Corruption and development: the importance of political economy

DSC00236aCorruption is generally seen as a major social problem, and is particularly prevalent in many developing countries (DCs), but also to a lesser degree in middle income and advanced economies. We frequently read in the media about new political leadership in all sorts of places promising to fight corruption in order to improve the social, political and economic environment, from China and Angola to South Africa and Mexico, to take some fairly recent examples.

Unfortunately, such battles against corruption in DCs frequently end in failure, an outcome that is demoralising, not least for the populations of the countries concerned, but also for those external actors who set great store by these kinds of reforms.

Corruption is often conceived of as a moral issue, but some heterodox economists have argued that it is frequently much more than this. They contend that it is more a political and structural problem symptomatic of societies undergoing change as new social forms struggle to emerge. This is typically the case in poor countries experiencing a socioeconomic transformation towards capitalism. Continue reading

Europe’s Growth Champion: institutions, economics and politics

Poland’s success in becoming a high-income country with dramatically improved living standards since its transition from communism in 1989 may be one of the lesser-known stories in recent world economic history.

This transition is in stark contrast to Poland’s historical record over several hundred years in which its economic fortunes fluctuated relative to Western Europe, but never got as close in terms of income per head and overall prosperity as it is today.

Marcin Piatkowski has written an interesting book on this subject, Europe’s Growth Champion, which draws on and extends some of the insights of the New Institutional Economics (NIE), particularly the work of Daron Acemoglu, Simon Johnson and James Robinson (AJR). Continue reading

The policy that shall not be named

Production_LineThe IMF recently published a refreshing paper on the principles of industrial policy. The paper is quite lengthy, so I will summarise and discuss some of the main points here. The authors do not speak for the IMF of course, and it merely reflects their current research, but it remains important.

The paper is important because it unambiguously makes the case for an active industrial policy in developing countries to enable them to catch up with the richest countries.

They argue that successful examples of such a development strategy have been extremely rare in recent decades, but that it is vital to learn from them. They use the case studies of the ‘Asian miracle’ economies of South Korea, Taiwan, Singapore and Hong Kong, which were relatively poor some decades ago, but managed to industrialise and grow rapidly, enabling them to catch up and graduate into the club of advanced economies.

They also note that most if not all of today’s rich countries, including the US, Japan and Germany, followed such a strategy during their catch-up phases of growth, and continue to employ industrial and technology policies, albeit in different forms.

The paper is also refreshing because the IMF, and the World Bank, are not known for supporting the principles of industrial policy as a viable development strategy. In their dealings with financial crises and developing countries in recent decades, they have tended to promote and enforce an anti-developmental state neoliberal policy agenda, known as the Washington Consensus, with often dire results for levels of poverty and inequality and the ability of governments to encourage successful development. Continue reading

Industrial policy and the UK – the keys to success

An excerpt from a chapter by my old tutor at SOAS, Mushtaq Khan, who has written extensively on industrial policy in a range of late-industrialising countries, analysing case-studies with a range of outcomes in terms of development, successful or otherwise. Here he considers both the differences and the similarities with an industrial policy in the UK, which needs to innovate, rather than simply emulate already existing technologies and catch-up with the richest countries:

“For an advanced country like the UK, industrial policy clearly has to support both innovation and the development of competitive production capabilities that can convert ideas and knowledge into marketable products. There is no question therefore that industrial policy must have a focus on supporting innovation and the development of new knowledge. This involves investment in public bodies such as universities as well as in networks linking public and private players engaged in innovation. Countries such as the UK still have a lead over most emerging Asian countries in the organization of innovation, though there may be particular strategies of financing or organizing innovation that may be worth looking at. However, the second plank of any effective industrial policy has to be the development of competitive manufacturing capabilities so that good ideas and technologies can be converted into competitive products. Here the UK can learn a lot about the types of problems countries can face when they try to acquire (or, in the case of the UK, re-acquire) firm-level competitive capabilities. Britain’s gradual loss of manufacturing competitiveness after the Second World War was exacerbated after the 1980s in the context of rapid de-industrialization. The country lost much of the tacit knowledge embedded in the organizational routines of manufacturing firms, and as a result fell even further behind in terms of its capacity to regain a broad base of competitive firms. The experience of Asian industrial policy shows that the achievement of competitiveness in new sectors and technologies can be a difficult problem to crack. The two planks of industrial policy are closely connected because without a broad base of firms that can organize production competitively, a successful innovation strategy will simply result in the offshoring of manufacturing somewhere else.”

Mushtaq Khan (2015), The Role of Industrial Policy- Lessons from Asia, in David Bailey, Keith Cowling, and Philip R. Tomlinson, New Perspectives on Industrial Policy for a Modern Britain, Oxford University Press, p.80.

The good governance illusion

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

Journeying through the world of economics: a personal note

2018 marks 24 years since I first took an interest in what is sometimes referred to as the ‘dismal science’. Not a particularly notable landmark, though it is more than half my life. And I certainly have not spent all that time with my nose in books about economics, although I have spent quite a bit of it like that, maybe more than is good for me.

Apparently it was the Victorian historian Thomas Carlyle who coined the phrase dismal science in the 19th century. I am sometimes inclined to agree, when observing a malfunctioning economy and its malfunctioning stewards in government and business. But more often I am prepared to be optimistic that we can find solutions to the problems of humanity. Some of them might even come from studying economics!

Keynes looked forward to a time when the economist’s role in society would be akin to that of dentists, as humble, competent fixers of minor problems. Notwithstanding a call from the UK’s current environment secretary during the campaign for Brexit to pay less attention to experts, economists and their ideological categories of supply, demand and growth have become extremely powerful and accepted, even if with passivity, resignation or incomprehension. Continue reading

Governance reform and development: a heterodox view – Part 2

Following yesterday’s post, here are the final two parts of the discussion on governance reform and development by Mushtaq Khan, Professor of economics at SOAS in London.