The policy that shall not be named

Production_LineThe IMF recently published a refreshing paper on the principles of industrial policy. The paper is quite lengthy, so I will summarise and discuss some of the main points here. The authors do not speak for the IMF of course, and it merely reflects their current research, but it remains important.

The paper is important because it unambiguously makes the case for an active industrial policy in developing countries to enable them to catch up with the richest countries.

They argue that successful examples of such a development strategy have been extremely rare in recent decades, but that it is vital to learn from them. They use the case studies of the ‘Asian miracle’ economies of South Korea, Taiwan, Singapore and Hong Kong, which were relatively poor some decades ago, but managed to industrialise and grow rapidly, enabling them to catch up and graduate into the club of advanced economies.

They also note that most if not all of today’s rich countries, including the US, Japan and Germany, followed such a strategy during their catch-up phases of growth, and continue to employ industrial and technology policies, albeit in different forms.

The paper is also refreshing because the IMF, and the World Bank, are not known for supporting the principles of industrial policy as a viable development strategy. In their dealings with financial crises and developing countries in recent decades, they have tended to promote and enforce an anti-developmental state neoliberal policy agenda, known as the Washington Consensus, with often dire results for levels of poverty and inequality and the ability of governments to encourage successful development. Continue reading

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Economic development in Palestine and beyond – via Developing Economics blog

An interesting and timely piece by Patrick Kaczmarczyk on promoting economic development in Palestine, via the excellent Developing Economics blog. The first two paragraphs are below.

Successful 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).

Jason Hickel on global poverty and neoliberalism

Jason Hickel is an anthropologist who has written extensively on global poverty and inequality, as well as political economy. Here is a recent post of his, discussing the nature and measurement of, and trends in, global poverty, as a response to a critique by Steven Pinker.

Hickel strongly disputes the idea that falling poverty, where it has occurred, has been due to neoliberal globalisation. Rather, the successful industrialisation and economic development that are necessary for sustained poverty reduction have been achieved with state intervention, industrial policies, and strategic integration with the global economy in countries such as South Korea, Taiwan, Singapore and China.

There is a huge literature on this, but Ha-Joon Chang is perhaps one of the best known academics to have written popular books on how particular forms of state intervention have promoted capitalist development. 23 Things They Don’t Tell You About Capitalism is the easiest read and I have posted a number of excerpts from it over the last few years. Bad Samaritans is also good value. For a more academic discussion see Kicking Away the Ladder.

Thanks to the excellent blog The Case For Concerted Action for posting on this first and drawing my attention to Hickel’s work.

Ideas and wealth creation

rawA break from the economics (sort of), with a quote from the late social philosopher and eclectic thinker, Robert Anton Wilson, from one of his most popular books (and one of my favourite), Prometheus Rising, which tries to make sense of the workings of the human mind and its role in human development in its broadest sense. Here he is on page 113:

All wealth is created by human beings using their neurons intelligently.

A neurotic young man once went to a Zen Master and asked how he could find peace of mind.

“How can you lack anything,” the Roshi asked, “when you own the greatest treasure in the universe?”

“How do I own the greatest treasure in the universe?” asked the young man, baffled.

“The place that question comes from is the greatest treasure in the universe,” said the Master, being more explicit than is common for a Zen teacher.

Of course, as a Buddhist, the Master had taken a vow of poverty and did not mean exactly what we mean here. But he knew that the brain produces all that we experience – all our pain and worry, all our bliss states and ecstasies, all our higher evolutionary vistas and trans-time Peak Experiences, etc. It is also “the greatest treasure in the universe” in the most materialistic economic sense: it creates all the ideas which, socially employed, become wealth: roads, scientific laws, calendars, factories, computers, life-saving drugs, medicines, ox-carts, autos, jet planes, spaceships…”

Despite many changes in today’s modern global economy developmental states are needed more than ever — Developing Economics

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 […]

via Despite many changes in today’s modern global economy developmental states are needed more than ever — Developing Economics

Anwar Shaikh on the mythology of neoliberalism

“Neoliberalism claims that free trade is the best way to foster economic development. But its doctrine is premised on the faulty notion that international competition levels the mighty and raises up the weak. Real competition operates quite differently: it rewards the strong and punishes the weak. From this perspective, the neoliberal push for unfettered free trade can be viewed as a strategy that is most beneficial to the advanced firms of the rich countries.

This also explains why the Western countries themselves, and subsequently Japan, Korea and the Asian Tigers, resisted free-trade theories and policies so strenuously when they were themselves moving up the ladder. Equally importantly, it allows us to make sense of the actual policies that they followed in their rise to success: using international access to markets, knowledge and resources as part of a greater social agenda. The object should not be to level the playing field, but to bring up the levels of the disadvantaged players. In this regard, practising neoliberalism on the poor of the world is a particularly cruel sport.”

Anwar Shaikh (2005), The Economic Mythology of Neoliberalism, in Alfredo Saad-Filho and Deborah Johnston (eds.), Neoliberalism: A Critical Reader, Pluto Press, p.48

What is GDP in China? Thoughts on the slowdown from Michael Pettis

A fascinating piece from Michael Pettis, an economist I regularly reference, on how China is probably growing much more slowly than the official GDP figures make out, alongside a discussion of the nature and measurement of GDP itself.

This would confirm his long-held thesis that China’s ultra-high investment growth model has been unsustainable for some years, and will change of necessity, either through enlightened policy or, more painfully, in the absence of such a policy.

Trade tensions and rising protectionism are combining with the exhaustion of the recent economic upturn to slow growth in many countries.

The slowdown in China could lead to a ‘lost decade’ of relative economic stagnation there, until growth rebalances away from a significant share of unproductive investment and towards a higher share of consumption and a lower but more productive share of investment in overall demand.

Although the country is already economically powerful, its rise to global dominance could be much further away than many ‘China bulls’ have predicted. Even so, given its prominence in global manufacturing value chains, relative stagnation will have a large but uneven impact on global economic activity.