Category: Dependency

Internal and external constraints: economic development without currency crisis

basiloberholzerLeave a comment

Simply speaking, development macroeconomics can be summarized as the challenge of improving productivity and production capacity in poor countries. This involves the conditions that need to be fulfilled for a development process to start as well as the policy framework and instruments that support it. Heterodox approaches consider the state’s role in steering productivity growth as essential (Cardim de Carvalho, 1997). Markets may be able to exploit price signals and adjust resource allocation correspondingly. However, they guarantee neither sufficient profitability of key sectors nor the demand for the goods produced. Both the profit rate and effective demand are conditions for investment to take place (Oberholzer, 2020). It is thus up to the government to make public investment in priority sectors and to apply instruments such as taxes and subsidies in ways that simultaneously allow for economies of scale, higher productivity large-scale employment and demand. This is what is generally referred to as industrial policy (see for example Chang, 2006; Oqubay, 2018).

But this is not everything. Policymakers have to pursue such a development strategy in face of an (often permanent) shortage of foreign currency. While domestic currency can be generated via the domestic banking system including public development banks, the availability of foreign currency is limited unless a country is able to increase exports or restrict imports. Since larger export capacity and a higher degree of import substitution are long-term goals, the current account is determined by domestic and foreign economic growth. This insight has come to be known as the balance-of-payments-constrained model or Thirlwall’s law, respectively (Thirlwall, 1979, 2013): it is reasonable to assume that demand for a country’s exports grows in income in the rest of the world while imports increase with domestic economic growth because a part of increasing incomes is reliably spent on imported goods. Therefore, stability in the balance of payments requires that imports do not grow faster than foreign exchange earnings via exports allow. A limit to the growth of imports implies a limit to the country’s economic growth, hence the balance-of-payments-constrained growth rate.

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Who will Benefit from the Bitcoinization of El Salvador?

Guy Cowman-SharpeLeave a comment

On 8 June, El Salvador’s Legislative Assembly voted to pass the Ley Bitcoin(Bitcoin Law), with a majority vote of 62 out of 84. The legislation was presented to the Assembly days after President Nayib Bukele announced his intention to make bitcoin legal tender, speaking via video broadcast to the Bitcoin 2021 Conference in Miami. Effective from 7 September, all businesses in the country will be required to accept bitcoin alongside the United States dollar, El Salvador’s current currency. Since the bill’s passing, legislators in Panama and financiers in Mexico have expressed interest in recognizing bitcoin as legal tender.

Rather than China’s digital renminbi or Venezuela’s petro, El Salvador will not be pursing the creation of its own cryptocurrency. Bukele is adamant that at this stage Bitcoin will not make up any of the nation’s reserves, held in the Central Reserve Bank of El Salvador. Rather, a trust in the country’s development bank (BANDESAL) worth US $150 million will guarantee convertibility to dollars as a safeguard against bitcoin’s volatility. In doing so, the BANDESAL trust would make sure that the price of a commodity does not widely fluctuate between point of purchase and completion of transaction.

In Bukele’s address he made mention of the lack of financial inclusion for Salvadorans being a motivation for the law. In a country where informal employment makes up around 70% of the labor force, anonymous peer-to-peer cash transfers without the formal requirements of a bank account or the high charges of Western Union make sense as an alternative. Bukele has also expressed his hope that the move will make El Salvador “less dependent” on the United States, given that dollarization ceded monetary independence to the Federal Reserve. But given the increasing centralization of Bitcoin and its reliance on big tech money, it is far more likely that bitcoinization will merely make El Salvador dependent on a different section of US capital.

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Center-periphery relationships of pharmaceutical value chains

Cristina ReisLeave a comment

By Cristina Fróes de Borja Reis and José Paulo Guedes Pinto

It is well known that, during the 20th century, the pharmaceutical industry became extremely powerful at the international level, alongside financial, energy, technology, and manufacturing companies (Wells, 1984). The internationalization of the pharmaceutical industry only rose after the internationalization of patent protection in the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs Agreement) (Haakonsson, 2009). This industry is highly concentrated around a small number of very large transnational groups (65% of global sales are made by the 20 largest players – the ‘big pharma’) that operate worldwide through subsidiaries in 150 countries, on average. Revenue in the worldwide pharmaceutical market increased at a considerable rate, even during the global slump of 2008, and was estimated at an astounding USD1.143 trillion in 2017 (Statista, 2019).  Recently, we published an article  on pharmaceutical value chains, which investigates how they are embedded in an international division of labor, from a new-structuralist theoretical perspective. We ask: how global are the pharmaceuticals value chains? Are there centers and peripheries in pharmaceuticals value chains, and if so, which countries are in each pole?  

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Enduring Relevance: Samir Amin’s radical political economy

Ingrid Harvold KvangravenLeave a comment

By Ingrid Harvold Kvangraven, Maria Dyveke Styve, Ushehwedu Kufakurinani and Ray Bush

In moments of great uncertainty there is refuge to be found in the work of intellectual titans like Samir Amin. After the sad news of his passing in August 2018 in Paris, aged 86, we began thinking about how best to explore the enduring relevance of his analysis and concepts to make sense of contemporary crises.

The pertinence and analytical heft of Amin’s work is particularly important in the contemporary period marked by the interconnected crises related to COVID-19, Black Lives Matter, the climate emergency, and looming debt crises across the periphery. In the years ahead, confronting these multiple and intertwined crises will require the kind of commitment to combining research with political engagement that Amin demonstrated.

Amin’s ability to weave together thorough analysis of the polarising effects of capitalism with concrete political projects for an international radical left makes his work particularly relevant in our quest to understand capitalism, its particularities across the world, and oppositions to it. There is a younger generation of scholars, of which we are a part, that is particularly hungry for Amin’s perspectives, one that came of age in a time where the universities have been thoroughly marketised and moulded by neoliberal processes, and where intellectual production and debates are not necessarily embedded within social struggles.

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Intellectual monopoly capitalism and its effects on development

ceciliarikap7 Comments

What is new with contemporary (global) leading corporations? If gigantic monopolies are a repeated phenomenon in capitalism’s history, why all the fuss we see every day regarding high concentration?

Leading corporations of the 21st century are intellectual monopolies. These are firms that rely on a permanent and expanding monopoly over portions of society’s knowledge. A recent joint OECD and European Union report shows that the top 2000 corporations in business expenditure in research and development (BERD) concentrated 60% of total IP5[1] patents between 2014 and 2016 (Dernis et al., 2019).

How did this happen if intellectual rents enjoyed by the innovator were supposed to disappear once the rest of the industry adopts the new technique? They disappeared if the secret was broken, the patent expired, or when another firm innovated, overcoming the innovating firm’s advantage. Knowledge is cumulative and those innovating have a greater absorptive capacity to keep innovating. Aided by a more stringent and global intellectual property regime, the continuous reinforcement of knowledge monopolies has led to a perpetuation of the core, maximizing rentiership over time.

Intellectual monopolies may not monopolize the markets they operate, which can even be competitive markets like Amazon’s marketplace, where Amazon sells its products with millions of other sellers. Their monopolistic condition relies on their capacity to significantly and systematically monopolize knowledge, which generally – but not always – contributes to market concentration.

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The Demise of Palestinian Productive Sectors: Internal Trade as a Microcosm of the Impact of Occupation

ishikakiLeave a comment

The Israeli occupation has consistently inflicted disastrous economic costs on the Palestinians, costs that economists have examined for decades. One dimension that has been missing in these examinations, however, relates to the distortions in the structure of the Palestinian economy, and the detrimental impacts of these distortions. The term economic structure refers to the contribution of different economic sectors, including agriculture, manufacturing, construction, and trade, to the key macroeconomic variables of output (GDP) and employment. 

Whereas a comprehensive study of these structural distortions is beyond the scope of this blog post, we zoom in on one particular economic sector that has been playing an increasingly dominant role in the Palestinian economy: internal trade. Briefly, internal trade refers to the retail and wholesale buying and selling of goods, including trade with Israel. The increased relevance of the contribution of internal trade to total economic activity in Palestine is part of an ongoing shift away from productive sectors, such as agriculture and manufacturing, towards services, trade, and construction.

This post argues that the dominance of internal trade at the expense of productive sectors is neither a result of a conscious policy effort by the Palestinian Authority (PA) nor an outcome of “laissez faire” market governance. Rather, it is a byproduct of Israeli occupation policies, and a clear consequence of the Palestinian economy’s dependence on the Israeli economy since 1967. The post argues that internal trade is a microcosm of the Palestinian economy as a whole, highlighting the futility of international and donor support for development under occupation. Rather, what is needed involves empowering independent, transparent, accountable, and collective Palestinian policy-making, a quality of leadership and governance that the Palestinian leadership of the last 25 years cannot lead or carry out. 

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Latin America: still caught in the capital flows trap

robertolampaLeave a comment

In a recent article, I discussed the poor state of Latin American economies drawing on some rather obscure works by Raúl Prebisch, explicitly addressed to the disturbing role of capital flows on (primarized and open) Latin American economies. I find that the post-2008 cyclical trend of capital flows is an exacerbated version of what has been affecting Latin America since the days of Prebich .

Mainstream literature on capital flows to developing countries has shared two important commonalities since the 1990s. This literature, for example in the tradition of New Institutional Economics,  tends to assume a beneficial effect of capital inflows, which leads to an improvement of peripheral institutions, whose deficiencies are ostensibly the main cause of economic turmoil and/or failure in attracting capital flows. In doing so, however, mainstream economists deliberately overlook the asymmetric characteristics of the international monetary system and the persisting hegemony of the US Dollar. 

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The New “Passive” Wall Street Counterparts for States in the Global South

jpetry11 Comment

By Jan Fichtner and Johannes Petry

In the past, during the time of the “Washington Consensus” developing countries from the Global South faced the IMF and the World Bank as their main counterparts in important matters of global finance. Based on our recently published research paper “Steering Capital” we argue that due to an ongoing paradigm shift in financial markets this constellation is changing profoundly. A new breed of Wall Street firms is emerging that occupies a pivotal position in the relationship between (developing) countries and financial markets – index providers.

This rise of index providers is grounded in the global shift towards passive investment. Formerly, investors gave their money to funds where a well-paid fund manager was picking stocks (or bonds) with the aim to produce above average returns – to “beat” the market in finance parlance. But now more and more investors invest in cheap passive funds (which comprise both exchange traded funds and index mutual funds) that merely track financial indices. Unlike actively managed funds, however, the passive index funds industry is characterised by enormous economies of scale – in terms of technology it is not a big difference if a passive fund has ten million or ten billion US$ assets under management. In addition, there is a strong first mover advantage. As a result, BlackRock, Vanguard and State Street dominate passive funds as the “Big Three”. Excellent recent work has since focused on how this “new money trust” is shaping the emergent ”American Asset Manager Capitalism”.

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