Structural polarisation and path dependent development models in the EU

heimbergecon1 Comment

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 »

The return of State planning

André Roncaglia1 Comment

brasilia-2448030_1280Conventional economics is notorious for having created a highly persuasive analytical toolbox. The challenge of this stream of the profession until the 1960s was to prove the logical possibility that the market could not only coordinate the entire economy, but also keep it stable at that single point of optimum equilibrium. In order to boast the wonders of decentralized market exchange, the theory paradoxically invoked the metaphor of a “benevolent social planner”.

A growing list of circumstances in which markets fail to generate the optimal societal outcome (externalities, coordination failures, and so on) raised the academic premium for sound justifications for avoiding State interventions in the economy. Government failures – it was, and still is, claimed – could be even worse than those of the market.

The theoretical vilification of the State’s performance matched the emerging political philosophy in the early 1980s. Despite the enormous State apparatus created after the Second World War, from 1980s onwards, government functions were gradually reduced to the subordinate role of supporting the private sector. To paraphrase Keynes: neoliberalism won over the West as the Holy Inquisition conquered Spain. Western society surrendered to market dominance, shrinking State capacity despite the achievements of the three decades of postwar Keynesian policies, which generated the highest world growth rates in modern history. 

One of the blindsides of the drastic downsizing of the State observed after 1980s is severely limiting its capacity to respond whenever needed. The COVID-19 epidemic made this very clear. Countries that fell for the neoliberal spell faced a flagrant difficulty in organizing an efficient response to a looming healthcare crisis, thus rekindling a debate about the way in which the State operates in society. Read More »

Is Postcolonial Capitalism a Thing to Itself? Reviewing Sanyal’s Rethinking Capitalist Development

srishtiydv3 Comments

18607553

Kalyan Sanyal’s Rethinking Capitalist Development (2007, 2014) is a rare work of political economy for many reasons. It is written by an economist, but it’s so interdisciplinary that you won’t be able to tell. It is an attempt to theorize capitalism in the postcolonial context from the inside-out rather than outside-in, i.e. with no reference to an ideal type. It refuses to sit neatly in theoretical boundaries — it is not entirely Marxist, not entirely Postmarxist, not entirely neo-Gramscian, not entirely Foucauldian, but a strange concoction of all. Perhaps the only thing that is not rare is that like most interesting and influential works that emerge from the Global South, it too has been largely ignored in the academic circles of the Global North, especially in Economics. Read More »

Financing Needs of Developing Countries in the wake of Covid-19: The Role of Special Drawing Rights

esraugurluLeave a comment

68512-rmb-rights-monetary-currency-fund-renminbi-basket

Since the outbreak of the Coronavirus, developing countries have been exposed to massive withdrawals of capital flows. In this post, I unpack the financial challenges these countries are facing and consider what role the Special Drawing Rights (SDRs) of the IMF can play in easing the burden. 

According to the calculations by the Institute for International Finance (IIF), investors withdrew almost $80 billion over recent weeks from emerging markets (Wheatley 2020). During periods of crisis, investors ‘fly to safety’ by selling risky assets and purchasing safe assets such as US Dollars and the US Treasury Securities. As international investors flee to dollars amidst the financial turmoil caused by the Coronavirus, there is an acute concern that low and middle-income countries will be short of dollars. Furthermore, the scale of the withdrawal suggests that these countries will face great difficulty in raising funds for their sovereign debt payments. Besides governments, firms based in developing countries are also expected to face difficulties in raising foreign currency-denominated debt in international capital markets. Meeting this growing demand requires a global lender of last resort that can provide dollars on request. Within the existing global financial order, the Fed and the IMF are two major organizations that are capable of meeting this demand. 

The Fed can provide dollar liquidity through swap lines, which allows global central banks access to dollars in exchange for their own currency with the promise that the principal, as well as the interest, will be paid later. When engaging in a swap operation, the Fed provides dollars to the recipient central bank for an equivalent amount of their currency at a given market exchange rate. After a certain period, the two central banks resell to each other their respective currencies at the initial exchange rate. The recipient central bank provides the dollars to financial institutions in its jurisdictions at the same maturity and rate. This way, swap lines provide dollar liquidity to recipient countries’ central bank and financial institutions (Bahaj and Reis 2018).Read More »

A regional response to help avoid rice shortages in West Africa

poorvakarkare1 Comment

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 »

COVID-19: how to transform the industrial policy toolkit in developing nations

kestonperryLeave a comment

industry-construction-industrial-civil-works

COVID-19 presents some leeway for countries to pursue industrial policy on their own terms. However, as crisis conditions dissipate, current economic theory is of little help. Current perspectives range from the almost theological to the overly positivistic. Mainstream economists who have tried to ‘mainstream’ industrial policy in recent times offer simple econometric-centred reasoning that seeks to find cross-country regularities instead of nuanced and real-world application based on a country’s economic history. They apply highly positivistic and proscriptive worldviews claiming industrial policy should reveal latent ‘comparative advantage’. On the other hand, and perhaps equally misguided, heterodox scholars who reclaim the structural roots of industrial policy have anchored it in increasingly irrelevant empirical foundations that would only be useful for countries with already existing manufacturing bases. The latter have opted for the more theological approach that presupposes classical growth as an end of any industrial policy as a positive development. I hope that we seize the chance to encourage a new paradigm for industrial policy beyond narrow prescriptions and dominant worldviews.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 »