Covid-19 and The Myth of Convergence: The West, the Rest and the urgent need for fiscal space in the Remainder

Imagining recovery, while a pandemic rumbles on, is an ominous task. But governments around the world have been forced to contend with this challenge. Several African, Asian and Latin American economies were in precarious financial positions before the pandemic hit. Fluctuations in global commodity prices in recent years and mounting trade deficits had already forced several African countries to request the International Monetary Fund (IMF) for a range of support mechanisms including credit facilities. Debt was already reaching alarming levels. The pandemic made economic dependencies more salient, with Zambia plunging towards becoming Africa’s first pandemic-related private debt default

The recent thrust of research championing possible convergence (often based on questionable and selective use of data) between ‘developed’ and ‘developing’ countries ignores the vast range of economic trajectories of former colonies. In slapdash cross-country economic studies, a strategic use of averages and unreliable categorisation is often used to draw generalisations about large-scale change. Sweeping claims made about a rising ‘developing’ world often fail to isolate China’s rise. There is rarely any acknowledgment that most countries’ economies remain undiversified and deeply dependent on foreign actors. The data used to make the case for convergence often relies on GDP and human development indicators, rarely mentioning let alone measuring the structural transformation of economies. Structural transformation remains one of the essential facets of economies that have ‘caught up’ historically. Whether countries can retain fiscal space after this crisis will inevitably depend on the nature of structural transformation and how that has shaped national growth and dependency within the global economy.

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The Social (Relations) Dilemma

The Social Dilemma that is currently streaming on Netflix has garnered much attention by raising a single question – how have we come to accept as normal the fact that a few hundred tech-enthusiasts in Silicon Valley has had an unprecedented impact on billions of lives around the world? Directed by Jeff Orlowski, the Social Dilemma features tech industry insiders raising ethical concerns about business models that shape our everyday digital experience. 

Though the docudrama has topped charts, the narrative on reckoning with this digital Frankenstein moment is not new. For example, Black Mirror is a popular show streaming on Netflix that speculates on how unchecked tech developments can result in a dystopian world. What makes Social Dilemma unique is perhaps because it features an array of “prodigal tech-bros” – usually white males who got rich working for big tech, but then got disillusioned and subsequently achieved “enlightenment”. 

The tech-bros point out that most platforms were started with good intentions to improve the quality of human lives. However, due to the advancements in AI, coupled with a shareholder model of revenue maximization, these platforms have become weaponized by those with nefarious interests. This has threatened liberal democracies, leading to political polarization. We are warned that a civil war is on the horizon, ironically triggered by social networks apparently aimed at bringing people together.

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

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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Structural polarisation and path dependent development models in the EU

The macroeconomic consequences of the CODID-19 pandemic in the EU economy are materializing against the background of underlying structural challenges. Ensuring long-term convergence and stability between EU countries will require coordinated fiscal, wage and industrial policies. This blog post finds that EU countries are stuck on different trajectories in their economic development. Core countries, periphery countries, East European countries and financial hubs have responded differently to increasing European economic integration. This leaves Europe mired in structural polarisation, where political tension relates to diverging economic developments and increasing gaps in the evolution of technological capabilities. As a consequence, counteracting polarisation and promoting convergence requires a coordinated strategy that includes fiscal, wage and industrial policies.

Several EU countries were already on diverging macroeconomic development paths when the COVID-19 pandemic hit, but the macroeconomic consequences of the crisis must be expected to further accelerate existing divergences. Even though large parts of the EU experienced an economic upswing in the years running up to the COVID-19 pandemic, this temporary upswing in the business cycle served to mask the underlying tendencies towards structural polarisation in Europe, which will become more apparent over the course of the current crisis.

In a study recently published in the Journal of Evolutionary Economics, I argue with Claudius Gräbner, Jakob Kapeller and Bernhard Schütz that essential factors for explaining the long-term polarisation between EU countries are to be found in the unequal regulatory conditions in the context of the European ‘race for the best location’ (for example, in the areas of labour market, tax and corporate law or financial market regulation), as well as in the different technological capabilities across EU countries.

We show that technological capabilities in EU countries are distributed unequally; EU countries remain structurally polarised, i.e. they are stuck on different developmental trajectories that contradict the political goal of ensuring convergence and stability in the EU. Notwithstanding short- and medium-term cyclical developments, existing differences in technological capabilities will continue to fuel a process of economic disintegration in the EU if policy-makers fail to counteract the polarisation trend by introducing a coordinated policy strategy that should include fiscal, wage and industrial policies.Read More »

A regional response to help avoid rice shortages in West Africa

Screenshot 2020-05-08 at 10.39.07As COVID-19 threatens rice imports from Asia, West Africa has an opportunity to reignite its ambitions of a regional value chain. But this would require coherence in policies and collective action.

As the COVID-19 pandemic reaches African shores, countries are grappling with questions of food security. This seems to confirm a longstanding concern among many countries to reduce their reliance on food imports. Take the example of rice in West Africa. In the Economic Community of West African States (ECOWAS) up to half of the regional rice consumption needs is met through imports. This external reliance is what led ECOWAS countries to agree to a ‘Rice Offensive’ in 2014, to boost production in the region. It is also behind the Nigerian border closures seen last year.

Regional value chains have often failed to take off because national interests trump regional agendas. But at extraordinary times like these, there is a case to give precedence to regional strategies rather than narrowly focusing on national responses.Read More »

Should the African lion learn from the Asian tigers? A comparison of FDI-oriented industrial policy in Ethiopia, South Korea and Taiwan

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The Huajian shoe factory in the Eastern Industrial Zone in Ethiopia. Photo: UNIDO.

Ethiopia is being hailed as one of the most successful growth stories in Africa. Because of the country’s rapid economic growth, the high degree of state intervention in the economy, and the state’s focus on industrialization, people have started to compare Ethiopia to the Asian ‘tigers’ (Aglionby, 2017; Clapham, 2018; De Waal, 2013, Hauge and Chang, 2019; Oqubay, 2015) four countries in East Asia (Hong Kong, Singapore, South Korea and Taiwan) that underwent rapid industrialization and maintained exceptionally high growth rates in the post-WWII era.

However, this emerging literature on Ethiopia-Asia comparisons has not yet sufficiently addressed one of the most important aspects of Ethiopia’s industrialization strategy — the attraction of foreign direct investments (FDI) into the manufacturing sector.

The rationale of my recently published article was this gap in the literature. In it, I ask the question: Should the African lion learn from the Asian tigers with respect to FDI-oriented industrial policy? 

In short, my answer is yes. While Ethiopia’s policies are bringing about short-term economic success and showing promise for further industrialization, the state could arguably bargain harder with foreign investors, like it did in South Korea and Taiwan.Read More »

Hirschman’s Linkages: Passé in the Age of Global Production Sharing?

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How does economic development happen? After World War II, many development economists rose to prominence, such as Paul Rosenstein-Rodan (the big push), Arthur Lewis (the dual-sector model), Walter Rostow (the linear stages of growth) and Albert Hirschman (unbalanced growth and linkages). Given the continued importance of industrial policy, it is particularly worthwhile to revisit the idea of forward and backward linkages — one of the central tenets of development thinking pioneered by Hirschman.Read More »

Economic development in Palestine and beyond

Palestine-blog-image-TSuccessful economic development in Palestine will require an adequate theory of development, industrial policy, and institutional reforms.

Recently, the Palestine Economic Policy Research Institute (MAS) published a comprehensive study on Palestinian economic development. In this report, co-authored by my colleagues Heiner Flassbeck, Michael Paetz, and I, we explore possible solutions as to how Palestine could sustainably finance its deficits. Now, after the Israeli elections, Jared Kushner, the US President’s son-in-law and senior advisor, is set to announce the details of the US Peace Plan for the Israeli-Palestinian conflict. Given that the Peace Plan is expected to include a large economic component to solve the conflict, it will be interesting to see to what extent it addresses the fundamental problems we identified in our research.

Our results suggest, succinctly, that under current conditions of excessive imbalances in the external sector (trade and current account), any issuance of debt securities requires fixing these imbalances first, for which, in turn, strategic public intervention is critical. This finding may come as a surprise to most policymakers, as orthodox economic theory suggests that the most efficient ways for countries to develop is through market led (as opposed to state led) policies. Historical evidence demonstrates that none of the advanced countries followed this path in their own development, yet the idea of ‘the market’ as the most efficient development tool is still widespread. Based on this belief, Western institutions wreaked havoc in developing countries during the 1980s and 1990s, and continue to do so (although some institutions, notably the IMF, show significant progress in learning from past experiences).Read More »