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).
Mariana Mazzucato is known for her view that the state plays a vital role in promoting innovation, which is an essential part of the process of economic growth and development. In her book The Entrepreneurial State she debunked the myth that a flourishing economy requires the state to ‘get out of the way’ of the private sector.
In her latest, The Value of Everything, published earlier this year, she attempts to reignite the debate over the sources of value which, she argues, has been neglected in mainstream circles since the rise of neoclassical economics at the end of the nineteenth century.
Indeed, until the neoclassical school became influential, the source of value in economics was a central concern and a matter of some controversy. The Mercantalists saw gold and precious metals as source of value, and their accumulation was held to be the object of economic policy. For the Physiocrats, only land and natural resources produced value, while for the Classical political economists like Adam Smith, industry was the source. Karl Marx held that labour and its production of a surplus product were the origin of value. Continue reading
This post summarises some of the ideas in an interesting article from the May issue of the Cambridge Journal of Economics. The piece shows that an analysis of ‘complex networks’ using ‘big data’ lends support to structuralist arguments about growth and development. I briefly discuss the implications for industrial policies intended to promote the ‘catching up’ of poor countries with richer ones.
The Cambridge Journal of Economics (CJE) is an influential heterodox journal published six times a year. It includes as one of its patrons nobel prize-winner Amartya Sen and as associate editors Ha-Joon Chang, Mushtaq Khan and Anwar Shaikh, whose ideas I have sometimes discussed in previous posts.
As CJE articles are usually behind a paywall, I thought it would be helpful to summarise and comment on one or two when they are interesting and relevant to this blog. Continue reading
I refer to the work of Michael Pettis quite often on this blog. He strikes me as a highly original thinker, combining macroeconomics, finance, development, political economy and economic history in a way which provides a deep understanding of world economic events.
He recently posted here about what he sees as the two main models of economic development which nations have used to transform their economies at certain times in history: the high wages model, and the high savings model.
Models of development can be described as a set of policies and institutions which aim to develop the economy and achieve sustained rises in productivity and output via industrialisation and the advancement of technology.
For Pettis, both models aim to raise wages and productivity, but they are distinct from one another in how they drive the investment which makes this possible. Continue reading
From Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism:
“We may be living in a post-industrial society in the sense that most of us work in shops and offices rather than in factories. But we have not entered a post-industrial stage of development in the sense that industry has become unimportant. Most (although not all) of the shrinkage in the share of manufacturing in total output is not due to the fall in the absolute quantity of manufactured goods produced but due to the fall in their prices relative to those for services, which is caused by their faster growth in productivity (output per unit of input). Now, even though de-industrialization is mainly due to this differential productivity growth across sectors, and thus may not be something negative in itself, it has negative consequences for economy-wide productivity growth and for the balance of payments, which cannot be ignored. As for the idea that developing countries can largely skip industrialization and enter the post-industrial phase directly, it is a fantasy. Their limited scope for productivity growth makes services a poor engine of growth. The low tradability of services means that a more service-based economy will have a lower ability to export. Lower export earnings means a weaker ability to buy advanced technologies from abroad, which in turn leads to slower growth. (p.88-9)
…[E]ven the rich countries have not become unequivocally post-industrial. While most people in those countries do not work in factories any more, the manufacturing sector’s importance in their production systems has not fallen very much, once we take in to account the relative price effects. But even if de-industrialization is not necessarily a symptom of industrial decline (although it often is), it has negative effects for long-term productivity growth and the balance of payments, both of which need reckoning. The myth that we now live in a post-industrial age has made many governments ignore the negative consequences of de-industrialization.
As for the developing countries, it is a fantasy to think that they can skip industrialization and build prosperity on the basis of service industries. Most services have slow productivity growth and most of those services that have high productivity growth are services that cannot be developed without a strong manufacturing sector. Low tradability of services means that a developing country specializing in services will face a bigger balance of payments problem, which for a developing country means a reduction in its ability to upgrade its economy. Post-industrial fantasies are bad enough for the rich countries, but they are positively dangerous for developing countries.” (p.101)
I have been doing some reading on economic development in Africa recently. The continent, if it is even possible to lump its many diverse nations together when discussing development, which is probably unwise, gets some bad press. But as development economist Ha-Joon Chang has said in his bestselling book, ‘Africa is not destined for underdevelopment‘.
That is refreshingly optimistic, and I humbly concur. Having said that, Chang thinks it is all about policies, but for me this is only part of the story. Why do bad policies persist? This is what we need to study. Poor nations whose people want things to improve via economic and social development need pragmatic and effective governments who can implement policies appropriate to their particular national contexts. These will vary from country to country, and over time.
Below I will share some of the ideas I have gathered which mainly draw on the work of political economists who have studied development processes across the African continent. Continue reading
In this brief video, a journalist gives his view as to why development in Africa has been so difficult. The answer apparently lies in the colonial legacy of (mis)dividing up the continent into states in a way that has failed to give rise to nation-building, both economically and politically. He also points a finger at self-serving elites, who have built great personal wealth but not, in general, the wealth of their own nations.
However, he does ignore the uneven record of growth on the continent since World War Two, which saw varying degrees of economic transformation. It is a tragedy that much good was undone during the ‘lost decades’ of the 1980s and 90s. A number of countries grew more rapidly in the 2000s, mainly due to the expansion of primary commodity exports, but a widespread problem is the failure of governments to diversify their economies into sectors which have more potential for growth in output and productivity, such as manufacturing.