While classical political economy has been considered outdated by many social scientists, I argue here that it can provide insights about the world today and the challenges we face. One of these insights has to do with the early disagreement that existed between Adam Smith and the mercantilists of his era with regards to the wealth of nations, a topic sometimes captured under the label “development”. Based on this disagreement, this blog post develops a typology of Smithian and Mercantilist nations as different models of capitalist development that may be considered alternatives for developing countries today.
According to a recent piece in The Economist, economic convergence with the US among so-called emerging markets has slowed in the ten years since the great recession. The difference in the growth rate of GDP per capita has slipped since the 2000s from an average of over six percent in emerging Asia to about four percent. Emerging Europe has slowed less, but from a lower rate, while Latin America, North Africa, Sub-Saharan Africa and the Middle East are now beginning to fall behind again, at least on average.
This is disappointing for champions of economic theories of convergence resting on the globalisation of the world economy. It is also bad news for those still living in poverty in the countries slipping back. Of course, slowing convergence need not mean that absolute poverty is no longer falling. But it does mean that the prospects for reducing inequality between rich and poor nations and more widely-shared prosperity are for now receding. Given that the US has not grown particularly fast since it emerged from recession, it means that only emerging Asia continues to be a truly dynamic region in economic terms. And even this mantle may be under threat as growth slows in China, affecting supply chains throughout Asia. Continue reading
“The mixed economy is a social institution, a human solution to human problems. Private capitalism and public coercion each predated modern prosperity. Governments were involved in the market long before the mixed economy. What made the difference was the marriage of large-scale profit-seeking activity, active democratic governance, and a deepened understanding of how markets work (and where they work poorly). As in any marriage, the exact terms of the relationship changed over time. In an evolving world, social institutions need to adapt if they are to continue to serve their basic functions. Money, for example, is still doing what it has always done: provide a common metric, store value, facilitate exchange. But it’s now paper or plastic rather than metal, and more likely to pass from computer to computer than hand to hand. Similarly, the mixed economy is defined not by the specific forms it has taken but by the specific functions it has served: to overcome the failures of the market and to translate economic growth into broad advances in human well-being – from better health and education to greater knowledge and opportunity.”
Jacob S. Hacker and Paul Pierson (2016), American Amnesia: How the War on Government led us to Forget What Made America Prosper, p.7
Democracy, accountable and transparent government, low levels of corruption, the rule of law, stable property rights, pluralism: we tend to think that these are all highly desirable in any society.
In poor countries, they are often absent, but at least some of them are present in many rich ones. It seems to follow that they should be encouraged in the former as a way to encourage development. After all, if richer countries have these characteristics, they may be part of the development process.
This wishful thinking provides a foundation for the ‘good governance’ agenda propagated by the World Bank and other international institutions during the 1990s and into the 2000s. It was argued that domestic political reforms in the direction of good governance in poor countries would provide the institutional environment conducive to the efficient working of markets and thereby promote development. Continue reading
Today and tomorrow, I will be posting a series of short videos discussing the relationship between governance and development. So-called ‘good governance’ covers such factors as support for the rule of law, anti-corruption and effective democracy, which I think most people would agree are desirable, but are usually missing in the poorest countries.
Professor Mushtaq Khan of SOAS discusses how, in contrast to the ‘good governance’ agenda of the World Bank, these desirable factors have historically been the outcome of successful development rather than its cause.
Instead of policymakers in poor countries trying in vain to achieve good governance, they should instead try to promote developmental governance, which would enable their economies to successfully grow and develop and to some extent ‘catch up’ with their richer neighbours. This would then create the conditions for good governance to be more easily promoted and sustained. Continue reading