Justin Lin on ‘jump-starting’ development: what’s good and what’s missing

LinMongaBeatingTheOddsJustin Lin, a former Chief Economist at the World Bank, is the author of several works on what he calls ‘new structural economics’. His latest book, Beating The Odds, is co-written with Célestin Monga, the current Chief Economist at the African Development Bank. It is ambitiously subtitled Jump-Starting Developing Countries.

The book contains some useful ideas on development policy, although for those more wedded to a political economy of development, rather than neoclassical economics, and all the self-styled ‘new’ branches of neoclassical theory, it is necessarily limited, compared to a more interdisciplinary story of development theory and policy.

I shall start with what is good in the book, and move on to what is missing, from the perspective of what I find to be a richer framework of political economy. Continue reading

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Politics and economics overlap

I am very much in favour of interdisciplinarity when it comes to economics and the richer insights it provides of the economy and society. Here is Mark Blyth on how it is misleading to separate the economic from the political. Doing so neglects a proper incorporation of such factors as distribution, power and vested interests:

Michael Hudson on rent-seeking

JisforJunkEconAnother excerpt from Michael Hudson’s J is for Junk Economics, his heterodox ‘guide to reality in an age of deception’. Here he defines and discusses rent-seeking (p.199-200), an important concept in economics. For those seeking a rich and detailed non-mainstream treatment of the theory of rents and rent-seeking and its application to development, I can definitely recommend Khan and Jomo (2000), but Hudson’s discussion is still interesting and provocative:

Rent-seeking: A zero-sum activity in which one party’s gain is another’s loss, unlike new capital investment and hiring that expand an economy’s production and income stream. The classical meaning of “rent-seeking” refers to landlords, natural resource owners or monopolists who extract economic rent by special privilege, without their own labor or enterprise.

Neoliberals have diverted attention from the land rent, resource rent or monopoly rent that classical economists associated with the FIRE (finance, insurance and real estate) sector. They have re-defined “rent-seeking” to refer only to politicians and labor unions lobbying for “special privileges”, such as Social Security, a minimum wage and public programs to meet other basic needs. But these programs have nothing to do with classical rent-seeking. They are proper functions of government.

In introducing the term “rent-seeking” in 1974, Anne Krueger applied it to import licensing and quotas that she claimed interfere with free trade, and extended the idea to government regulation in general – including legislation setting a minimum wage, claiming that this led to rising unemployment. Gordon Tullock, a follower of Ludwig von Mises, defined rent-seeking as lobbying by politicians for special privileges such as higher Social Security payments.

As a high-ranking World Bank and IMF official defending free trade, Ms. Krueger opposed agricultural protectionism designed to save foreign economies from food dependency on US farm exports. Conflating rent-seeking with subsidies to modernize, her 2012 book Struggling with Success (p.86) accused all government regulations, tariffs and subsidies of being bad and wasteful. “Ultimately, regulation has negative effects on the market in the country imposing the regulation…” The political effect of such deregulation and non-subsidy is to let “the market” pass by default to financial managers – as if their own major aim is not to seek classic economic rents to empower themselves as monopolists and financial rent-seekers!

Nobel Prize-winner James Buchanan’s euphemistic “public choice” anti-government philosophy (that government should make no choices, except to disappear) goes so far as to claim “that a tax with more excess burden,” such as taxing wages or industrial profits (adding to the cost of living and doing business) is better than a more reasonable tax on land rent with less burden. His argument is that classical rent theory would work, but that this would increase government power, precisely by being reasonable and economically efficient – “because government, if allowed to tax in the less burdensome way, may get more revenue,” which Buchanan opposes.

Such language makes a travesty of economic vocabulary. It strips away the classical association of rent with the FIRE sector, applying it only to the “cost” of government regulations and pretending that only government bureaucrats receive economic rent, not private sector rentiers. This leaves out of account the obvious fact that a strong government is needed to overcome opposition from predatory vested interests. The political effect of “public choice” ideology and its self-proclaimed “libertarian” doctrine is thus to serve as a handmaiden to oligarchy. It relinquishes economic rent to the FIRE sector instead of taxing it.

At the end of this road, imagine everyone paying user fees for everything from fire hydrants to schools, turning every road and parking space into a toll road. Payment for these erstwhile free public services would be made to owners and financiers of these natural monopolies, free from public regulation or other “Big Government” acting to save the economy by preventing predatory fees. In the name of opposing economic rent as “socialism”, AKA “the road to serfdom”, “public choice” doctrine thus prepares the groundwork for classic rent grabbing, financialization and kleptocracy.”

Ellen Meiksins Wood on the spread of capitalism

The Origin of CapitalismMarxist historian Ellen Meiksins Wood, in an excerpt from her hugely interesting book The Origin of Capitalism, describes the spread of capitalism from its unique genesis in England and its impact on international relations (p.174-6). The section on the role of the state in promoting ‘late’ development beyond Britain remains particularly relevant to today’s poorest countries:

“For those who regard capitalism as the consequence of commercial expansion when it reached a critical mass, there is something paradoxical about the development of English capitalism. England was certainly part of a vast trading network. But other European nation states in the early modern period were also deeply involved in the system of international trade, as were non-European civilizations, some of which long had trading networks more highly developed and extensive than the European. What distinguished England – and what was specifically capitalist about it – was not, in the first instance, predominance as a trading nation or any peculiarity in its way of conducting foreign trade. England’s peculiarity was not its role in an outwardly expanding commercial system but, on the contrary, its inward development, the growth of a unique domestic economy.

What marked off England’s commercial system from others was a single large and integrated national market, increasingly uniting the country into one economic unit (which eventually embraced the British Isles as a whole), with a specialized division of labour among interdependent regions and a growing, and mutually reinforcing, interaction between agricultural and industrial sectors. While England competed with others in an expanding system of international trade, not least by military means, a new kind of commercial system was emerging at home, which would soon give it an advantage on the international plane too. This system was unique in its dependence on intensive as distinct from extensive expansion, on the extraction of surplus value created in production as distinct from profit in the sphere of circulation, on economic growth based on productivity and competition within a single market – in other words, on capitalism.

Capitalism, then, while it certainly developed within – and could not have developed without – an international system of trade, was a domestic product. But it was not in the nature of capitalism to remain at home for very long. Its need for endless accumulation, on which its very survival depended, produced new and distinctive imperatives of expansion. These imperatives operated at various levels. The most obvious was, of course, the imperialist drive. Here again, although other European states were deeply involved in imperialism, capitalism had a transformative effect. The new requirements of capitalism created new imperialist needs, and it was British capitalism that produced an imperialism answering to the specific requirements of capitalist accumulation. Above all, capitalism created new imperialist possibilities by generating economic imperatives, the compulsions of the market, which could reach far beyond direct political dominion.

Capitalism also expanded out from Britain in another and more complicated sense. The unique productivity engendered by capitalism, especially in its industrial form, gave Britain new advantages not only in its old commercial rivalries with other European states but also in their military conflicts. So, from the late eighteenth century and especially in the nineteenth, Britain’s major European rivals were under pressure to develop their economies in ways that could meet this new challenge. The state itself became a major player. This was true most notably in Germany, with its state-led industrialization, which in the first instance was undoubtedly driven more by older geopolitical and military considerations than by capitalist motivations.

In such cases, the drive for capitalist development did not come from internal property relations like those that had impelled the development of capitalism in England from within. Where, as in France and Germany, there was an adequate concentration of productive forces, capitalism could develop in response to external pressures emanating from an already existing capitalist system elsewhere. States still following a pre-capitalist logic could become effective agents of capitalist development. The point here, however, is not simply that in these later developing capitalisms, as in many others after them, the state played a primary role. What is even more striking is the ways in which the traditional, pre-capitalist state system, together with the old commercial network, became a transmission belt for capitalist imperatives.

The European state system, then, was a conduit for the first outward movements of capitalism. From then on, capitalism spread outward from Europe both by means of imperialism and increasingly by means of economic imperatives. The role of the state in imperial ventures is obvious, but even in the operation of purely economic laws of motion, the state continued to be an unavoidable medium.

Capitalism had emerged first in one country. After that, it could  never emerge again in the same way. Every extension of its laws of motion changed the conditions of development thereafter, and every local context shaped the processes of change. But having once begun in a single nation state, and having been followed by other nationally organized processes of economic development, capitalism has spread not by erasing national boundaries but by reproducing its national organization, creating an increasing number of national economies and nation states. The inevitably uneven development of separate, if interrelated, national entities, especially when subject to imperatives of competition, has virtually guaranteed the persistence of national forms.”

Industrial policy in developing countries: some key issues

Tilman Altenburg of the German Development Institute discusses a range of issues related to industrial policy in developing countries. He is promoting his book, but that aside, he highlights some important points in the debates on industrial policy and its role in accelerating development.

The book itself is sitting on my bookshelf, and I hope to post on it at some point. In my view industrial policy, or at least state intervention to promote development, remains vital in both rich and poor countries. If it is to be successful, its form must necessarily change as countries approach the technology frontier in particular industrial sectors, but the need for it never really goes away.

It will also tend to vary depending on the structure of industry, the nature of technology and institutional and political factors.

The ‘organised hypocrisy’ of US industrial policy

“[O]rganised hypocrisy…characterises American industrial policy…mostly tucked away from public and academic attention, the US government has not had to navigate the tensions inherent in telling other countries–directly in bilateral and regional trade and investment agreements and indirectly through structural adjustment programmes in the interstate organisations where it is the dominant actor–‘do as I say, not as I do’. It says simply, ‘do as I (say I) do’. And so, ever since the 1980s, American and other Western governments have applied strong pressure on developing countries to ‘follow comparative advantage’ and keep specialising in exportable primary commodities, tourism and cheap-labour assembly manufacturing and to stop pressing for ‘policy space’ to develop production capabilities. This pressure continues imperial countries’ long history of trying to stop peripheral countries from entering dynamic sectors. The post-1980s push relies not on gunboats, colonial restrictions and racial ideology, but on conditional lending, ‘free trade’ agreements and neoclassical theory-the latter apparently justifying the proposition that developing countries should stick to their sectors of comparative advantage in their own best interest. This is a prescription for sustaining the core-periphery structure of the world economy, in which the activities with increasing returns, high linkages and high price and income elasticity of demand are located mainly in the core, sustaining the core’s prosperity relative to the periphery. One lesson…is that policy communities in other countries and interstate development organisations such as the World Bank and IMF should push pack when American policy makers and academics urge them to stick to the Washington Consensus ‘fundamentals’, whose efficacy can be seen from the economic success of the USA. The key point is this. For a developing country to sustain movement of the production structure into higher value-added activities (deploying technologies mostly developed elsewhere) the Washington Consensus agenda–opening the economy to the international economy and improving institutions of exchange–is at most a necessary condition. The American experience, and that of just about all the post-Second World War success stories, underlines the need for public policies to incentivize the production of some activities over others. Creating a level playing field does not ensure that the players turn up to play.”

Robert Wade, Cambridge Journal of Economics, May 2017

Large-scale immigration: the costs and benefits

workersImmigration can be a divisive but also a sensitive issue. Arguments surrounding last year’s referendum here in the UK on EU membership could not avoid it. Media hysteria, particularly from the right, has focused mainly on the negative impacts, and rational debate has been drowned out. The right seemed to shout loudest, and the left often ended up talking to itself.

This post aims to make a small contribution to rational debate, drawing mainly on an interesting little book by Cambridge Professor Robert Rowthorn, published in 2015 by the think tank Civitas.

The overall findings of the study suggest that, at least in the UK, the overall net economic and fiscal (tax and public spending) outcomes from large-scale immigration are small when compared with the effects of more rapid population growth. Rowthorn argues that considerations of the latter should play a more important role when deciding future government policy. Continue reading