSTITUTIONS
HAVE PROVIDED A STRING OF RED HERRINGS
?get the prices right?
?get the property rights right?
?get the institutions right?
?get the governance right?
?get the competitiveness right?
?get the innovations right?
?get the entrepreneurship right?
?get the education right?
?get the climate right?
?get the diseases right?
?get the culture right?
?GET THE ECONOMIC ACTIVITIES RIGHT?
? ?Mechanisms? of Development
? Pattern of success of England, to continental Europe and US, and to East
? Economic development is ?activity-specific?. (Economic structure matters.)
? Industrialisation (manufacturing) as mandatory passage point to
» Increasing returns activities.
» Synergy (manufacturing - agriculture - advanced services)
» Induces institutions
» Emulation, then Comparative Advantage.
? Comparative Advantage: also means it?s possible to specialise in being
? Development strategy must be activity-specific and context-specific.