Category: Developmental state

Structural Transformation: Then and Now

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by C.R.Yadu and Sahil Mehra

A major theme that dominates the literature on development economics is the narrative of ‘Structural Transformation’, which, based on the experience of developed economies, envisages a gradual ‘modernisation’ of the economy. This process is expected to unfold in a similar way across the economies of global South, where the importance of non-agriculture/high-productivity/capitalist sectors in terms of both contribution to national income and labour employment would increase and that of agriculture/low-productivity/pre-capitalist sectors would fall, ultimately leading to dissolution of this dualist structure of the economy (Lewis, 1954; Kaldor, 1967; Kuznets, 1968). This transformation is expected to bring productivity gains across all sectors, reduce poverty, and lead to high levels of economic prosperity. According to Monga and Yifu Lin (2019), structural transformation is “arguably the single most significant concept and social goal in the global quest for prosperity and world peace.”

However, many of the economies of the global South have not been able to undergo this expected path of structural transformation. For example, in 2019, for sub-Saharan Africa, the average contribution of agriculture to GDP has been around 14% while the proportion of population employed in agriculture is 53%. The GDP contribution and employment figures range from 8% and 27% for East Asian and Pacific economies to 17% and 42% for South Asia respectively (World Development Indicators, 2021).

The dominant narrative, largely propagated by international agencies like the World Bank, still advocates the validity of the process of structural transformation, continues to use this framework to understand the labour and employment transition in the global South, and advocates policies to achieve the same. In contrast, within various critical strands of literature, there is an increasing realization that the nature and pattern of structural transformation that unfolded in the global North might not be replicable in the global South (Dorin, 2017; Scherrer, 2018; Breman, 2019). Building on some of these criticisms, we argue that the possibilities of attainment of a North-style structural transformation remains bleak in the contemporary global South. This is majorly because the socio-economic and political context which facilitated the process of structural transformation of the economies in the global North is no longer available to the global South. The process in the North was, to a large extent, fostered by colonialism which allowed these economies to undertake expropriation and extraction of resources, without much concern for ecological limits, as well as to transfer a proportion of their population to the newly found lands in the temperate regions. Given the significant changes in the structure of capitalism now as compared to the earlier phase, it is worthwhile to investigate the possibilities of the global South experiencing the envisaged path of structural transformation.

In the following sections, we elaborate on why the received wisdom in development economics no longer provides an adequate framework to understand capitalist development in the global South.

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Big business’s response to the COVID-19 pandemic highlights a problem of incentives in South Africa

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The COVID-19 pandemic has swept across the global economy, causing havoc and leaving many economies teetering on the brink of economic and social collapse. Moreover, the arrival of a second and now third wave of infections and a further mutation of the virus is driving the economy further into peril and uncertainty. The announcement by Cyril Ramaphosa, back in March 2019, that two of South Africa’s wealthiest families and the pinnacle of big business, the Rupert and Oppenheimer families, would be donating R1 billion each was met with admiration from all corners of the country. These commitments have since been matched by the Motsepe group of companies and Naspers, donating R1.5 billion. To date, the fund has amassed over R3.22 billion in pledges from a wide array of private, public, and political donors.

Responses of this type are understandable when combining the already bleak outlook for the South African economy with a significant and potentially catastrophic supply shock. However, a question that may be playing on many South Africans minds is: why, given the fact that South Africa’s economy has long struggled with growth and several structural issues, is this response from big business only coming now in the face of a global pandemic? An easy answer may be that there has not yet been an event of this magnitude for big business to respond. However, a counter to this argument is that businesses should continuously be re-investing their profits regardless of the economy’s health.

South Africa has a long history of the inefficient use of profits, which favours hording cash and conducting unproductive investments such as mergers and acquisitions. These uses of profits are a direct result of the skewed incentives facing the agents of many large companies. For instance, many CEOs are incentivised through sizeable bonus packages to maximise the shareholders’ value rather than focusing on the long-term health and sustainability of the business. This short-term view causes CEOs to opt to retain earnings rather than embark on risky research, development, and innovation endeavours that often fail but may result in enormous payoffs if they succeed economically and socially. Short-termism is a result of a corruption of the idea of value creation where price is associated too closely with true value, nuturing an entrenched system of extraction that contributrs to worsening economic and social conditions. This is something the professor in the Economics of Innovation and Public Value at University College London, and director of the Institute for Innovation and Public Value, Mariana Mazzucato laments in her book The Value of Everything.

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Developmental Agency under the Radar: Developmental States and Coalitions in Dependent Market Economies and Low-Tech Sectors

David KarasLeave a comment

In a recent paper co-authored with László Bruszt and published in a Special Issue of Review of International Political Economy, we identify a developmental state in the least likely  of times – the period of hegemonic neoliberalism in the 1990s and early 2000s –  and the least likely of places, namely the post-socialist Central Eastern European (CEE) economies conventionally described as FDI-dependent Dependent Market Economies (DMEs). 

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Separated under the Same Roof: The Revived Relationships of State-Market Institutions. 

Lorena Lombardozzi1 Comment

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When looking at the way contemporary global value chains/global production networks (GVCs/GPNs) and the articulations of globalised capital have been studied, it is clearly visible that the hegemonic power of Multinational Corporations (MNCs) has monopolised the empirical and theoretical analysis. Indeed, their ability to maintain control over the technological, financial and commercial flows through private-led governance has impacted most of the industrial development and underdevelopment of the Global South. Such footloose private operations have often caused undesired consequences such as eroded environmental standards, low wages and scrapped social protection rights. Governments have joined in a race to the bottom on fiscal and labour deregulations in order to attract foreign direct investment in exchange for low and semi-skilled jobs, resulting in very low fiscal revenue, low productivity, balance of payment imbalances and poor social outcomes. 

The underpinning theory was that countries should follow their comparative advantages and let the market determine prices of labour (costs) and goods in order to be competitive in the world market and maximise returns. Yet, such losing game has been criticised since the start by heterodox development economists who widely denounced how theories and policies of development forgot the role of the state in history and in the present. In other words, public institutions have always played a key role not only in the quantitative making of capitalist accumulation, but also in its qualitative distributional and developmental outcomes. 

Building upon the heritage of such scholarship, and in view of multiple and overwhelming ‘market failures’ in the global South and beyond, a new wave of Marxist-institutionalist inter-disciplinary literature spanning from Geography to International Economics and Finance has been trying to untangle the potential synergies between the public and the private domains by connecting the GVCs/GPNs and Developmental State approach. 

In this debate, it has been emphasised that the state should be seen as a facilitator (i.e. assisting firms in smoothing market transactions); a regulator (combined with distributor to mitigate inequality and negative market externalities); a buyer (i.e. public procurement); a producer (i.e. state-owned enterprises) and a financer as a result of state-capital reconfigurations through sovereign wealth funds and development banks. Therefore, such functions should be foregrounded in analyses of development, because they are key to understanding developmental sources and processes within GVCs. Read More »

BNDES’ multidimensional retreat from the Brazilian economy

kyunghoonkim0208Leave a comment

BNDES_Building

Brazil is in a crisis again. The COVID-19 pandemic has spread across the country and political incompetence has led to a massive health crisis. Investment outflows have been rapid and the Brazilian real has depreciated dramatically. The Brazilian economy is set to contract again after three years of weak positive growth.

Brazil’s development bank Banco Nacional de Desenvolvimento Econômico e Social (BNDES) has announced some measures to deal with the financial instability caused by the COVID-19 pandemic. However, these measures are being criticised for being insufficient. Rather than being a temporary policy mistake that can be corrected easily, BNDES’ passive response is linked to the bank’s structural retreat from the economy over the past five years.

During the 2000s, BNDES was acclaimed as a catalyst of the country’s economic growth. Globally, developing countries such as Indonesia saw the rise of BNDES as something favourable and sought to mobilise their own national development banks.

By acting as a lender and a minority shareholder of major domestic companies, BNDES played a key role in Brazil’s state-activist growth model of which the observers have labelled ‘liberal neo-developmentalism,’ ‘developmental neoliberalism,’ or ‘democratic state capitalism.’ Furthermore, BNDES actively supported national champions’ internationalisation strategy by financing export and investment activities. During and after the global financial crisis, BNDES’ role extended and was used by the government to carry out counter-cyclical operations. Read More »

Lean on me: Development financial struggles and national development banks

kyunghoonkim0208Leave a comment

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National development banks are back in fashion and here to stay. A number of countries benefited from the global economic boom during the 2000s as exports and commodity revenues surged. These countries’ governments stored some of the current and fiscal account surpluses and used the capital to expand state financial institutions. Two prominent types of institutions have grown rapidly, namely sovereign wealth funds (SWFs) and national development banks (NDBs), which often have financial return and development stimulation as their core mandates, respectively. Much attention has been afforded to how these organisations’ activities have turned into a global force. For example, the Norwegian SWF’s investment spans across 73 countries, including shares in more than 9,000 companies, and China’s NDBs have emerged as the developing world’s leading project backer.

More recently, NDBs have been identified as important agents in funding domestic development projects in a wide range of developing and advanced countries. The perceived role of NDBs is shifting from a reactive counter-cyclical role towards a proactive patient capitalist role. Popularity in NDBs may appear to be obvious due to the rising interest in pursuing state-designed development planning and industrial strategies over the past decade. While many observations have focused on the growing inclination towards state activism as catalyst to NDBs’ expansion around the world, this piece examines three structural challenges incentivising developing countries to mobilise NDBs. Read More »

The Sacrificial Generations of Capitalism

Abel B.S. Gaiya1 Comment

Screenshot 2020-02-11 at 09.28.58In this article I remind readers about the existence of “sacrificial generations” within global capitalist history. By sacrificial generation I mean a group of people at a point in time that experiences suffering with the immanent or intentional effect of changing economic, political or social conditions, which are in turn disproportionately enjoyed by another group of people at a later period in time. I identify four areas in which there systematically exists sacrificial generations:  three stages of capitalist development (state formation, capitalist property rights transition and early industrialization) and a cyclical aspect of capitalism (Polanyian-Marxian cycles). It could also be argued that the future generations which would disproportionately experience the environmental costs of past and present generations’ consumption are “climatic sacrificial generations”, but this will not be explored. Read More »

Indonesia’s State-Led Development: Custodian of the National Interest, or Boondoggle?

guildjames1 Comment

industry-4612432_1920Nobel Laureate Esther Duflo once likened the work of economists to that of plumbers – tinkering and adjusting as necessary as they engage with the details of economic policy-making. The implication in this comparison is that economists generally understand economic systems and behaviour – how the pipes come together – and that the main work of the discipline is to fiddle with these components – adjusting the pressure, replacing valves – to see what works and what doesn’t.

A critique of this approach was compiled by Ingrid Harvold Kvangraven here. The primary criticism is that the basic premise is flawed – we do not, in fact, have a very complete understanding of how the pipes come together. Often, we don’t even know where they are. The institutional architecture that determines economic outcomes can vary widely from one country to the next. With so much variation at the systemic-level the utility of “tinkering” at the margins is questionable.

This blog series will interrogate some of the prevailing assumptions about the relationship between state and capital and look at why and in what ways some economies are deeply intertwined with the state. The structural conditions that actually exist in developing economies are often ignored in mainstream economic analyses – the prescription for countries with large state-owned sectors is usually some combination of more market liberalization, less protectionism, better enforcement of property rights. This ignores why the economy is structured that way in the first place, and therefore such prescriptions risk being disconnected from the reality on the ground, and thus ineffective.

Indonesia’s economic trajectory helps to illustrate this point. Despite a long history of sometimes violent anti-communist sentiment, massive portions of the economy are either partially or directly controlled by state-owned enterprises. According to Kyunghoon Kim in 2016 there were “148 SOEs in Indonesia, and their total assets were equivalent to 56.9% of the country’s GDP.” This includes the state-owned oil and gas company Pertamina, three of the four largest banks, the state-owned electric utility PLN which owns the entire national grid, airport operators Angkasa Pura I and II which operate every major commercial airport, the telecom giant PT Telekomunikasi Indonesia and the largest toll road operator Jasa Marga, to name just a few. Read More »