‘Modern’ industrial policy in brief

In the short video below, Evelyn Dietsche outlines what she calls a ‘modern’ approach to industrial policy that developing countries can apply to their policymaking. She contrasts the lessons of those countries in East Asia that industrialised successfully in the post war period, with the relative failures of such policies in other nations.

Although she mentions rent-seeking as a potentially bad outcome of industrial policy, the video misses the point that rent-seeking can lead to value-creating rents which benefit development. All economies have rents and rent-seeking, broadly defined, although they tend to be more formal and legalised in advanced countries, taking forms such as lobbying rather than bribery and other forms of corruption.

The video does discuss the need to look at the specific contexts in which industrial policy takes place in different countries. This is an important point.  In some cases, a successful industrial policy may require some kind of prior political reform; in others, a particular economic policy may be implemented straight away. In both situations, governments and other institutional actors need to adopt an experimental approach, and learn from successes and failures as they go.

Overall the video makes some helpful points in introducing some of the modern research findings on industrial policy. The latter has had something of a bad name in mainstream circles, but the tide has been shifting in recent years.

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Michael Hudson on The American School of Political Economy

JisforJunkEconMore from iconoclast Professor Michael Hudson’s book J is for Junk Economics (p.30-32). For a more detailed account, I can recommend his book America’s Protectionist Takeoff 1815-1914, which I have posted on here.

“American School of Political Economy: The northern economists who focused on protective tariffs, infrastructure investment and a national bank to promote industrial and agricultural technology before and after the Civil War (1861-65). Mathew and Henry Carey, Henry Clay and William Seward among the Whigs and, after 1853, the Republicans, provided the economic policy that enabled America to industrialize and overtake England. They also emphasized the positive effect of rising wage levels and living standards on the productivity that made the American economic takeoff possible. Every major Northern politician and region was associated with a major economist: Alexander Everett for Daniel Webster and other Bostonians; Calvin Colton for Henry Clay; the Careys for Pennsylvania industrialists; and E. Peshine Smith for Seward and the Republicans. They developed the logic for tariff protection as opposed to Ricardian free-trade theory, and for government-sponsored internal improvements and a national bank to finance industry and achieve monetary independence from Britain.

It is testimony to the censorial power of subsequent free-trade ideology that these writers make no appearance in histories of economic thought. Historians have also ignored them, focusing on the Democratic Party (which meant mainly the South seeking to add slave states). At issue was whether the United States would suffer deflation and monetary and trade dependency on Britain, or would become independent. The American School opposed westward expansion and Manifest Destiny, and also opposed the Anglophilia of free traders and slave owners. The latter demanded monetary deflation to prevent industrialization so as to keep food prices low (and hence the cost of feeding slaves).

When the Civil War brought the Republicans to power, the American School found that the most prestigious colleges – founded originally to train the clergy – simply taught mainstream British free trade economics (largely because New England and southern seaboard schools favored free trade). The path of least intellectual resistance was to create a new set of schools – business schools and state land-grant colleges.

A central tenet of the American School was technological optimism in contrast to the Dismal Science of Ricardo and Malthus based on diminishing returns in agriculture and overpopulation leading to poverty. Also central was the Economy of High Wages doctrine: “It is not by reducing wages that America is making her conquests, but by her superior organization, greater efficiency of labor consequent upon the higher standard of living ruling in the country. High-priced labor countries are everywhere beating ‘pauper-labor’ countries.”

By the late 19th century nearly all the major American economists studied in Germany and followed the Historical School. Returning to America, they developed the Institutionalist School to explain why the United States should follow a different economic path from free-trade Britain. They continued to elaborate the logic for the protective tariffs that were nurturing American industry, as well as for public support for internal infrastructure improvements so as to create a low-cost competitive US economy. Most notable was Simon Patten, the first professor of economics at the Wharton School at the University of Pennsylvania. He taught protectionist trade theory and led economists into the discipline of sociology to analyze what he called the Economy of Abundance that resulted from the increasing returns in industry and agriculture.

When the United States achieved world industrial and financial dominance after World War I, it deterred other countries from protecting their own industry and agriculture – while continuing to protect its own. This about-face emulated British experience in urging free trade on other countries so as to make them dependent. This free-trade logic remains the buttress of today’s financial austerity and privatization policies imposed on debtor economies by the United States, the World Bank, and the International Monetary Fund. These policies are the opposite of America’s own protectionist takeoff, the Economy of High Wages Doctrine and the Economy of Abundance that powered its rise to global economic supremacy. The lessons of the American School of Political Economy provide a more realistic model for other countries to emulate.”

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

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