Economic Development in the 21st Century: A Review

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by Ramiro Eugenio Álvarez (University of Siena) and Santiago José Gahn (Roma Tre University)

What drives economic development? What is the nature of the external constraints that developing economies face? What is the role of industrial policy and the central banks in the development process? These were the core questions that were posed in the recent webinar series on Development in the 21st Century, organized by the Economic Development working group of the Young Scholars Initiative (YSI). These four meetings were particularly oriented towards examining notions such as distribution, patterns of specialization, industrial policies and balance of payment constraints. The discussion of such phenomena is especially important in a context of deep academic divides regarding the drivers of economic development.

Following the tradition of the Latin American structuralist school, the meetings placed special emphasis on the inherent challenges of conditions associated with being in the periphery when the problem of development is faced. During the meetings, processes of economic integration that perpetuate asymmetric economic relations of the center-periphery type were examined, as well as the role played by public institutions, e.g. central banks, in the development of industrial economies.

Value and Distribution in a Small Open Economy

In the first session, Guido Ianni introduced the following question: “Why does an economy produce a certain set of goods and not others?” In order to shed light on the pattern of specialization, he went beyond the traditional critique of the Principle of Comparative Advantage, to account for the impossibility of define it on the basis of a strictly technical criterion (i.e. a priori to distribution).

Also, taking the analytical scheme of the “Production of Commodities by means of Commodities” (Sraffa, 1960), Ianni proposes a distinction between economies capable of producing all the goods necessary for the reproduction of the Social Product domestically and those economies that require imports. Thereby, by recovering on the notion of basic commodities, the presenter formally reconstructs the centre-periphery relationship to explain how the distribution in the first type of economies conditions the distributive conflict in latter.

Finally, and based on the analysis of the choice of techniques, Ianni presents four examples that highlight the issue: 1) the persistence of the phenomenon of reswitching and reverse capital deepening in the context of the open economy, 2) the possibility that variations in the exchange rate induce the development of different patterns of specialization depending on the distributive closure considered, 3) the impossibility of classifying techniques according to a criterion of factorial intensity independently of the values ​​of the real exchange rate and, finally, 4) the effects that variation in distribution exert on the ordering of sectors according to their international competitiveness.

Income Distribution and the Balance of Payments – Some Latin American Structuralist Contributions

In the second session, Ariel Dvoskin and Germán Feldman recovered the Classical Keynesian Approach to revisit the Latin American Structuralist school of thought and proposed economic policy applications based on their suggested interpretation. They emphasized the political nature of the distribution, the redistributive effects of the real exchange rate and the ability of the balance of payments constraint to limit growth.

Dvoskin and Feldman propose a model for peripheral economies, characterized by structural heterogeneity, the endogeneity of the specialization pattern and the possibility of alternative distributive closures. From there, an attempt is made to explain some stylized facts of Latin American economies, particularly the effects derived from technical dependence and financial dependence as distinctive features of their development problems (Dvoskin & Feldman, 2018a, 2018b). The proposed formalization also allows the rereading of the contributions of the Classical Structuralist economists regarding the role of the exchange rate in distribution, exchange rate and tariff policies.

Furthermore, Dvoskin and Feldman also discussed recent theoretical attempts to establish a causal relationship between the real exchange rate and the growth rate of the economy. Such contributions, known in the academy as the Neo-Developmentalist Approach, identify a set of channels by means of which real devaluations would induce increases both in the level and in the growth rate of the product. They critically examine the statements of this stream in the light of their suggested model (see Dvoskin, Feldman and Ianni, 2018).

Industrial Policy in the 21st Century

The third session led by Margarita Olivera focused on the possibilities of economic development in this century. Under this perspective, she focused on demarcating the possible institutional limits induced by a variety of supranational organizations such as, for example, the World Trade Organization.

Based on her work on the book Development in Latin America: Critical discussions from the periphery (edited by Víctor Ramiro Fernández and Gabriel Brondino),  Olivera suggests that free trade agreements do not seem to have been the best strategy to achieve economic development.

Olivera argues that transformation of an economy’s productive structure continues to be one of the pillars of economic development. However,  most of the policies aimed at reforming productive structures carried out by the Western and Asian countries that are developed today are no longer available. On the contrary, the international system, through the regulations imposed on international trade, is more restrictive.

Olivera argues that it is essential to bear in mind that the development strategy adopted will depend on class struggle, power and domination (within and among countries). The development path is conditioned by the ability of certain social groups to impose their political vision. The manner in which these disputes are solved will determine the form and content of the developmental state and its capacity to build and promote industrialization policies beyond the World Trade Organization and the impositions of the Global Value Chains.

The Role of Central Banks in Economic Development

Finally, in the last of the webinars, Matías Vernengo addressed the role that central banks played in the processes of economic development from a historical perspective (listen to the whole presentation here). In his presentation, the creation of public debt and the role of public banks in the financing of industrialization at the end of the 18th century and the first half of the 19th century stand out. Referring to the ideas of Friedrich List, Vernengo argues that such role was interrupted by the rise of liberalism and the “vulgar economy” (the theory of value based on forces of supply and demand and the Quantitative Theory of Money) as well as by the international division of labor. All this meant “kicking away the ladder”, by removing the the possibility of replicating the role of such institutions in the economic development of the periphery (Vernengo, 2016).

If during the Victorian era, central banks circumscribed monetary policy action to the preservation of the value of the currency, it was only in the Keynesian era, after the Great Depression, that Central Banks recover the role of State’s financial agent. In this context, Vernengo highlights the role of capital controls (suggested by Raúl Prebisch) and the policy of low interest rates (promoted by Marriner S. Eccles) in the recovery of the old role of central banks as promoters of growth, in the centre, and facilitators of the incipient processes of industrialization, in the periphery.

Vernengo concludes his historical narrative by interpreting the rise of the Age of Globalization as the return to central banks of the Victorian tradition. In this sense, the author recalls, on a theoretical level, the notion of the Natural Unemployment Rate and the Taylor Rule as the return of the vulgar economy in combination with geopolitical factors, promoting the orientation of the monetary policy towards the control of the inflation and its independence from the treasury. All this disregards the possibility that the monetary authorities might reassume the driving role of development and growth.

References

Dvoskin, A., & Feldman, G. D. (2018a). Income distribution and the balance of payments: a formal reconstruction of some Argentinian structuralist contributions Part I: Technical dependency. Review of Keynesian Economics, 6(3), 352-368.

Dvoskin, A., & Feldman, G. (2018b). Income distribution and the balance of payments: a formal reconstruction of some Argentinian structuralist contributions-Part II: Financial dependency. Review of Keynesian Economics, 6(3), 369-386.

Dvoskin, A., Feldman, G. D., & Ianni, G. (2018). New-Structuralist Exchange-Rate Policy and the Pattern of Specialization in Latin American Countries (No. CSWP28). Centro di Ricerche e Documentazione “Piero Sraffa”.

Olivera, M. (2019). The Possibilities of Industrialization and Structural Change for the Periphery in the Context of Globalization. In Development in Latin America: Critical Discussions from the Periphery (pp. 157-177). Fernández, V. R., & Brondino, G. (Eds.) Palgrave Macmillan.

Sraffa, Pierro. 1960. Production of Commodities by Means of Commodities. Vora & Co Publishers.

Vernengo, M. (2016). Kicking Away the Ladder, Too: Inside Central Banks. Journal of Economic Issues, 50(2), 452-460.

Ramiro Eugenio Álvarez is a PhD student at Università degli Studi di Siena.

Santiago José Gahn is a PhD student at Università degli Studi di Roma Tre.

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