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Forum on Economic Reform (Part VI) In recent decades the alliance of neoclassical economics and neoliberalism has hijacked the term “economic reform”. By presenting political choices as market necessities, they have subverted public debate about what economic policy changes are possible and are or are not desirable. This venue promotes discussion of economic reform that is not limited to the one ideological point of view. Reclaiming Policy Space for Equitable
Economic Development1 Kari Polanyi Levitt (McGill University, Canada) © Copyright: Kari Polanyi Levitt 2006 In 1944 Karl Polanyi published a
book entitled The Great Transformation, which at that time attracted very
little notice. But in recent years, since we have entered this era of
neo-liberalism, the book has attracted increasing attention, because it was
written during the war, in the light of the experiences of the 1920s and 30s
and it was a trenchant critique and explanation of why the original liberal
order of the 19th century, which actually lasted until 1914 or perhaps
1929, ended in such a disaster of war and Fascism. I mention this because we
are now living in a time when neo-liberalism has given a new life to the
previous model of economic liberalism which played itself out in those times.
My generation of students of economics was interested in understanding the
functioning of economies with a view to achieving full employment and social
security from cradle to grave, not personal gain or how to invest or play the
stock market. Favoured career options were university or public service; only
the weakest students opted for the private sector. Keynes and his associates
and students in Cambridge challenged prevailing doctrines, most famously by the
publication of The General Theory of
Employment, Interest and Money (1936), which proved that an
economy could reach equilibrium with under-utilized capacity of labour and
capital. During the war Keynes was instrumental in directing the British war economy.
His small volume on “How to Pay for the War” illustrated the analytical power
of the macroeconomic categories of modern national income
accounting-production and consumption, savings and investment, etc- and
described fiscal, monetary and administrative instruments to repress
inflation in conditions of short supply which were successfully implemented
in Britain. Although Keynes did not concern himself with post-war planning
for underdeveloped regions, his indirect influence was pervasive. Many of the
best and brightest Indian economists studied at Cambridge and the
intellectual links between Cambridge and Indian economic planners and
policymakers remained important. At this time also, students and future
political leaders from Asia, Africa and the West Indies turned their thoughts
to the economic transformation which would have to follow political
decolonisation. One of Keynes’
closest intellectual collaborators was Joan Robinson, who was quick to
recognise that it was not unemployment of labour declared redundant but
rather the vast pool of wasted human resources in the form of underemployment
in low productivity activities which characterised the emerging new nations.
A similar observation was made by the Norwegian trade economist working for
the League of Nations, Ragnar Nurkse,
who suggested that surplus labour be mobilised for large, labour intensive,
public works, as was done in China after the revolution of 1946. Another of
Keynes’ students was Hans Singer, whose initial interest in unemployment in
chronically depressed areas of Britain turned to underemployment and
underdevelopment. He is perhaps best known for the Prebisch-Singer
thesis on terms of trade. A number of emigré economists in Britain, influenced by their
personal experience of late industrialisation in central and eastern Europe
developed plans for the post-war transformation of underdeveloped regions.
The contributions of Michael Kalecki, Kurt Mandelbaum, E.F. Schumacher and
Joseph Steindl of Oxford University and Paul
Rosenstein-Rodan of the Royal Institute of
International Affairs laid the basis of development economics as a formal
sub-discipline. These Central European economists were more familiar with
Marx than with Keynes, and the success of Soviet five year plans played a significant
role in approaches to development planning. It is well known that Kalecki’s model of an economy with under-utilized
resources of labour and capital was similar to Keynes’, but presented in
Marxian rather than the more familiar Anglo-Saxon analytical categories. His
contribution to planning for economic development deserves to be more widely
acknowledged. An imaginative
plan for a radically new international financial order was designed by Keynes
and notwithstanding opposition from the several quarters, including the City,
the Keynes plan for an International Clearing Union was published as an
official government document in 1942 and officials from Canada and other
dominions were invited to London for discussion. The intention was to permit
policy space for nations to secure full employment without engaging in
competitive devaluations or subjecting the economy to the punishing
deflationary measures required by the gold standard and imposed on weak
succession states by the League of Nations. A special purpose money (Bankor) for purposes of clearing international payments
between central banks and backed by commodity stocks, would have precluded
private trade in national currencies. Such an international financial
architecture would have enabled countries with widely different economic and
financial institutions to engage in international exchange. The resources
proposed in the Keynes plan were six times larger than those allocated to the
International Monetary Fund, established in 1944, a moderately modified
version of the White plan proposed by the U.S. Keynes considered he had
failed, and, in fact, it was the US dollar which replaced gold as
international reserve currency. In 1945, Karl Polanyi thought that only the United States believed in
universal capitalism- now known as globalisation. In “Universal Capitalism
vs. Regional Planning”, he envisaged a world of regional blocks, including
communist Russia, social democratic Western Europe, and the United States, to
be followed by other emerging regions of the world. The United
Nations, founded in San Fransisco in 1945, brought
together economists concerned with the eradication of underdevelopment and
poverty in Africa, Asia and Latin America. It was charged with responsibility
for financial and technical assistance to the underdeveloped regions.
Responsibility for financial development assistance, however, was soon
transferred to the IBRD, where the principal donor
countries controlled policy and the United States had an effective veto. Outstanding among
the regional commissions of the UN was the Santiago-based Economic Commission
for Latin America, under the direction of Raul Prebisch.
The Economic Development of Latin
America and its Principal Problems, accompanied by background studies of
the experience of Latin American export economies in the 1920s and 1930s was
drafted by Prebisch with the assistance of a team
of brilliant young Latin American economists, and published by the United
Nations in 1947. It made the case for reducing export dependence by domestic
industrialisation and came to be known as the Prebisch
Manifesto. In the 1940s and
1950s, great minds applied themselves to the great problems of economic
development and students chose to study economics to make the world a better
place. Econometrics as a scientific tool of economic planning was pioneered
by Jan Tinbergen and Ragnar
Frisch who advised the government of Egypt in the construction of an
innovative multi-sectoral development plan.
Development economists such as Celso Furtado, Arthur Lewis, Albert Hirschman and Gunnar Myrdal approached the
problem of underdevelopment from a historical, structuralist
and institutional perspective, while Alexander Gershenkrohn,
economic historian, analysed the way in which the first generation of late
industrialising countries of Germany, Russia and Austria-Hungary challenged
the supremacy of Britain in their days. There is a considerable similarity in
the strategies used, with those used later by Japan, later still by Korea,
Taiwan and other East Asian countries and in a very different way of course
now by China. By the mid-1950s development
economics had gained recognition as a distinct sub-discipline of economics.
Books were published and academic journals and institutes were established in
American and British universities. A representative collection of papers by
development economists from many countries, The Economics of Underdevelopment , edited by Agarwhala and Singh, was published in 1958. Three major
themes dominated the discourse; market and state, trade and
development and growth and equity. Underlying these themes is the
deeper issue of the relationship of the economy to society, which requires an
approach beyond the scope of economic analysis. Karl Polanyi’s
warning of the consequences of “disembedding” the
economy from its social matrix, points to the critical role of social policy
in the design of equitable economic development. The 1950s and
1960s witnessed the decolonisation of Asia, Africa and the West Indies and the
determination of post-colonial countries to engage in national projects of
economic transformation. In the context of the superpower rivalry of the Cold
War, the Non-Aligned Movement of Asian and African countries was convened in Bandung by President Sukarno in 1954. The establishment
of the United Nations Conference on Trade and Development under the
directorship of Prebisch in 1964, served as a forum
for third world countries to fashion a common programme for a New
International Economic Order (NIEO). The early
post-war decades were, on the whole, favourable to national economic
development, and high average growth rates of the developing world, including
Africa, equalled or surpassed those of the industrial countries. Market and State It was generally
accepted that the state must play a central role in economic transformation
because the private sector was either dominated by landed and commercial
oligarchies with vested interest in the status quo, or was simply too weak
and disorganised. The degree of state involvement in the economy varied
across countries, but it was common practice that the provision of basic
public infrastructure and its financing was universally undertaken by the
state, accompanied by some form of long-term economic planning. In the first
three post-war decades, countries were able to privilege domestic agriculture
and industry by discretionary access to credit and foreign exchange,
subsidies and a variety of protective commercial policies. The principal of
sovereignty regarding natural resources and more generally the sovereign
right of nations to formulate fiscal, monetary, commercial and all other
aspects of government policy was not questioned, although in practice it was
often violated. Trade and Development Issues of trade and development
were contentious from the start. Policies of import substitution
industrialisation, successful to varying degrees, met the unwavering
opposition of international trade theorists, with reference to the theory of
comparative advantage, and Prebisch was considered
a dangerous radical. Indeed, the asymmetry of gains from international trade
formed the bond which united countries of different ideologies in the
formulation of the UNCTAD agendas. However, a
decade of international conferences aimed at reform of the international
economic order failed to produce tangible results. Arthur Lewis declined to
participate in these negotiations. In his view the South, collectively, had
all the resources required for economic development, and when that potential
was realised, a more equitable international order will ensue. In the 1970s,
Taiwan and South Korea followed the example of Japan in strategies of late
industrialisation; the city states of Hong Kong and Singapore were also
highly successful and South East Asian countries embarked on programmes of
industrialisation for domestic and export markets according to their
different geographical and historical endowments and China made the turn to
its unique model of communist market capitalism in 1978. In each of these
cases of “late industrialisation” governments designed incentives specific to
the circumstances and development objectives of each country. Growth and Equity With the notable exception of
Nehru’s India, development economists and development planners were not
directly concerned with issues of equity or poverty. It was thought that
capital accumulation would create employment opportunities on a scale
sufficient to absorb underemployed surplus labour. Perhaps the most profound
disappointment with success in economic growth was that it failed to do so,
giving rise to the phenomenon of “growth without development”, reformist and
radical critiques of developmentalism and the
search for revolutionary solutions. The use of per capita Gross National
Product as an implicit measure of the welfare of nations was challenged by
alternative measures of the Quality of Life. As it became evident that
capital intensive technology could produce growth without employment, the
significance of the informal sector- whether as problem or solution- came
into focus. It was found that ISI had effectively
increased external dependence by the requirements of imported inputs and
capital goods to sustain employment in new industries. The foreign exchange
constraint became the principal bottleneck to growth. The phenomena of
marginalisation and social exclusion inherent in developmentalist
approaches to economic growth pointed to the economistic
bias of prevailing doctrines of development economics. The eminent Swedish
economist Gunnar Myrdal
was among the first to identify social expenditures on health and education
as investments in the expansion of the human capacity of the working
population. Under pressure from critics of growth without development, the
World Bank identified Basic Human Needs as priority areas of expenditure,
although the bulk of development assistance continued to finance large-scale
industrial infrastructure. The Return of Liberalism In the fractured decade of the
1970s, the demise of the Bretton Woods Financial
Order released constraints on international liquidity as capital was freed
from national control. The flood of liquidity was a permissive condition of
commodity booms, benefiting petroleum, bauxite and other commodity exporting
countries, and large sovereign lending by commercial banks to middle income
developing countries. In the industrial heartlands of capitalism,
inflationary pressures eroded the value of financial assets and the
profitability of capital in the real economy. Slow growth and economic
instability in the industrial world and political revolutions, from
Afghanistan to Nicaragua, from Angola and Mozambique to Grenada and
ultimately revolution in Iran, were the catalyst for a profound regime change
signalled by the accession of Thatcher and Reagan to office. The “Volker
shock” precipitated the Latin American debt crisis of 1980s. An ideological counter-revolution
in economics replaced Keynes with policies of monetarism, deregulation,
liberalisation and privatisation. Capital was enabled to reverse the gains
made by labour in the industrial world and national developmental gains in
Latin America and Africa. The policy leverage exerted by international
financial institutions over Latin American countries indebted to commercial
banks and African countries indebted to the multilateral agencies
progressively constrained national policy space. As Ha-Joon
Chang has pointed out, the policies which served late industrialisers
of the 19th century and the more recent East Asian countries are now
largely precluded by commitments made in bilateral or multilateral
agreements. Keynes
was banished and development economics was demonised as structuralist
heresy bordering on socialism. The World Bank declared that that there was
one and only one economics and economic science could explain the functioning
of the economy anytime, anyplace, anywhere regardless of institutions.
Developing countries as diverse as anything you can find from, Asia, Africa
and Latin America were no different from the leading industrial countries,
only poorer. There was a changing of the guard at the World Bank; reformist
economists including Hollis Chennery, Paul Streeten and Mahbub Ul Haq were replaced by Anne
Krueger and Deepak Lal and a team of consultant
trade theorists including Jagdish Baghwati, Bala Belassa and the Swedish economist Assar
Lindbeck, who wrote a research memorandum placing
the entire blame for the debt crisis on erroneous domestic policies pursued
by Latin American governments. In the passage of two decades, the
priorities prevailing prior to 1980 with respect to the three major themes of
development economics were reversed. The market was elevated to the principal
economic mechanism and the state was downsized, stripped of fiscal resources
and bound by a multitude of commitments made in bilateral or multilateral
negotiations with creditors, including national treatment for foreign
investors. The provision of basic infrastructure, both physical and social
was privatised and/or subjected to criteria of cost recovery. Trade was
enthroned as the engine of growth and economies were restructured to
privilege exports over production for the domestic market, competitiveness
rather than national welfare became the objective of economic policy. In many
countries, liberalisation of imports destroyed agricultural and industrial
capacity. In Jamaica, for example, 30 % of jobs in agriculture, fishing and
forestry and 48 % of jobs in manufacturing disappeared in the decade of the
1990s.2 The neo-liberal
experience has brought financial crises of increasing severity and frequency.
The human costs have been enormous. Where growth has occurred, it has been
accompanied by an unprecedented polarisation of income and the social
exclusion of poor people from economic circuits of production and
consumption. The prevailing doctrine is that trade liberalisation and foreign
direct investment engender economic growth, inequality is perhaps inevitable
and poverty should be addressed directly by targeted programmes to ensure
social stability, a necessary condition for a favourable investment climate. It is now widely
recognised that these policies have failed. I am sometimes asked how
development experts in the multilateral agencies could possibly believe that
one set of policies- the so-called Washington Consensus- could fit the great
diversity of countries. The answer is simple; the policies serve the
interests of creditors and provide a favourable environment for foreign
investors. These requirements are indeed rather uniform. The problem is that
the assumption that such an environment engenders growth and development does
not accord with experience. A recent paper by
Harvard economist Dani Rodrik
states that most economists would now agree that 1) the reforms of the 1980s
and 1990s have produced disappointing results, 2) the most successful
countries in terms of growth have followed heterodox policies, 3) most
successful countries have adhered to some generally recognised principles 4)
policies appropriate to a particular situation cannot be inferred from these
principles and 5) policy diversity is desirable. (Rodrik,
2004:1) In an exhaustive study of the relationship between episodes of growth
and significant economic reforms, Rodrik found that
the majority of growth take-offs are not produced by significant economic
reforms, and the vast majority of significant economic reforms do not produce
growth take-offs. (ibid:3) Rodrik proposes a
diagnostic approach to identify bottlenecks to economic growth specific to a
country and to develop policies directed at these, rather than an attempt to
implement a comprehensive set of reforms which may moreover, fail to yield
results. This is reminiscent of the classical structuralist
approach of earlier Latin American economists. If indeed
countries which have been successful have followed heterodox policies and
those which have followed the prescriptions of the World Bank and the IMF have generally failed, one can conclude that policy
formulation and implementation should be returned to national authorities,
who are politically accountable to their populations for success or failure,
regardless of the nature of political institutions. The multi-lateral
agencies and the economists they employ are not accountable to the populations
which have suffered the consequences of their failed policies. The World Bank
is directly accountable only to the creditors who provide it with operational
finance. The experience of
the past 20 years has produced an unprecedented degree of inequality and
social exclusion, both between nations and most significantly within nations,
whether accompanied by high growth, low growth or no growth. While economic
globalisation gives the impression of a world more uniform and homogeneous
than it was 50 years ago, the realities of daily life of the majority of
people are characterised by diversity and difference. Contrary to the general
belief both of mainstream economists and Marxists, that the economy forms the
base of society, we suggest that, ultimately, it is the cultural, social and
institutional relations of a society which sustains a strong economy. An
equitable economic order must rest on an equitable political and social
order. This requires a longer view, and an analysis of the political and social
structures that underly the national and
international economies. Until the
cleavages between populations of European, indigenous and African descent
arising from the displacement of indigenous peoples of the Americas and
plantation slavery are addressed, a modern market economy will be neither
stable nor equitable. The chronic instability of Latin American economies is
ultimately a product of the social and political exclusion of majority
populations. In Africa , the promising beginnings of the 1950s and 1960s have
been rolled back by neo-colonial structural adjustment programmes, crude
appropriation of natural resources and the human tragedy of the devastating
HIV/AIDS epidemic, particularly scandalous in view of the availability of
treatment. The historical legacies of the incorporation of peripheral regions
into the world economy are profound. Notwithstanding the reality and
desirability of diversity of political, social and economic structures, a
revaluation of the three themes of development economics points to a reversal
of priorities prevailing in the past 20 years. The emphasis on economic
growth must be replaced with an emphasis on the quality of life of the
people. Market and State The state must take responsibility
for the provision of basic infrastructure, starting with universal access to
clean water and other essential services which most directly affect the lives
of people. The state must reclaim its sovereign right over natural resources
and ensure that all citizens benefit from the national heritage. All modern
economies are mixed economies and the institutional forms of private, public
and community involvement in the economy offer fruitful areas of
institutional experimentation. Trade and Development Trade is beneficial but the
extreme export orientation of many countries has destroyed domestic capacity
and measures should be taken to restore priority to agriculture and industry
serving the domestic market. Where entrepreneurs and businesses produce only
for export markets, labour is simply a cost to be reduced, but where they
sell in the domestic market, their employees are also the consumers of their
products, and they have a collective interest in maintaining the purchasing
power of the population. Domestic production of food for domestic consumption
must be protected from destructive competition by imports, not only for
important reasons of individual and national food security but because
agriculture, forestry and fishing are organic relationships of people to the
natural environment. Foreign
investment is desirable but should be required to comply with national
regulation concerning employment of nationals, purchase of local materials,
and adherence to environmental standards. On no account should foreign
investors and non-nationals receive treatment more favourable than nationals.
Control over
entry and exit of capital flows is a basic instrument of macroeconomic
management and countries should reclaim the sovereign right to exercise it. Growth and Equity The biggest challenge we face is
to address the enormous inequities which have characterised the experience of
the neo-liberal model. It is an everyday observance in many countries,
including those that have experienced substantial economic growth, that the
quality of life has deteriorated, that the bonds that link us in society have
loosened, that insecurity, both physical and economic, has increased. This
suggests prioritising measures which directly impact the quality of life, not
only of the poor, but of the whole society. Investment in the provision of
universal primary health care and primary education and the provision of
other essential public services of water, sanitation and public
transportation address not only the needs of the poorer sections of the
population, but if universally used, can help to restore social cohesion. In
many countries, including the developed economies of the north, intensified
competition has led to perpetual downsizing of employment and productivity
gains have increasingly accrued to capital and persons employed in
professional and business services. Where people cannot secure gainful
employment, they join the ever increasing ranks of the informal sector,
where, while some manage to make a decent living, very many are consigned to
work which cannot secure a basic livelihood. The vast range of productivities
and remuneration typical of a developing country calls for institutions to
secure a more equitable distribution of national output. Proposals for basic
income merit consideration as means of instituting entitlements. As Myrdal pointed out a long time ago, a population that is
lacking good health and basic education cannot meaningfully contribute to the
economy. Ultimately, people are the most valuable economic resource of any
country. International Development Assistance In the context of the pressures of
globalisation, shared common historical experience of distinct, large regions
suggests that equitable economic development should be conceived on a
regional scale. We are reminded of the project of “extended nationalism”
(Seers, 1983: 165) of regional blocks- based on geographic, historical and
cultural commonalities- proposed by Dudley Seers in the early 1980s as a
response to the evident failure of international negotiations for a more
equitable economic order. “If
and when nationalism is extended in this way, and a world of regional blocks
replaces the neo-colonial system, the governments of the superpowers will
feel less compulsion to meddle (whether by financial aid, diplomatic pressure
or military force) in the affairs of other countries, and also be less able
to do so: world peace will be more secure.” Dudley Seers was
an eminent development practitioner and consultant to UN Economic Commissions
in Latin America and Africa and British development agencies in Africa, Asia
and the West Indies, and founded the Institute of Development Studies at the
University of Sussex (1963). A lifetime of experience led him to reject
external assistance by international development experts, and he spent later
years of work in the expansion of the European Community to include the
poorer nations of South and Eastern Europe. Seers was not the
only development economist to become disillusioned with international
development assistance. In the early 1980s, Gunnar Myrdal expressed the view that development assistance
should not be directed toward building up the modern industrial sector, which
could only employ “a minimal part of the total growing workforce” while the
rest became “economic refugees” from the agricultural sector. (Myrdal, 1984: 160) Because money is fungible, external
assistance may serve to support corrupt and unpopular political regimes. He
believed that assistance should be more effectively controlled by donors and
directed exclusively at social sectors. “the
only “development aid” I would find room for under present circumstances
would be directed to the simplest and least costly measures to increase food
production, to provide sanitation facilities and to increase their
utilisation, generally to supply pure water, and also as far as possible to
improve health care, particularly for poor families, and to give their
children somewhat more of better schooling. This together with securing the
availability of contraceptives could well claim the whole part of any
so-called development aid.” (Myrdal, 1984:161) The approach we have taken departs
from current practice, where policies of economic and social development for
many countries are designed by the international development industry.
Responsibility for the welfare of the people must return to national
political authorities, in the context of regional cooperation. This however,
does not dispose of the responsibility of the rich countries of the North to
share in the financial burden of human development. They should take prime
responsibility for the provision of global public goods, by fiscal
contributions and effective taxation of the operations of trans-national
corporations. What is suggested here is that the international community take
collective responsibility for those truly global problems which clearly
require global action and far exceed the financial capacities of individual countries. The
appropriate agencies are those of the United Nations, the only international
institution where all countries have a voice. These requirements far exceed
current levels of development assistance. Specifically, we suggest three
areas requiring a global approach:
1) permanent provision for relief of victims of
natural disasters which are likely to occur with increasing frequency due to
environmental degradation,
2) issues of public health, which respect no borders;
eradication and prevention of communicable diseases including HIV/AIDS, reducing
toxicity from industrial and agricultural pollution and
3) restoration and preservation of the biosphere and
long term management of natural resources. The
coordination of functional cooperation in these areas would be facilitated by
the establishment of regional authorities. This approach to international
development assistance addresses the critiques of Seers and Myrdal. It restores a measure of policy space to national
and regional political authorities, relinquished in unequal negotiations over
the past 25 years, and places the responsibility for financing urgent human
needs which can only be addressed on a global scale on the countries which
have the resources to do so. Notes
Bibliography Breit, William and
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Thirteen Nobel Economists. MIT Press. Cambridge, Mass. Chang, Ha-Joon. (2002) Kicking
Away the Ladder –Development Strategy in Historical Perspective, Anthem
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Retrospect” in Gerals M. Meier and Dudley Seers,
eds. Pioneers in Development. World
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Developing World” Luca d’Agliano Lecture in
Development Economics. Torino, Italy. October 2004 Seers,
Dudley.(1983) The Political Economy of
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