A recent article by Trinh Nguyen of the Carnegie Endowment for International Peace (which can be accessed for free here) describes Vietnam’s recent development success story, its lessons for other late-developers and its prospects for the near future. According to the author, this success has been based on a rapid growth in manufacturing exports, much of it from foreign invested firms. This is in turn down to a liberal approach to international trade and investment, incentives for foreign firms to invest, including the provision of “industrial parks, infrastructure building, and tax breaks”, and more widespread “improvements in its electric system, national highways, and air and sea ports”. Continue reading
This brief article draws on the research of the authors and the ACE to outline some general principles for developing countries to use in their response to the Covid-19 pandemic, particularly in scaling up the overall response via a coordinated effort from a variety of agencies.
The authors write:
“the reality is that in many countries, corruption and governance constraints will limit the rapid scaling up of responses to COVID-19. As we explain in a SOAS-ACE policy brief, this will not only undermine treatment responses, but result in cycles of unsustainable lockdowns and massive economic deprivation.”
“…The enormity of the crisis justifies thinking in terms of a wartime response and asking how the different parts of this strategy could be provided by mobilizing different delivery agencies to achieve the most cost-effective and rapid scaling up.”
“[D]eveloping countries could temporarily mitigate corruption and low capacity by involving public, private and third sector actors to enable scaling up on the basis of revealed competence. This does not get rid of corruption but reduces its level to maximize scaling up. This is very different from the optimization strategy of standard economics.
…[In addition] we were deliberately suggesting building in redundancy. In a storm, even if you are building a small hut, you would do well to build some redundancy into each wall. A leaner approach may look more cost effective, till the storm blows it away. It is only if developing countries have an effective strategy of strengthening their health responses in the storm can lockdowns be relaxed in a sustainable way.”
An interesting and topical article by Paul Ormerod, which argues that slavery has historically been as much an economic problem as a moral one. Slave-based societies have no incentive to invest in labour-saving technologies, given the low cost of the workforce. The widespread adoption of improved technologies is necessary for sustained rises in productivity and living standards.
I would also add that there is a potential problem of insufficient demand due to the absence of wages. Of course, low wages and poor working conditions can also be a problem for a capitalist society, if growth is constrained by inadequate demand in the form of consumption out of wages. Decent pay and working conditions also help to promote well-being. But despite their flaws, only capitalist economies have enabled sustained rises in living standards for the masses. Ormerod concludes:
“Slavery is of course morally repugnant, a stain on the histories of civilised societies. But it is also economically detrimental to the societies it ostensibly appears to benefit. The fact is that no society based on slavery has ever come anywhere near to delivering decent living standards for the average person.
The only system which has is capitalism. Britain and other areas of north west Europe started to become rich through a system based on the rule of law, the ability of individuals to profit from innovation and not be expropriated, and the freedom of labour to negotiate contracts.
Morality undoubtedly played a part in Britain’s leading role in abolishing slavery. But by the early nineteenth century, it had become an anachronism. Resources employed in slavery could be put to much more productive use under capitalism.”
“When they hear someone criticizing free trade, free-trade economists tend to accuse the critic of being ‘anti-trade’. But criticizing free trade is not to oppose trade.
Apart from the benefits of specialization that the theory of comparative advantage extols, international trade can bring many benefits. By providing a bigger market, it allows producers to produce more cheaply, as producing a larger quantity usually lowers your costs (this is known as economies of scale). This aspect is especially important for smaller economies, as they will have to produce everything expensively, if they cannot trade and have a bigger market. By increasing competition, international trade can force producers to become more efficient – insofar as they are not developing country firms that would get wiped out by vastly superior foreign firms. It might also produce innovation by exposing producers to new ideas (eg., new technologies, new designs, new managerial practices).
International trade is particularly important for developing countries. In order to increase their productive capabilities and thus develop their economies, they need to acquire better technologies. They can in theory invent such technologies themselves, but how many new technologies can relatively backward economies really invent on their own?…For these countries, therefore, it would be madness not to take advantage of all those technologies out there that they can import, whether in the form of machines or technology licensing (buying up the permit to use someone else’s patented technology) or technical consultancy. But if a developing country wants to import technologies, it needs to export and earn ‘hard currencies’ (universally accepted currencies, such as the US dollar or the Euro), as no one will accept its money for payments. International trade is therefore essential for economic development.
The case for international trade is indisputable. However, this does not mean that free trade is the best form of trade, especially (but not exclusively) for developing countries. When they engage in free trade, developing countries have their chances of developing productive capabilities hampered…The argument that international trade is essential should never be conflated with the argument that free trade is the best way to trade internationally.”
Ha-Joon Chang (2014), Economics: The User’s Guide, Pelican Books, p.412-4.
Myths abound when it comes to cultural stereotypes regarding working hours and productivity. But it is important to distinguish between the two. People can work all day long in a poor country with inadequate technology, infrastructure and institutions, and produce a fraction of the conventionally measured economic value of someone in a rich country in which these factors are much more advanced.
Yes, incentives for individuals to work are important, but without the right physical and social technologies, there are significant limits on how much can be produced. Parachute a rich entrepreneur from an advanced economy into a very poor one and, while she may have some good ideas about how to make a living, she will find it impossible to earn anything like as much as she does at home. Continue reading
Many development economists in the heterodox or non-mainstream tradition argue that the particular kinds of goods and services produced by an economy and the way this structure of production evolves is a key determinant of developmental success. Leaving this evolution to the ‘free market’ is unlikely to lead to rapid and sustainable growth and transformation. It should therefore be a target of industrial policy, although the form this takes will necessarily vary between different country contexts.
The May issue of the Cambridge Journal of Economics carries an interesting article on the economic development of Brazil in recent decades (1990-2016) as a case of what the authors call ‘regressive specialisation’. That is, “both production and export structures are strongly oriented to goods of low technological sophistication and low income elasticity of demand”.
This has led to a “falling-behind trajectory” so that GDP growth is slow relative to the richest countries and the economy fails to catch-up over a sustained period in terms of GDP per capita. This carries negative implications for efforts to reduce poverty and inequality and raise living standards for the majority of the population. Continue reading
Ben Fine is a professor at SOAS and a prominent Marxist economist. He has written on everything from the evolution of economic thought to consumption, industrial policy and development. His writing often takes the form of a critique of mainstream thinking, and appeals to develop an alternative, drawing on a political economy which comes to grips with modern capitalism, warts and all.
Here he summarises the classic development economics, which was influential in the post-war period before being superseded by what was becoming mainstream economics, increasingly dominated by microeconomics as opposed to a more systemic, contextual and interdisciplinary analysis concerned with economic and social transformation. The study of development which builds on the latter seems to me to offer a much richer understanding of this vital field. Continue reading
The insightful quote below distinguishes the structural approach to economic growth from the mainstream one. Although both allow for a transformation in the structure of the economy as part of the growth process, the former leads to a stronger argument for evolving patterns of state intervention to sustain this process.
This distinction in term of policy implications probably goes some way to explaining the biases on either side of the debate, as well as some of the hypocrisy of rich country policymakers, who have often used mainstream arguments to justify non-intervention in poor countries while continuing to employ a range of industrial and technology policies at home. For me the historical record of development, in particular the limited number of countries which have successfully “caught up” with the richest, favours the structuralist approach.
“There are two views regarding the role and implication of production structure for growth. The conventional narrative is that structural change in the patterns of production, expressed numerically in terms of variations in sectoral contributions to output, employment, investment, and patterns of specialization, is just a side effect of growth. As the economy expands and markets enlarge, new demands require new production processes that come into being by attracting inputs such as labor and capital. The structural configuration adjusts to incorporate novel activities or to enlarge existing ones. Growing economies almost always move from primary to secondary and further towards tertiary sectors.
The alternative view is that these patterns of structural change are not just a byproduct of growth but rather are among the prime movers. This has inherent policy implications. Because production structure must change if growth and development are to proceed, conscious choice of policies that will drive the transformation of the system toward certain sectors is essential for long-term economic expansion.
This insight is ignored by most contemporary economic theory. But it arises from observation and analysis of economic performance of developing countries around the world in the past and present. Economists who have been trained within the structuralist tradition share this perspective, holding that development requires transformation or the “ability of an economy to constantly generate new dynamic activities”, particularly those characterized by higher productivity and increasing returns to scale of production as reflected in decreasing costs per unit of output. This logic underlies Kaldor’s growth model…
One key aspect of growth in the poorest countries is that agriculture dominates the economy. Therefore, agricultural productivity growth is crucial, as in sub-Saharan Africa now. But productivity increases in the sector are significantly constrained by lack of access to modern technology, natural factors such as low fertility land, and mostly by its intrinsic inability to offer increasing returns. Hence, per capita output growth at 2 percent requires even higher growth rates of labor productivity in leading sectors (assuming that the ratio of employed labor to the population is fairly stable).
At higher income levels, the leading sector(s) must offer increasing returns and opportunities for robust output growth in response to demand. As demonstrated in…a raft of historical studies, a clear pattern of structural change emerges from the data for economies (today mostly in East and South Asia) which sustain rapid growth. Historically, manufacturing has almost always served as the engine for productivity growth but not for job creation (India with its information processing boom is an intriguing recent exception). For a sector or the entire economy to generate employment, its per capita growth rate of demand has to exceed its productivity growth. Net job creation usually takes place in services.
…[P]atterns of international trade also shift as economies grow richer. Their exports become more technically sophisticated and shift from raw materials toward manufactured products, especially in recent decades with the explosion of assembly manufacturing around the world. Import composition also shifts in response to overall changes in the basic structure of the economy. Indeed, those changes in the pattern of specialization in international trade are an essential part of the transformation of production structures, a fact that has been highlighted by the role that the terms “import substitution” and “export diversification” have played in development debates. Concerning these changes, one key question is whether an economy can pass through the raw material and assembly export stages to sell products abroad that have a high value-added content at home.”
José Antonio Ocampo, Codrina Rada, and Lance Taylor (2009), Growth and Policy in Developing Countries: A Structuralist Approach, New York: Columbia University Press, p.8-10.
Pluralistic Economics and Its History, edited by Ajit Sinha of Thapar School of Liberal Arts & Sciences, Patiala (India) and Alex M. Thomas of Azim Premji University, Bengaluru (India), contains seventeen essays. This review seeks to engage with some of the principal themes that animate the essays in this volume.
More from Ha-Joon Chang’s Economics: The User’s Guide, this time on production and its relative neglect by neoclassical economics. Despite the rise of the so-called knowledge economy, manufacturing and industry more generally remain vital to the development and evolution of our society, and a key driver of the economy.
Chang has written extensively on industrial policies, making the case for their role in promoting economic progress, both in the poorest and the richest countries. Here he is on p.273-275:
“Production has been seriously neglected in the mainstream of economics, which is dominated by the Neoclassical school. For most economists, economics ends at the factory gate (or increasingly the entrance of an office block), so to speak. The production process is treated as a predictable process, pre-determined by a ‘production function’, clearly specifying the amounts of capital and labour that need to be combined in order to produce a particular product.
Insofar as there is interest in production, it is at the most aggregate level – that of the growth of the size of the economy. The most famous refrain along this line, coming from the debate on US competitiveness in the 1980s, is that it does not matter whether a country produces potato chips or micro-chips. There is little recognition that different types of economic activity may bring different outcomes – not just in terms of how much they produce but more importantly in how they effect the development of the country’s ability to produce, or productive capabilities. And in terms of the latter effect, the importance of the manufacturing sector cannot be over-emphasized, as it has been the main source of new technological and organizational capabilities over the last two centuries.
Unfortunately, with the rise of the discourse of post-industrial society in the realm of ideas and the increasing dominance of the financial sector in the real world, indifference to manufacturing has positively turned into contempt. Manufacturing, it is often argued, is, in the new ‘knowledge economy’, a low-grade activity that only low-wage developing countries do.
But factories are where the modern world has been made, so to speak, and will keep being remade. Moreover, even in our supposed post-industrial world, services, the supposed new economic engine, cannot thrive without a vibrant manufacturing sector. The fact that Switzerland and Singapore, which many people consider to be the ultimate examples of successful service-led prosperity, are actually two of the three most industrialized countries in the world (together with Japan) is a testimony to this.
Contrary to conventional wisdom, development of productive capabilities, especially in the manufacturing sector, is crucial if we are to deal with the greatest challenge of our time – climate change. In addition to changing their consumption patterns, the rich countries need to further develop their productive capabilities in the area of green technologies. Even just to cope with the adverse consequences of climate change, developing countries need to further develop technological and organizational capabilities, many of which can only be acquired through industrialization.”