Quote of the week: five reasons why manufacturing matters for growth and development

“The manufacturing sector plays a key role in rapid growth and development for five reasons. First, manufacturing growth fosters diversification, backward and forward linkages, agglomeration economies and dynamic economies of scale through learning-by-doing. Thus, manufacturing tends to ‘pull’ the other economic sectors, even when they are initially larger. Second, manufacturing offers greater scope than agriculture or services for productivity growth through the development and adaptation of new technologies. These innovations are subsequently diffused across the economy through the spread of new skills and production methods and the sale of manufactured inputs. Third, manufacturing productivity tends to rise with the rate of growth of manufacturing output, potentially creating virtuous circles of growth across the economy. Fourth, manufacturing can more easily foster export diversification and the production of import substitutes, which can alleviate the balance of payments constraint. Fifth, manufacturing sector wages tend to be relatively high, which can support demand growth and improvements in living standards. Hence, intersectoral shifts of labour and other resources towards manufacturing can help to raise productivity and growth rates in developing economies; conversely, economic structures narrowly determined by static comparative advantages, as is envisaged by mainstream economics, are sub-optimal for long-term growth and for global convergence.”

Alfredo Saad-Filho (2021), The ‘Rise of the South’ and the Troubles of Global Convergence, Chapter 3 in Growth and Change in Neoliberal Capitalism, Chicago: Haymarket Books, p.79.

Chinese industrial policy: learning to succeed

Shanghai_-_Pudong_-_LujiazuiIndustrial policy has played a major role in enabling the Chinese ‘economic miracle’ in recent decades. This kind of catch-up development requires institutional and policy incentives for firms to learn to acquire and use existing technologies. China seems to have had success in this area, but its extent and future prospects, particularly in relation to its large state-owned enterprises, remain subject to debate. It is widely recognised that reforms are now needed, but at the interface between industrial and macro policy, the state is finding it hard to achieve what is necessary economically.

This week’s Economist magazine features a useful article on China in its Business section. It argues that foreign multinational companies (MNCs) with operations in China are finding it harder to compete with domestic firms that are becoming increasingly successful in supplying their home market. Many of the latter have been closing the technological gap with their foreign-owned rivals. While the article does not consider the implications of this for assessing the success of China’s industrial policy, the evidence is provocative. This post will attempt to outline the theory of industrial policy for ‘catch-up’ development and its application in China in recent decades since the period of ‘reform’ and ‘opening up’ began in the late 1970s. Continue reading

Quote of the week: Pro-poor development and the role of the state

“Pro-poor development requires close co-ordination between private and public sector activities and the regulation of intersectoral and intertemporal resource allocation (including international capital flows) by the state, through growth-promoting industrial and financial policies. This is not because the state is either necessarily efficient or inherently ‘good’. Policy activism and state-led co-ordination of activity are necessary because the state is a fundamental tool for collective action. The state is the only social institution that is at least potentially democratically accountable and that can influence the pattern of employment, the production and distribution of goods and services and the distribution of income and assets at the level of society as a whole. Only the state can limit the power of unaccountable private interests, raise sufficient funds for democratic economic reforms, and ensure that economic activity is guided by the demands of the majority. This does not imply that the state should ‘take over’ the economy, however this may be defined. Pro-poor economic strategies are distinctive not because the state manages individual firms or enjoys unlimited property rights, but because of the way in which the state co-ordinates economic activity in pursuit of distributive ends. State ownership of specific assets is a secondary issue; what really matters are the objectives of government policy, and how state institutions interact with one another and with private concerns.”

Alfredo Saad-Filho (2021), Moving beyond the Washington Consensus: Pro-Poor Macroeconomic Policies, Chapter 1 in Growth and Change in Neoliberal Capitalism, Chicago: Haymarket Books, p.35-36.

Too much industrial policy? The case of China


China has reached a stage in its development where it needs to reform its growth model and rebalance its economy. But it is finding it hard to do so. Its policy framework remains too focused on expanding industrial capacity and insufficiently on rebalancing domestic demand away from excessive investment and towards consumption. In this sense China has ‘too much’ industrial policy. Sufficient incentives for progressive reform in China and other ‘imbalanced’ economies may ultimately require a new kind of global trade and financial system.

Many heterodox economists with an interest in development have made the case for industrial policy. Part of the reason for this is that all of today’s advanced economies have used it in various forms in order to accelerate growth and structural transformation. So-called late industrialisers, such as South Korea and Taiwan, have used it as part of their strategy to catch up with the richest countries. There have undoubtedly been industrial policy failures, with policies used to support fledgling industrial sectors becoming entrenched and firms failing to ‘grow up’ and become internationally competitive. However, these cases should not lead us to reject such policies wholesale. Rather we should learn from both the success stories and the failures in order to do the policies better and get state intervention right. Continue reading

Sustainable development: what role for mainstream economics?

Can we reconcile rising prosperity with the protection and restoration of the natural environment? This must be one of the defining issues of our age. Dieter Helm, an economist at Oxford University, thinks that we can. In his 2019 book Green and Prosperous Land, he employs a mainstream economics approach to sustainable development, focusing on the British countryside as a case study. He argues that a radical transformation of environmental policies is needed and that orthodox economics can be used to inform this. In particular, we need to urgently restore and improve our stock of ‘natural capital’, producing both an improved environment, in tandem with rising and sustainable long term prosperity and well-being. In fact, given that human activity is ultimately dependent upon nature, our prosperity is simply not possible without its preservation: the two must go together. A key debate is over what this means and how to achieve it. Surprisingly for this blogger, Helm’s use of pretty mainstream economics has much to offer. Continue reading

Quote of the week: avoiding business-as-usual on the environment

“The tyranny of the marginal is the route to an increasingly silent spring. It is what business-as-usual means. Lots and lots of marginal losses end up with a catastrophe for insect life and for farmland birds. To seriously head off the damage that business-as-usual will bring – through more people, more houses and more hard infrastructures – the starting point needs to be the public goods and not the marginal changes. It is these public goods that are being eroded in a death by a thousand cuts. Make no mistake, business-as-usual is likely to tip many ecosystems over the edge. By 2050 there could be very little left, and in a world with perhaps 500 or more parts per million of carbon in the atmosphere. The intensification of farming, industry, towns and cities could result in a silence of nature – of the birds, of the remaining insects and most of our mammals, reptiles, fish and invertebrates. It doesn’t have to be like this, but it will unless we act, and act now.”

Dieter Helm (2019), Green and Prosperous Land: A Blueprint for Rescuing the British Countryside, London: William Collins, p.58.

Some notes on the political economy of central banking

EpsteinPolEconofCentralBankingI have just finished a very useful collection of some of the papers of economist Gerald Epstein, entitled The Political Economy of Central Banking. Epstein is Professor of Economics and Co-Director in the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst in the US, which is known for the progressive research agendas of its members.

Rather than write a lengthy review, this post sets out some of the key points made in the book and which stood out for me as being original and important. Epstein’s focus on central banks (CBs) remains especially relevant in today’s world of increased inflation and CB efforts to return it to target rates.

  • Epstein argues that CBs, especially the US Federal Reserve, are not as independent as they make out and tend to be captured by a variety of vested interests. In today’s financialised economies, many are predominantly influenced by the financial sector, particularly since its liberalisation, expansion and rising power and influence since the 1970s and 80s. Thus they tend to serve finance and support financial sector profits more than industry/industrial profits and workers/wages and employment.
  • Historically, CBs have often played a more developmental role at various times and in various countries, supporting industrial expansion and allocating credit to more productive sectors in order to encourage economic growth rather than financialisation.
  • Epstein argues that major reforms to CBs and the economy more broadly are needed today to democratise CBs and make them more accountable to society as a whole, so that they better serve the public good and not simply the financial sector. They need to play a larger role in supporting employment in the macroeconomy and industrial growth, especially in driving the green transition which is so vital to building a more sustainable economy.
  • CBs should be more accountable to society eg. to Congress in the US, and their boards and staff more generally should reflect the wider society and economy, including industrial and labour interests.
  • Monetary policy in the form of changes to interest rates have distributional impacts and are therefore political. Thus no CB can be truly ‘independent’ and free of partisan influences and political outcomes.
  • The financial sector, industry and labour (as classes or sectors in the economy) are impacted differently by monetary policy in terms of their respective income flows in the form of profits and wages, as well as their borrowing and servicing of their stocks of debt.
  • Lower interest rates may stimulate industrial investment, economic growth and employment, but can lead to a profit squeeze if the labour market becomes sufficiently ‘tight’. They may also inflate asset prices and boost financial profits. However higher interest rates can also boost financial profits and rentier incomes.
  • Epstein contrasts speculative finance with enterprise finance as two different sets of relations between the financial sector and industry. Speculative finance, more dominated by capital markets, may mean that the two sectors operate further apart and with more conflict between their respective economic aims, while enterprise finance means that banks and industry are more closely connected and cooperate in the service of expanding longer term productive investment and profitability. In a more financialised economy, industrial firms may themselves become more like financial institutions, with potentially detrimental impacts on economic performance. These varying relations, which can also be seen as different class coalitions, may alter their members’ preference for tight or loose monetary policy on the part of the CB. Varying degrees of conflictual and cooperative relations between industry and labour can do likewise.
  • Epstein questions the evidence that sustaining very low inflation, the remit of independent CBs, is a precondition for robust economic growth. He suggests that moderate inflation can be positively associated with growth and that overly tight monetary policy can damage growth performance over a significant period.
  • Quantitative Easing (QE) since the Great Recession of 2008-09 in the US has increased inequality through the inflation of asset prices, and despite some positive impact from increased employment, this has been offset by wage stagnation for many in work. However, an absence of QE and higher interest rates could also have increased inequality by reducing employment growth apart from its other effects. This paradox suggests that more wide-ranging progressive policy responses are needed to reduce inequality in the US and elsewhere, such as changes to labour market regulation and a higher minimum wage, as well as the effective use of fiscal policy.

Epstein’s contributions in the book are varied, original and interesting. His ideas are founded on a political economy approach, so that economics is necessarily seen as political. Particular class configurations in society therefore play a role in determining institutional and policy change, and for the author, CBs can never be ‘independent’ of them. This has major implications for the economy. In a more financialised world, the finance sector itself has become a more powerful influence on CB policy in many countries, and for Epstein, this has had detrimental effects on economic outcomes. The interests of labour in terms of employment and wages have in many cases been neglected in the service of finance and financial profits.

The reforms to CBs that the author proposes are an attempt to democratise aspects of finance and monetary policy so that they better serve the wider society and economy. The aim is to support employment and rising living standards for the majority, and this requires reforms that go beyond CBs alone, with changes made to the financial sector as a whole so that it better supports non-financial business investment. CBs and finance more broadly need to play a more developmental role, as they have done at certain times throughout history. Given the current need for massive investment in the transition to a green economy, there is a case to be made for a comprehensive progressive policy agenda which supports this.

CBs have been called upon to play such a role during episodes of national emergency, such as wartime. In these kind of situations, some of the ‘normal’ rules of capitalism have been suspended in order to focus on a huge collective effort. Repressed interest rates, the state-led allocation of credit to vital industries and price controls have all come into play when needed. A return to more peaceful conditions has tended to see such interventions set aside and a return to freer markets and a less regulated private sector.

Today the global economy faces multiple major challenges which have increasingly called for the state to play more of a role in securing the public good. These include, not least, maintaining political, social and economic stability as nations are battered by a variety of shocks, from the pandemic to war, climate change and inflation, as well as geopolitical instability and a global order under threat of fragmentation as a particular form of globalisation evolves in an uncertain fashion. In understanding and responding to all of this, CBs and their actions are a key part of the institutional and policy makeup. Epstein’s work on the political economy of central banking offers a richer, more comprehensive and more progressive contribution than a purer and narrower mainstream economic approach.

Opening up Keynesianism – the implications for economic policy

keynesAt its simplest, Keynesian economics makes the case for the role of aggregate demand in determining output and employment in the economy as a whole. Government policies should therefore attempt to achieve low levels of unemployment through the management of aggregate demand, or the growth of expenditure. A crude form of this emphasises fiscal policy, the balance between tax revenues and public spending. A weak economy with rising unemployment may need an expansionary fiscal policy, with public spending increases or tax cuts to boost demand, while an overheating economy may need the opposite, to reduce demand and lower inflation.

This is a crude characterisation of a major school, or truthfully what has given rise to many schools, of economic thought. It is unfortunate since, in the wake of economic crises in recent decades, particularly that of 2008-09, commentators proclaimed the return of Keynesian ideas as governments across the world responded to recession with degrees of expansionary fiscal policy, as the use of monetary policy alone was deemed to be inadequate. But it didn’t last, and the turn to austerity and ‘tighter’ fiscal policy quickly followed. Alongside a return to reliance on monetary policy and the adoption of Quantitative Easing (QE), this played a role in the weakness of the recovery.

Following the global pandemic and the advent of war in Ukraine, many countries now face the prospect of stagflation, the combination of weak growth and rising unemployment alongside high inflation. Policymakers are now tightening monetary policy by raising interest rates, even as recent fiscal expansions come to an end. Crude Keynesianism appears to have little to offer, echoing its abandonment during the stagflation of the 1970s.

But genuine Keynesianism does have far more to offer public policy than expansionary fiscal policy during a deep recession. It may start with a focus on aggregate demand, but can be used to illustrate the importance of industrial policy, the reduction of inequality and the reform of the global monetary and trade system. This post intends to explain how. Continue reading

The lessons we shouldn’t learn from the UK government’s fiscal U-turns

The UK government’s September ‘mini-budget’ is no more. The chancellor who delivered it has been sacked, and the Prime Minister is hanging on to her position by her fingernails, her authority withered and her humiliation almost complete. The new chancellor has reversed virtually all of the promised tax cuts, and has scaled back support for people’s energy bills. Further spending cuts are likely to be proposed in a couple of weeks. So far, the financial markets have been reassured, with the pound stabilising against the dollar and the price of gilts rising somewhat, though they are still lower, and interest rates higher, than before the mini-budget.

Regular readers of this blog will likely know that I am no right-wing libertarian when it comes to economic policy, and am therefore critical of Trussonomics, which is of course now effectively dead. In today’s post, I thought I would assess some of the wrong lessons that might be drawn in the UK and around the world from the evolving fiscal policy of the current Conservative government. Continue reading

Move fast and break things? What’s missing from the UK’s ‘growth plan’

The UK has a new Prime Minister and cabinet, from a party that has been in power for twelve years. The Conservatives have presided over austerity and Brexit, as well as a pandemic and now war in Europe. Many economists argue that the first two have sapped economic growth since the Great Recession of 2008-09, even before the disruption of the latter two factors. Productivity growth has been feeble during those years, breaking sharply with the previous long run trend. Other countries have experienced productivity slowdowns, but the UK’s has been particularly poor. The ‘new’ government and its leader Liz Truss have promised to ‘grow the economy’ faster via a mix of tax cuts and deregulation. Rather than acknowledging the Conservatives’ role in holding the country back, she has blamed some made-up enemies: the ‘anti-growth coalition’, which in practice seems to mean anyone who opposes her policies, and a focus of previous governments on redistribution rather than growth itself. As a self-styled controversialist, she has claimed that disruptive change is needed in order to restore the country’s economic fortunes.

All this seems to imply a future of regressive growth at all costs, whether socially, environmentally or even, paradoxically, economically. The government may not see it this way, and the full extent of its plan has yet to be laid out. But as an antidote to what is likely to prove to be a fantasy, more or less libertarian, set of economic policies, I thought I would lay out some areas of progressive concern over the ‘growth plan’, by taking a constructive approach rather than a purely critical one. The following sections are not meant to be in order of importance. In fact I think that all these areas are important to securing a more widely-shared prosperity, not least for the UK, as well as elsewhere. Continue reading