Development Strategies

An Expert's View about Business Environment in the United Kingdom

Posted on: 2 Mar 2010

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.

Development Strategies in Historical and Critical Political Economy Perspectives Course on: GLOBALIZATION AND CHALLENGES TO THIRD WORLD DEVELOPMENT Bonn Juego PhD Fellow Global Development Studies Aalborg University, Denmark E-mail: 18 February 2010 Development and International Relations Department of History, International and Social Studies Aalborg University, Denmark 1 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 much poorer? ? 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 connected 2 Why are there so few middle income nations? South Korea - Somalia, GDP per Capita 1950-2001 Korea (Rep.) Somalia 16000 14000 12000 10000 8000 6000 4000 2000 0 Source: original data extracted from Angus Maddison, OECD, Paris, 2003 From Erik Reinert?s Presentation. 3 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2001 On the power of political-economic ideas.... John Maynard Keynes, concluding notes in The General Theory of Employment, Interest and Money (1936) ?[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.? 4 Paul Samuelson?s Family Tree of Economics 5 David Ricardo Theory of Comparative Advantage in International Trade ? 2 x 2 model (2 economies, 2 goods) ? Labor theory of value (bartering of labour hours) ? No transport costs ? Identical traded goods ? Perfectly mobile factors of production ? No tariffs or other trade barriers ? Perfect knowledge Principles of Political Economy and Taxation (1817) 6 Two Types of Economic Theory MAINSTREAM CANON THE OTHER CANON FUNDAMENTAL (Standard Textbook (Renaissance / Reality DIFFERENCE Economics) Economics) Origin of Wealth Material sources: from nature Immaterial sources: from (land, physical labour, capital) culture (Man?s creativity and morality) PHYSIOCRACY ANTI-PHYSIOCRACY Focus of Analysis Man the Trader and Consumer Man the Creative Producer EXCHANGE PRODUCTION Unit of Analysis Atomistic; Mechanical analysis Holistic; Synthesis analysis INDIVIDUAL COMMON WEAL 7 See The Circular Flow of Economics The real economy Financial/money economy ?Black Box? Production of goods Money/capital and services 8 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 9 Qualitative difference in economic activities Diminishing returns Increasing returns ? production ?costs ?returns ?production ?costs ?returns 10 Qualitative difference between ?Agriculture? and ?Manufacturing? (some stylised facts/ideal types) MANUFACTURING AGRICULTURE 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 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 services) ? 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) relations. ? Creates a middle class and conditions for 11 democracy Adam Smith: 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 12 Karl Marx: 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 civilization.? - 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 objectified.? - The Grundrisse: Critique of Political Economy (1858) 13 Cumulative Causation 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 Napoli 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 Mines (1613) (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) 14 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) 15 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 exportation of manufactured goods and the importation of foreign raw material.? Sir Robert Walpole (1676-1745), Britain?s First Prime Minister 16 Industrial Policy, Infant Industry Protection/Creation in 1721 British Legislation 1. Import duties on raw materials used for manufactures were lowered or dropped. 2. Duty drawbacks on imported raw materials for exported manufactures were increased. 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. 17 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 18 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?." 19 Listian Principles vs Neoclassical Principles in Development NEO-CLASSICAL PRINCIPLES LISTIAN 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: polarization.) win/win situations. 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). th 13 century Florentine Chancellor Brunetto Latini (1210-1294) explains the wealth of cities as a common weal (?un ben comune?). 20 The United States as the Ideal Type of a Developmental State ?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 21 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 administrations. ?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 [1841]) of her greatness, to preach to other ladders 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.? 22 Morgenthau Plan vs Marshall Plan To deindustrialise, or to reindustrialise... MARSHALL PLAN MORGENTHAU PLAN (Re-industrialisation Plan) (De-industrialisation Plan) George C. Marshall Henry Morgenthau, Jr Secreta US Secretary of State, 1947-1949ry of the US Treasury Nobel Peace Prize, 1953 (1934-1945) 23 Free Trade: 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, 24 social and institutional phenomena" Third World?s integration to the World Economy : The Case of Peru Increasing Exports, Falling Wages 100 % 7 75 % 6 50 % 5 25 % White collar wages 4 0 % Blue collar wages 3 Export -25 % 2 -50 % 1 -75 % -100 % 0 1960 1970 1980 1990 2000 25 INTRA-TRADE: Rich-to-Rich, Poor-to-Poor 26 Development Paradigm: State vs Market DEVELOPMENTAL STATE NEO-LIBERALISM (East Asian Miracle, 1965-1990) (Washington Consensus, 1980s-present) Industrial Policy Market-led Development Thru Industrial Policy and active role of state in Privatisation, Liberalisation, Deregulation, development Open Market Economy, Competitiveness High growth, high equity with state intervention (8 HPAEs) 27 Culture shaping Development ?The central conservative truth is that it is culture, not politics, that determines the success of a society. The central liberal truth is that politics can change a culture and save it from itself.? ?Daniel Patrick Moynihan 28 Geography, Climate, Disease School vs 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 29 mankind - Erik Reinert (2007).? Development Aid and Millenium Development Goals as ?Welfare Colonialism? ? 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 for (RE-)DISTRIBUTION ? Increasing dependence of the poor rather than promoting LONG-TERM STRUCTURAL CHANGE 30 Bad habits for, serious obstacle to, Development... ?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 assumptions) 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. 31 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? Missing dimension: ?GET THE ECONOMIC ACTIVITIES RIGHT? 32 Concluding Remarks ? ?Mechanisms? of Development ? Pattern of success of England, to continental Europe and US, and to East Asia ? Economic development is ?activity-specific?. (Economic structure matters.) ? Industrialisation (manufacturing) as mandatory passage point to development. » 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 poor!!! ? Development strategy must be activity-specific and context-specific. 33
Posted: 02 March 2010

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