In this article I argue that there is a fundamental tension characterizing the process of global development and structural change. Industrial policy is necessary for triggering structural change in the developing world. Yet such efforts put pressure on economic leaders to adjust structurally as well. Drawing from international relations theory, a hegemon is necessary to provide international public goods such as peace, which are critical for development to be possible in the first place. But this necessity gives the hegemon expansive powers over international institutions of economic governance; and this enables the hegemon to externalize the costs of adjustment associated with structural change in the developing world.Read More »
Late developers are nowadays confronted with the problem of having to earn foreign currency to finance structural transformation under extremely unfavourable conditions. The dependency on forex is rooted in the international financial architecture and represents a major pitfall for countries trying to catch up. However, this structural impediment to transformation is not paid much attention to by the dominant development economics.Read More »
In the fall of 2017, SPERI’s Matthew Bishop and Anthony Payne gathered essays from a group of nine development economists who produced essays on ‘Revisiting the developmental state’ (SPERI Paper No. 43). They drew upon a body of work published on the SPERI Comment blog and in other publications about the state’s appropriate role in development and the nature of a modern industrial strategy. The essays examined the current status of the notion of a ‘developmental state’ in today’s contemporary context of globalization. This article reviews the series, highlights some key takeaways, and considers some other elements that were not addressed by the essays.Read More »
Bradford deLong has recently argued that neoliberalism provides a way for former colonies to close the gaps with their erstwhile colonial masters. But this argument ignores the fact that several economic policies of colonial times were explicitly laissez-faire in nature.
The recognition of the dangers of allowing finance a free hand in the economy has led to a rethink of the soundness of neoliberalism as an economic and policy doctrine, from no less an organisation such as the IMF. Dani Rodrik has attacked the theoretical foundations of neoliberalism itself, judging that its insistence on allowing for unhindered market activity is bad economics itself, for economic models that make a theoretical case for markets cannot be easily transplanted into the real world in the way that advocates of neoliberalism believe.
Yet this is not to say that the concept is dead and buried. As Harvey (2007) points out, neoliberalism is a political economic process that ostensibly seeks to organise society and economies around the principle of free market activity, while primarily attempting to shift the balance of power towards dominant economic classes that control capital. Seen in this light, neoliberalism is still a powerful force shaping political and economic changes in much of the world today.
Bradford deLong’s blog post, first published in 1998 and re-published now shows that the term “neoliberalism” still carries intellectual currency. His is a curious argument; neoliberalism provides the only suitable path for countries of the developing world to close the gap with their former colonial powers. Access to the latest goods and technology allows developing economies – with low levels of productivity – to boost productivity and output growth, and consequently incomes. The reason the State should stay away from the economic sphere in the developing world is because democratic institutions have not been established yet, and hence the political sphere is vulnerable to capture by elites.Read More »
Walt Rostow (1959) infamously put forth a five-stage theory of economic development, extrapolating from the experiences of the great industrialized nations. However, as dependency theories strongly pointed out, the conditions under which those countries industrialized is significantly different from those that prevailed after decolonization. In addition to this, democratic capitalism experiences turbulence, which I argue makes development under this global system a struggle against powers and against what I call “Burawoyan Cycles”.Read More »
‘The principal enemy is orthodoxy: to use the same recipe, administer the same therapy, to resolve the most various types of problems; never to admit complexity and try to reduce it as much as possible, while ignoring that things are always more complicated in reality. Albert O. Hirschman (1998:110)
It’s clear from last week’s blog posts by Duncan Green that he is tired of academic critique against aid which have not been translated into concrete solutions (see here and here). However, the problem with his ‘marmite’ approach to addressing very complex problems is that it leads to reductive debates which are more symptomatic of the problem than constructive ways of finding solutions. Following Pablo Yanguas’ synthesis of research approaches I thought of taking a step back and analyzing the case of a successful aid recipient, South Korea. I do this in hope of moving away from the ‘literature’ – which Duncan finds overbearing – as well as getting away from the linearity of the contemporary monitoring and evaluation approach used by the aid sector. Read More »
‘This tendency to Diminishing Returns was the cause of Abraham’s parting from Lot, and of most of the migrations of which history tells’ wrote the founder of neo-classical economics, Alfred Marshall, in the first edition of his textbook Principles of Economics (1890). In a footnote he refers to the Bible’s Genesis xiii : 6: ‘And the land was not able to bear them that they might dwell together; for their substance was great so they could not dwell together’. (Marshall 1890: 201)
Marshall’s observation also applies to today’s migration patterns: from countries where most activities are subject to constant or diminishing returns to countries whose key economic activities are subject to increasing returns to scale. Diminishing returns occur when one factor of production is limited by nature, which means that it occurs in agriculture, mining, and fisheries. Normally the best land, the best ore, and the richest fishing grounds are exploited first, and – after a point – the more a country specialises in these activities, the poorer it gets. OECD (2018) shows how this occurs in Chilean copper mining: every ton of copper is produced with a higher cost than the previous ton.
In Alfred Marshall’s theory, the ‘Law of Diminishing Returns’ is juxtaposed with ‘The Law of Increasing Returns’, also called economies of scale. Here we find the opposite phenomenon; the larger the volume of production, the cheaper the next unit of production becomes. Traditionally economies of scale were mainly found in manufacturing industry, and increasing returns combined with technological change has for centuries been the main driving force of economic growth. Increasing returns creates imperfect competition, market power and large barriers to entry for challengers – companies or nations – making it difficult for them to enter these industries. In contrast to the rents produced under conditions of increasing returns, raw materials – commodities – on the other hand, are subject to perfect markets, and productivity improvements spread as lowered prices. This is the essence of the theory which explains why former World Bank Chief Economist Justin Yifu Lin was correct hen he asserted that ‘Except for a few oil-exporting countries, no countries have ever gotten rich without industrialization first’ (Lin 2012 : 350).Read More »