Paradigms

Paradigms in Development Economics Richard Scholz, 14.01.2014

Content 1

Introduction .................................................................................................................. 2

2

Early Development Economics ................................................................................... 2 2.1 2.2

3

Washington Consensus............................................................................................... 9 3.1 3.2 3.3 3.4

4

Modernization Theories ........................................................................................... 4 Structuralism and Dependency Theories ................................................................. 7

Methodological Issues ............................................................................................10 The Role of the State .............................................................................................11 Trade Policy ...........................................................................................................12 Agrarian vs. Industry Sector ...................................................................................13

Development Economics beyond the Washington Consensus ...............................13 4.1 4.2 4.3

The East Asian model of development ...................................................................16 Latin American Neostructuralism ............................................................................25 New Development Economics ................................................................................27

5

Summary ......................................................................................................................34

6

Literaturverzeichnis ....................................................................................................36

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1 Introduction According to Kuhn a paradigm which is closely related to the normal science represents universally recognized scientific achievements mostly expressed in textbooks that, for a time, provide problems as well as solutions for a community of practitioners (Kuhn 1989, 25). Kuhn (1989, 59) proposes further that the analysis of scientific history of ideas and paradigms will not end in identifying generalizable and strict system of rules. In contrast the common ground of paradigm is more comparable to Wittgenstein’s concept of family resemblance (Familienähnlichkeit). The book “Structure of Scientific Revolution” of Thomas S. Kuhn provoked several famous criticism (see Lakatos 1970) probably the most famous critic was the one of Margaret Mastermann (1970, 61–65) stating that the notion “paradigm” is used in not less than twenty-one different senses. Answering this critique, Kuhn (1970, 271) is proposing the term “disciplinary matrix”. However the notion “paradigm” became into use and Fine (2002, 2061) argues these twenty-one interpretations can be boiled down into three: an exemplar, a world vision and a body of professionals. Irrespective whether the Kuhnian framework can be totally applied to the field of development economics it seems to help to enhance the understanding the field of study. The following analysis of development paradigms should be regarded in this manner which is in compliance with the common use of the phrase such as it used by Fine (2010a) or Stiglitz (2002).

2 Early Development Economics After decolonization and political independence the newly established governments has been thinking about economic independence of their former colonial masters. Especially the quest for industrial self-sufficiency became apparent since the former colonies had been serving as market for industrial goods and exported mainly raw materials and food. A greater economic strength accompanied with military strength could be achieved via a rapid industrialization which in turn facilitated the preference for economic planning and public control as well as hostility for foreign direct investment. The challenges of decolonialisation and the accompanied problems of late industrialization thus lead to the birth (emergence) of development economics. Of course problems of development had been of course part of economic theory (Szentes 2005, 156; Jomo & Reinert 2005). According to Srinivasan (2000, 171) all of economics has been development economics until the advent of neoclassical economics and only since the second half of the twentieth century only few studies on growth and development has been published.1 The 1

Srinivasan (2000, 171) makes assumptions for Allyn Young (1876–1929) and Joseph Alois Schumpeter (1883-1950).

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emergence of development economics as sub-discipline was driven by the assumption that much of economic theory is bounded to special conditions and preconceptions of the advanced industrialized countries that cannot be applied to developing economies. The best practice example was probably Albert Hirschman (1981) who distanced itself from what he calls “monoeconomics” meaning the same type of economics applied to developed and less developed countries. Thus, as long as countries exist which did not accomplish the transition to a developed country development economics would exist (Srinivasan 2000, 173). Economic theory after the Second World War was dominated by the rejection of the laissez faire doctrine which has failed so spectacularly during the interwar period. Thus development economist has been much influenced by Keynesianism which in contrast to the neoclassical view assumed that governments should actively intervene for economic development (Chang 2002, 539). Nonetheless the obvious differences between modernization and dependency theories, both theories exhibit a close historical and theoretical relationship. Several authors such as Srinivasan (2000, 191) or Gore (2000) argue that there has been a paradigm of development economics in the Kuhnian sense in the 1950s and 1960s which is the analogy to the Keynesian Revolution which replaced the former neoclassical view of economics. The paradigmatic dominance of early development economics was not only exhibited in scientific writings but also manifested in the relevant institutions. Development programs and national planning boards complemented by the already established Bretton Woods institutions including the IMF and the World Bank as well as aid agencies in the already industrialized countries provided the framework for underdeveloped countries at this time. Further the establishment of Unctad (1964) and Unido (1966) mainly based on the ideas of early development economists had been fallen into this time. Development economists had been characterized by sometime excessive historical analysis which had been used to derive empirical regularities which should be the base for understanding economic development. Ben Fine therefore concludes that early development economist had been framed by an inductive method (Fine 2010a, 64). Krugman (1994) also emphasizes their adherences to a discursive and non-mathematical style and even addresses their demise to their unwillingness or disability to put their ideas about imperfect competition, increasing returns to scale and external effects into formal mathematical models. Srinivasan (2000) contradicts this view, old development economics did not died because their founders were unable or unwillingly to codify their ideas into internally consistent mathematical models (Krugman 1994), in contrast they developed a rich tool of analytical methods like input-output analyses, linear programming and optimal growth models. In contrast, most development economists rely on their historical and discursive 3

style because of their conviction on the importance for interdisciplinary studies. Focusing on economic and social transformation including structural change, economics had to be complemented by other aspects of development studies. Modernization theories e.g. proclaimed the simultaneous progress of modernization in various aspects of cultural life such as wealth, equity, democracy and autonomy and thus had been subject for sociologists, political scientist as well as economist (Weiner & Huntington 1994, 6–11) Gore (2000) emphasizes that modernization as well as dependency theories had been of course been strongly determined by national concerns but their analytical and explanatory framework was global in the sense that development needed to be regarded within the system of international relations. Coined by the Keynesian revolution, they further agreed that economic structure matters for economic development and didn’t use microeconomic principles, rational optimization or equilibrium analyses in their models (Fine 2010a, 64). The focus on systematic economic and social factors had also been expressed in the structuralist view on the market which in contrast to the neoclassical assumption claims that markets for certain products and services simply do not exist, markets that do exist not always work in the manner that is expected and in some cases markets do exist where they are not supposed to be (Toye 1989, 33–34). According to Krugman (1992) these early and glory days of development economics were commanded by “great intellectual prestige and substantial real-world influence”. To get an impression of what these theories have been about the most famous ideas has been summarized on the next pages.

2.1

Modernization Theories

The beginning of development economics in the 1950s were dominated by modernization theories.2 Economic growth became the main policy objective which can be achieved through massive investment in modern activities like manufacturing. Many theorist conceived industrialization as main engine of economic growth. The industrial sector in contrast to the agricultural one was assigned the dynamic role with high productivity growth pulling the economy forward (Thorbecke 2007, 6). Probably the most famous modernization theory are the “Stages of Economic Growth” by Walt Withman Rostow (1997). He assumes that countries go through five stages of economic growth which are characterized by a number of conditions.

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Modernization Theories assumes that least developed societies can – via economic growth and modernization per se – be transformed in the same manner as already developed countries have. While dualism and inequalities can be eliminated, trade-offs are neglected and thus different kinds of developments goals like wealth, equity, stability, democracy and autonomy can be achieved simultaneously and are complimentary to economic growth (Weiner & Huntington 1994, 6–11).

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1. Traditional society 2. Preconditions for take-off 3. Take-off 4. Drive to maturity 5. Age of High mass consumption The most important stage is the “take off” in which dynamic growth through rationalizing and economies of scale in the manufacturing sector accelerates the shift from the agrarian to the secondary sector. Industrialization is the crucial phenomena in this period which requires a huge amount of savings or funds for massive investments in key sectors such as textiles and clothes which should induce a chain of growth also in other sectors. His theory is mainly criticized due to the stages approach which assumes the process of growth as a sequence of stages rather than a continuum, moreover Rostow’s model is denoted as fairly mechanical or quasi-automatic mechanism of development without providing sufficient theory which connect these different stages (Itagaki 1963) Alexander Gerschenkron (1966) another proponent of the linear stages theory added a new component to the theory of development. In his book “Economic backwardness in historical perspective” he emphasizes the role of technology and innovation for economic development. His analysis concentrated mainly on the development of the latecomer economies Japan and UDSSR which experienced unexpected growth rates in that time. In his theory he implies that latecomer economies can benefit in their industrial development by using advanced technologies from already developed economies and thus are able – due to their “advantage of backwardness” – to grow faster and catch up to already developed countries. Government policies and institutional characteristics play a substantial role in this catch-up process and state intervention are more likely and seen as one key success point for development (Grabowski et al. 2007, 20). To answer the question why some countries manage to industrialize and some not Paul Rosenstein-Rodan (1943) developed the theory of the “big push” which is taken up by the similar “critical minimal effort” thesis of Leibenstein (1957). Both theories assume that underdeveloped countries are caught in vicious circles of poverty and require a breakthrough to overcome these obstacles. While Leibenstein basically points to a Malthusian theory meaning that population growth exhibits an income depressing effect which needs to be overcome by a critical minimum of investments, Rosenstein-Rodan mainly emphasizes indivisibilities3 in the production function, domestic demand and savings which justify the need for a “big push”. In accordance with Rosenstein-Rodan, Ragnar Nurkse (1953) 3

Indivisibilities emerge for example when several investments require some complementary demand or industry. The investments thus cannot be realized on its own.

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underlines the role of the government in several areas. For example “skilling” of labour is a first task for industrialization which needs to be realized by the government because private firms will not train potentially mobile workers.4 Rosenstein-Rodan and Nurkse underline furthermore the needs to initiate large private investments in a number of industries. Furthermore the amount of investments in different industry sectors should be in accordance to the increase in demand which can be determined by the income elasticity of demand. The henceforth postulate the concept of balanced growth which is in contradiction with Hirschman’s theory of unbalanced growth. Albert Hirschman (1958) criticizes Nurkse and Rosenstein-Rodan big-push model because it requires a large amount of entrepreneurial and managerial capacity which is typically scarce in least developed countries (LCD) (Dutt 2005, 107). He further proposes that investment decisions are mainly determined by the expected demand rather than available funds. Hirschman finally introduced the concept of forward and backward linkages through which particular industries can spur economic growth in the whole economy. He therefore proposes to promote some key industries having strong backward and forward linkages which should take the lead and advance ahead others sectors. This sectors would produce disequilibria which in turn induce other private sectors (driven by the profit motive) to correct these disequilibria (Meier 2005, 64). Another major characteristic feature of modernization theories and hence the early development economics was the analytical framework of dualism. Arthur Lewis (1954) provided probably one of the most influential models in development economics.5 More precise he developed a two sector model differentiating between the low-productivity subsistence sector with diminishing returns to scale due to limited amount of land and the capital-accumulating capitalist (industrial) sector. The models builds up on the assumption that marginal productivity in the subsistence sector is negligible (Lewis 1954, 141). Since the price of labor is determined by the wage in the subsistence sector there is unlimited supply of unskilled labor. Industries can thus be established without the limit of a existing wage rate. Creating new and expanding old industries capitalist sector draws labor due to wage differentials from the surplus labor in the subsistence sector (Lewis 1954, 142). The entrepreneurs are assumed to reinvest the profit made because of the fixed wage level.

4

Theodore W. Schultz (1961) in contrast raised the question of individuals and families own investments into stocks of skills which he called educational capital because they could be used to earn future income. 5 Arthur Lewis is drawing on Boeke (1942) who originally created the concept of the dual economy. However the Lewis-Model is probably the most famous one which provided the underlining framework and induced a whole series of dual sector models. Examples can be found in: Fei & Ranis (1963), Jorgenson (1961), Zarembka (1970), Harris & Todaro (1970), and Dixit (1973).

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Output of agricultural sector and the wage level will remain unchanged until all surplus labor of the subsistence sector is absorbed.6 Gunnar Myrdal emphasized the role of vicious circle and circulative or cumulative causation over the concept of equilibrium to explain the global inequalities in the world economy. Such unstable processes are working either from the demand side (income – demand – income) or from the supply side (via increasing returns to scale) or the government side (via taxes) (Dutt 2005, 108).7

2.2

Structuralism and Dependency Theories

Since the modernization theories assume that economic development is a systemic process including similar stages of development through which all nations go through when they just implement the right economic policy. Structuralism and dependency theories arose from critique of modernization theories. While the primary object of investigation of modernization theories is the nation state and its economic policy, these theories reject the idea of the sovereign state as entity of analysis (especially in the case of Africa) and tries to explain changes as a consequence of evolution and interaction within the world system (Wallerstein 1974, 7). Originating mainly from two papers by Hans Singer (1950) and Raúl Prebisch (1950) a principle component of these theories is that development is dependent on the structure of the international economic system which can be divided in the poor “periphery” and the rich “core”. The theory is based on observations that implicate a downward trend of terms of trade8 for primary commodity exporters. This can be explained by the higher income elasticity for demand of manufacturing products in contrast to primary products. It is thus believed that systematically inequality exist within the international economic system between the rich western industrialized countries and the periphery (especially Latin America). Instead of an outward orientation it was believed that protection and decoupling of the economy from the international system through policies of import-substitution would help the periphery to industrialize (Meier 2005, 65). The differentiation between structuralism and dependency theories is not always obvious since both strands of theory exhibit a close theoretical and historical relationship. However there is a fundamental difference since structuralist theorist assume that economic development is possible in the periphery by import-substitution-industrialization, dependency 6

For further applications of the dual sector model see Bhaduri (2006, 222–223). Myrdall admits that countervailing processes may exist such as external diseconomies, rising wages that increase the cost of the firm or technological write offs, however he argued that the above mentioned effects are stronger (Dutt 2005, 109). 8 Terms of Trade means what quantity of imports can be purchased through a fixed amount of exports. It can be calculated in dividing the price of exported goods by the price of imported goods. The development of terms of trade is sometimes interpreted as indicator for economic wealth. 7

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theories are more pessimistic, arguing that capitalism systematically underdevelops the periphery and only a change in the world system to a e.g. global socialism can help development economies to escape from underdevelopment (Saad-Filho 2005, 128). Besides the analytical differentiation between sovereign nation states and the world system, dependency theorist doesn’t start their analysis with the establishment of sovereign nation states after decolonization in 1960. In contrast they emphasize colonial continuities and hence start their analysis either with the arrival of Europeans in Africa (Rodney 1980) or with the mercantilistic slave trades (Amin 1972) and thus the integration of Africa into the world economy. Probably the most famous African authors in this line of theory are Kwame Nkrumah the first president of Ghana (1960-1966) and the Egyptian economist and advocate of PanAfricanism Samir Amin. In his article “Accumulation and Development” (1974), Amin differentiates between the self centered system of development which determines the centre of the capitalistic world system (Europe, North America and Japan, but also Soviet Union and China). The system is based on the relationship between the sector of mass consumption goods and the sector of capital goods. It mainly functions in the way Marx described the pure capitalistic mode of production in Das Kapital and is driven by the main relation between the rate of surplus value (distribution between wages and the surplus value which takes the form of profits) and the level of development of productive forces (labour distribution between the capital sector and the sector of mass consumption goods). The system of production in the periphery in contrast began under an impulse of the centre of the world system an export sector was created which produced mainly primary products either agricultural or mineral at lower production costs than those at the centre. The periphery thus doesn’t have the traditional pre-capitalistic opportunity to supply cheap labor for capitalism. The relation between the wage rate and the development of productive forces thus disappears. The small internal market of the periphery attracts only limited capital from the centre. However when the export sectors increases and the internal market reaches a certain size it is biased for the demand of luxury goods in contrast to mass consumption goods. Figure 3: Differentiation between the self-centered and the peripheral model

central determining relationship

exports

mass consumption

consumption of luxury goods

peripheral determining relationship 8

capital goods

Source: own depiction referring to Amin (1974, 10)

According to Amin (1974, 19) a successful transition from a peripheral to the central system of production depends upon the establishment and improvements in the mass consumption sector meaning the use of modern techniques for the improvement of productivity. However, the task of restructuring the system is constituted outside the rules of the market since it contradicts the laws of optimal resource allocation. Due to this reason Samir Amin finally proposes that the problem of underdevelopment cannot be solved in the actual world system, he hence propose the introduction of a global socialism (Amin 1974, 19).

3 Washington Consensus In the light of the neoclassical counterrevolution in the western industrialized countries accompanied by the politics of Margaret Thatcher and Ronald Reagan neoclassical orthodox economist regained massive influence in the World Bank and the other Bretton Woods Institutions. As Meier (2005, 83) puts it: “Reagan’s ‘magic of the market’ and Thatcher’s minimization of government provided a congenial intellectual environment for the neoclassical resurgence.” In 1980, the World Bank president Robert McNamara was followed by A.W. Clausen with a new ideological focus who replaced the former chief economist Hollis B. Chenery by Anne O. Krüger which can be interpreted as institutional reflection of the neoclassical takeover.9 The following two decades have been characterized by the second generation of development economist criticizing the former policies for ignoring fundamental neoclassical principles (Meier 2005, 85). Economic theory in the following years became synonym with neoliberalism driven by the Bretton Woods institutions IMF and the World Bank which became more dominant since African economies suffered of severe debt problems.10 Due to the severe debt crisis in developing countries in the 70s the World Bank began their structural adjustment programs in 1980, which was lending conditional on implementing of economic policies which had been according to the new “Washington Consensus”. The IMF and the World Bank made 958 adjustment loans to developing countries over 1980–98 and 9

While the emphasis of Hollis B. Chenery was on role of structural change for economic development Anne O. Krueger was a strong neoclassicist pointing to failures of import-substitution policy failures. In her article: “The Political Economy of the Rent-Seeking Society” (1974) she showed how rent-seeking economies produce deadweight losses. 10 The hegemonic power of the World Bank in development economics was additionally underscored by a range of World Bank studies and the World Development Reports published annually. The WDR are the flagship publication of the Research Department headed by the chief economist. $3 million were spent only for the WDR report 1997, they are translated in various languages and were copied about 150.000 from which nearly the half are distributed as free copies to libraries and universities in developing countries (Menzel 2000, 208). About eight of the best and most senior researchers of the Bank are working at any time on the making of a WDR report which is about 10 percent of the Banks research effort measured in only in numbers of people (Deaton 2009, 107).

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thus became the most dominant players in the economic policy of African states (Easterly 2000, 136). In 1990 John Williamson (1990) coined the term “Washington Consensus” reflecting the neoclassical standard economic policy of World Bank or IMF for development countries for the time since 1981. While the early development thinkers mainly focused on market failure such as information or coordination externalities, the economists of the 80s and 90s stressed government failures and pointed to excessive government consumption, misallocation of resources as well as inadequate macroeconomic policy or corruption (Tarp 1994, 14 ff.). The neoclassical market price system with a minimalist government including the achievement of balance-of-payments as well as fiscal deficit equilibrium became the main feature of the new development paradigm of the 1980s and 1990s (Thorbecke 2007, 16). Anne Krüger together with Bela Balassa and Jagdish Bhagwati became the famous advocates of this strand of thinking.

3.1

Methodological Issues

The World Bank in their famous “Berg Report” (World Development Report 1981) attributed most of the in Sub-Sahara-Africa to the erroneous perception that development is equivalent to industrial growth and the overoptimistic interventionist import-substitution industrialization policies lead to a huge unproductive administrative public sector including corruption, delays and underutilization of capacities (Sender & Smith 1985, p. 126). The central point of the report and the upcoming economist at this time is the recognition that individuals react to incentives. The inefficient use of resources and the overcommitted public sector can thus be traced back to the wrong institutional incentive structures. While the early development economics focused on structure rather than individuals, methodological individualism and the recourse on physical metaphors which already had been prominent during the marginal revolution in 1870 came into vogue again (Hodgson 2012, 503). Probably the main methodological feature of the Washington Consensus is the revival of microeconomic principles in economic theory which needs to be regarded especially in critiques to Keynesianism (Fine 2010a, 65). According to the concept of methodological individualism social phenomena and thus economic outcomes are explained by the action of individuals. The action of individuals in turn is most often explained by optimization and the maximization of utility according to some given preferences. Fine (2003a, 7) further argues that the application of universal concepts such as production, utility, inputs, outputs in neoclassical economics are entirely ahistorical and asocial. They in fact ignore other analytical concepts such as structure or power as explanatory factors. Since

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the structural approach is trying to explain an economic conflict as providing the basis for change the market theory is ahistorical since it is unconcerned with change. Development economics in consequence at this time has itself distanced from development studies and the incorporation of interdisciplinary (Fine 2010a, 69). And the historical analysis of

modernization, progress and industrialization which was accompanied by an

interdisciplinary exchange with development studies was abandoned in favor of the analysis of individual agents, incentive structures and phrase “performance” in perfectly working markets (Gore 2000, 794). Development economics which had been a sub-discipline of economics in the following became again an applied field of normal economics in which the same tools of labor economics, agricultural economics as well as international economics could be addressed (Krueger 1986, 62–63). When the principles of marginalist economics had been extended to macroeconomics (Fine 2010b, 63) the rise of neoclassical thinking was accompanied by the rise of modern growth theory in which human capital becomes one of the prime movers of economic development. Furthermore the role of knowledge, technology and innovations has been important contributions for the understanding of development (Lucas 1988; Romer 1990). Interestingly these endogenous models could be equally applied to developing economics as well as industrialized countries which reveal the neglect for structural issues in these models. Gore (2000) further emphasizes that the explanatory framework of development in the Washington Consensus was national while the structuralist approach (especially dependency economist but also modernization theorist) had a global framework for explaining development and underdevelopment. The changing perspective explains why development economics was simply seen as an applied field of normal economics and why economic policy became the primacy in explaining differentials between the performances of economies. However the framework dismisses the impact of global developments as well as historical grown path-dependencies. According to the national framework of explaining economic growth, the neoclassical analysis is underlined by empirical growth regressions in which around 60 variables have been found to be significant for economic growth (Sala-I-Martin 1997, 178) but dualism and structural change have been nearly completely absent from empirical growth research. In contrast “much of that research proceeds as if structural change can be ignored” (Temple & Wößmann 2006, 188).

3.2

The Role of the State

The most famous contribution pointing to government failures especially in the case of import-substitution policies is from Anne Krüger, in her article “The Political Economy of the 11

Rent-Seeking Society” (1974) she showed how rent-seeking economies produce deadweight losses. Since modernization theories focused on the role of the developmental state, the article introduced a turn in developmental thinking to refusal of government interventions. Even thus, specific arguments such as the infant-industry argument hadn’t been neglected by neoclassical economists, the notion of the state was attacked by the universally valid motive of self-seeking interest. In consequence, with the exemption of areas of law and maybe infrastructure, the state was seen as playing no positive role in the development process at all.11 State planned or even state owned enterprises and assets were seen in general as performing less efficient than private owned properties. The promise of the counterrevolution in development economics was to solve three problems of inadequate development (Toye 1989, 48–49): a) the over-extended public sector, b) the over-emphasis on physical capital formation and c) the proliferation of distorting economic controls. Since the Berg Report (World Bank 1981) as well as World Development Report (WDR) 1981 and 1985 were about structural adjustment in the sense of the World Bank. The WDR 1983 became the hallmark for advocating the market mechanism which replaced the role of government planning in the time of structural adjustment.

3.3

Trade Policy

The influential study of Little et al. (1970) showed that import-substitution policies had been much more costly than expected and the export-led policies of the Newly Industrializing Countries (NIC) in East-Asia had been much more successful. Instead of import-substitution industrialization an outward oriented trade policy was seen as a key ingredient for economic growth and development (Krueger 1997, 1). Theory provided indications that protectionist policies encourage rent-seeking economies involving corruption, smuggling and black markets (Meier 2005, 85). Simultaneously dynamic trade theories (Helpman & Krugman 2002; Jensen & Wong 1997) helped the comparative advantage theory to celebrate its comeback and became prominent again. The use of tariffs or any other type of importrestrictions was in the consequence seen as hampering for economic development. On the same time the codeword “openness” became the synonym for the objective integration the national economies of least developed countries into the world economy. Therefore the establishment and expansion of several free trade regimes especially the World Trade Organization (WTO) in 1994 was promoted by the industrialized countries. When industrialization was seen as the key success factor for economic growth and development in 11

Altenburg (2013) is employing case studies to address the question whether pro-active industrial policies and thus can work under weak state institutions. Indeed in several countries selective government intervention are a source of patronage and clientelism. However, e.g. Ethopia and Tunisia are examples for successful industrial policies.

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the 1960s and 1970s structural change is not denied by neoclassical scientist but is seen as endogenous to economic development and hence do not play a crucial role in their models. Additionally numerous publication (mostly, but not exclusively, econometric) appeared in that time which found a positive relationship between trade openness and economic development, countries with outward orientation seemed to perform better than the ones with inward orientation (Chang 2006, 258).12

3.4

Agrarian vs. Industry Sector

In reaction to the emphasis of industrialization the role of agriculture –sometimes denoted as the comparative advantage of the most developing countries – was emphasized (Schultz 1978; Timmer 2007). The African agricultural sector while accounting for more than 40% of total value added in 1960 shrunk on cost of the establishment of the industry sector to 18 percent in 1980 (see table 1). However this share is relatively high in world comparison there had been a widespread discussion about the marginalization of the agricultural sector at this time. Since in most of the early development theories the agrarian sector is mostly seen as unprogressive while the industry (respective the manufacturing) sector is in focus of the investigation. Especially in modernization theories (especially Rostow 1997) development is seen as an irreversible process of development and/or social evolution from the traditional agrarian to the modern industrial society. Several authors criticize the view that the agrarian sector should only be a sector from which resources are withdrawn. In contrast, agricultural investments could be the starting point for economic development (Toye 2006, 25). Kaldor for example suggests that agricultural surplus plays a critical role in the process of industrialization not only for the low wage level (see Lewis) but for demand of industrial products (Bhaduri 2006, 225). Another argument emphasizes rising agrarian productivity since inexpensive food has always been a crucial part in order to keep wages down which in turn is responsible for a successful manufacturing sector during the early industrialization phase (Stein 2006, 168). One of the earliest critics on the neglected role of agriculture was Peter T. Bauer (1954; 1956).

4 Development Economics beyond the Washington Consensus While most of the developing countries needed to go through a painful adjustment process it became clear that the overall situation has become one of stagnation. While in the time span 12

The question whether “trade openness” is good or bad for economic growth remains dependent the measurement “trade openness”. Since exports are the only reliable indicator the problem of causality between economic development and rising exports as a indicator for competitiveness remains open (Chang 2006, 258; Pritchett 1996).

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1960-1979 the average per capita growth was 1.7 percent, 1980-1999 the average per capita growth was -0.7 percent (table 3). The two decades between 1980 and 2000 became to be called the “lost decades” for development economics (Easterly 2001). Only the Newly Industrializing Countries (NIC) in East Asia13, experiencing an unprecedented growth between 1960 and 1990.14 Table 1: Average GDP per capita growth in percent

Sub-Saharan Africa East Asia & Pacific Latin America & Caribbean Middle East & North Africa North America Europe & Central Asia World

1960-1979 1.7 4.5 3.2 6.3 2.8 3.4 2.7

1980-1999 -0.7 2.8 0.6 0.1 2.0 1.5 1.2

2000-2012 2.0 3.3 2.0 2.7 0.9 1.5 1.5

Source: World Development Indicators

The success of the NIC on the one hand implied the demise of dependency theorist which had not been able to explain this phenomena but also challenged the neoclassical view on development policy. Several authors emphasized the Japanese development experience in contrast to the structural adjustment conditions. The first one was Chalmer Johnsons book “MITI and the Japanese Miracle” where the term miracle was firstly used. Further milestones has been: Cumings (1984), Evans (1995), Evans et al. (1999), as well as Amsden (1989) and the famous study of Robert Wade (1990) or Aoki et al. (1997). All focused on the role of government and institutions as well as industrial policy and henceforth heavily challenged the neoclassical interpretation of the World Bank (1994) “The East Asian Miracle”. The government of Japan itself supported adjustment loans until 1991 due to concerns about the bilateral relationship with the US (Stein 1998, 40). As a result of the breakdown of the USSR it started to voice its critic after the shift in Japanese-American relations (Stein 1998, 41). The increasing influence of Japan as donor and investor thus challenged the Washington consensus in 1991. The result of this process is the WDR 1991 which represented a market friendly view (in contrast to the radical neoliberal one in 1987). According to the Japan Ministry of Finance and the Japanese directors of the World Bank, it still proved unacceptable because too little attention was paid to the bureaucratic developmental state in Asia. However it can be already seen as a first small shift away from orthodox neoliberalism (Menzel 2000, 209). The report recognized that generally strong states managed to stabilize their economies and introduce market friendly reforms. In the backdrop of the democratic experiences especially 13

Sometimes called the Four Tigers: Hong Kong, Singapore, South Korea and Taiwan, later a second generation joined the Tiger Club: Indonesia, Malaysia, the Philippines and Thailand. 14 Botswana and Mauritius are two African outliers which also experienced high growth in this time.

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in Africa it stresses the relationship between the state and the market. It acknowledges the principle faults in the dichotomy of laissez faire and intervention and advocates a consensus for a market-friendly approach (World Bank 1991, 1–2). The role of the state was to limit its activities and public services to where the institutional capabilities are enough (Yusuf 2009, 33). Scarce state capability should be still addressed by reducing unnecessary government involvements. State fragility was attributed to authoritarian and predatory governments working in opposition to market forces. In general, democracy was seen as complementary to market forces and the successful authoritarian governments in the NIC had been the exception rather than the rule (World Bank 1991, 133). According to this view the World Bank (1994) tried to explain the “East Asian Miracle” with the help of the neoclassical exportoriented economic policy. The fast development can largely be attributed to the pace of human and physical capital accumulation (World Bank 1994, 5). Macroeconomic stability for optimal allocation of production functions is hence the key to achieve long-lasting economic growth. Additionally market-friendly export-oriented policy helps to keep pace with the world’s shifting technology frontier a thus speed up the catch-up process (World Bank 1994, 10 ff.). Furthermore the World Bank admit that most East Asian countries industrial policies but concluded that industrial policies had been in sum ineffective for economic growth (World Bank 1994, 312). The interpretation was thus that NIC achieved high growth rate and industrialization despite relying on industrial policy. With the end of the cold war and the change of the world order development economics changed dramatically. The Post-Washington Consensus still dominated by the World Bank refuses its former SAP. New Development Economics is the notion of the new paradigm within the World Bank which is mainly characterized by Joseph Stiglitz. However, Gore (2000, 795) proposes that besides the Western dominated paradigm of development economics, there is a Southern Consensus of Latin American Neostructuralism mainly articulated by United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and the East Asian Development Models described by United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) (1990). An African Version of the Southern Consensus could be emerging from Mkandawire & Soludo (2003) or Unctad (1998, part 2). However according to Gore (2000, 795) the consensus is neither analytically articulated nor it is existing as a political reality, in contrast it is solely formulated in policy conclusions. Indeed, until today there is no textbook formulating the generally accepted findings or assumptions of the Southern Consensus. However, the literature about the East Asian

model

of

development

is

huge

and

widely

reproduced.

Latin

American

Neostructuralism instead is relatively unknown but recently summarized and elaborated in a book by Leiva (2008a) in form of a textbook. However, the next sections will briefly

15

summarize the main findings of the East Asian model and Latin American Neostructuralism before regarding the New Development Economics of the World Bank.

4.1

The East Asian model of development

The emergence of the Newly Industrializing Countries (NIC) in East Asia asked for an explanation why these economies had been so successful and some not. Despite of their regional concentration the economies differed widely concerning size, political regime, resource endowments as well as their socio-cultural and ethnical structures. Several authors thus proposed that the presence of a typical form of state was the most important factor in generating high and sustainable economic growth. Chalmer Johnson (1982) invoked the concept of the “developmental state” in characterizing the Japanese economic bureaucracy especially the Ministry of International Trade and Industry (MITI) and their role for the Japanese extraordinary post-war development. The policies of MITI became the role model for the NIC especially South Korea, Taiwan, Hong Kong and Singapore but also China adapted to the institutions of the model during the 1990s (Johnson 1999, 40). Several other authors contributed to the role of the state in the developmental process in East Asia such as Alice Amsden (1989), Robert Wade (1990), Peter Evans (1995) and Adrian Leftwich (1995) and thus established the “developmental state” model as a paradigm. The original thesis of the Japanese model of development which Chalmer Johnson (1982) developed in his last chapter which originally wasn’t suppose to serve as a role model for other development countries consisted of mainly four elements: 1. The existence of a small, inexpensive but elite, very competent and well staffed bureaucracy which a) have the duty to choose the industries which serve best for the productive development of the country , b) identify the right means and measures to develop these industries, and c) guarantee their economic effectiveness by supervising competition within these industries. All need to be pursued by applying market-conforming methods of state intervention (Johnson 1982, 314–315). 2. A political system ensuring the bureaucracy sufficient scope to operate efficiently which means to restrict the legislative and judicial branches of the government heavily (Johnson 1982, 315). 3. The perfection of market enhancing methods including for example: the establishment government financial institutions, tax incentives, provision indicative plans, goals, and guidelines for the whole economy, revision of policies, welcoming feedback, assignment to private and semi-private associations or reliance on public-private partnerships (Johnson 1982, 317–318).

16

4. The establishment of a pilot organization like MITI characterized by small size, indirect control of government funds, including a think tank function, vertical bureaus and internal democracy (Johnson 1982, 319–320). Furthermore according to Johnson (1982, 305) all policies rely on the assumption that the first and overarching priority is economic development. “It must first of all be a developmental state – and only then a regulatory state, a welfare state, an equality state or whatever other kind of functional state a society may wish to adopt.” (Johnson 1982, 306) While some scientists argue that the developmental state is unique in East Asia due to its characteristics and historical circumstances which make it difficult to transfer the model (Öniş 1991, 120). Leftwich (1995, 405) challenged this view and adjudged African countries to establish a developmental state.15 While Leftwich (1995) and Pempel (1999, 160) try to define the developmental state using a list of characteristics, Peter Evans (1995) introduced the concept of embedded autonomy for identifying the development-enhancing features of South-Korea. The concept combine two central features of the developmental state, the unusual degree of bureaucratic autonomy and the high extent of public-private cooperation. Bureaucratic Autonomy The bureaucratic autonomy refers to the Weberian thesis of bureaucracy postulating that insulation of society is a necessary condition for organizing the state activities in an effective and rational way. Answering the neoclassical interpretation of the debt crisis in the 70s bureaucrats must have a certain degree of autonomy for not to be captured by rent-seekers. Autonomy means the independence from demanding interest groups of the society which does not mean that certain interest groups didn’t benefit from the implemented policies. Accordingly the national interest of economic development could not have been challenged by certain popular or vested pressures (Leftwich 1995, 408). In contrast to the development of the most African states the East Asian developmental states faced an unusual external threat during the postwar period causing a security threat which has been reinforced by shortages in resources especially raw materials. Several authors (Öniş 1991, 116) thus connect the specific historical circumstances with the inherent nationalistic vision of economic development and the exceptional degree of state autonomy. Examples for the association of military strength and state formation are the nationalistic struggles of South Korea with its northern counterpart or Taiwan with mainland China. 15

Leftwich (1995) analysis focuses on South Korea, Taiwan, Singapore, Indonesia, Thailand, Malaysia, China and Botswana which had been the only countries experiencing growth rates above four percent during 1965 and 1990. Astonishingly Botswana the only non-Asian country had been the only democratic developmental state. If this is by accident or if there are some reasons for this development remains an unchallenged question.

17

Malaysia’s confrontation with Indonesia as well as the regional and internal threat of communism to Thailand and Indonesia (Leftwich 1995, 409). The nationalistic and military origin accompanied with the military strength often led to non-democratic governments suppressing other societal groups and classes. However if there has been a formally democratic government it was coined by a single dominating party with minor political threat from political rivals such as in Singapore, Malaysia and Botswana which allows a great policy autonomy for the ruling bureaucracy. Additionally most of the states had been strengthened by substantial inflows of foreign aid and loans which reduced the government dependency on local-generated revenues. Cumings (1984) attributes the built up of the authoritarianbureaucratic regimes to the geopolitical importance of these countries and thus the benefits in terms of trade, capital and technology from the two dominant powers Japan and USA. Developmental states have often been described as strong states which meant that all other privately-organized interests and groups below the state-level are not challenging the preeminence of the state. The subordination of civil society is retained by infrastructural power as well as the use of security legislation and agencies, secret police and party organizations. Labor organization, mass media and the emergence of other active spheres of civil society has been under strict control. Since the subordination of civil society seems to be a critical conjuncture for the establishment of the developmental state, the economic success of these states in turn stimulates demands for political participation, decentralized decision-making and individual liberty (Leftwich 1995, 416). The interpretation of the developmental state thus follows the perceptions of Yuan Kew Lee who suggest: “A country must first have economic development, then democracy may follow. With a few exceptions, democracy has not brought good government to new developing countries. Democracy has not led to development because the governments did not establish stability and discipline necessary for development. [.] As an Asian of Chinese cultural background, my values are for a government which is honest, effective and efficient in protecting its people and allowing opportunities to all to advance themselves in a stable and orderly society where they can live a good life and raise their children to do better than themselves.” (Lee 1992, 29–30)

Conclusively private economic interest needed to be suppressed in order to make effective use of national and international capital in the productive transformation in the country. Local bourgeois classes and land power thus didn’t exist before developmental states consolidated their state power as well as the described autonomy. Only later national or international capital became influential but had been embedded by conditionality and policy instruments carefully directing to state’s economic development priorities. State-Business relations had been characterized as “authoritarian corporatism” (Öniş 1991, 118) describing close institutional cooperation between the developmental elite and the private sector power 18

groups for the realization of strategic goals. International capital had been only welcomed as long as it deserves the interest of national economic development. Policy instruments for limiting foreign ownership via legislation, state funds, large public cooperation or joint enterprises and local content requirements had been used for managing non-state economic interests. Several developmental states had been criticized due to their appalling human rights record. According to Leftwich (1995, 419) despite sometimes brutal suppression of civil rights the developmental states enjoy a considerable high degree of political legitimacy. The mixture of repression and legitimacy is a result of the high growth rates which show up in higher incomes as well as life expectancy and educational attainment.16 State Business Cooperation The developmental state is most often characterized by a small number of developmental elite of politicians and bureaucrats surrounding the executive head of the government. The coherence of this in international comparison relatively small but intimate and well networked elite is crucial for the continuity of the developmental state. However the linkages between civil services and political bureaucrats and military elites lead to shifting coalitions and diversifying structures of interest, ideas, and institutions which make corruption a relatively certain characteristic of the developmental state. However, Leftwich (1995, 407) argues that rapidly growing economies in transition displays a mixture of patrimonialism, centralization, technocratic economic management, coercion and corruption were client-patron relationships are heavily embedded in the economic sphere.17 Besides the autonomy of the state its bureaucracy including its societal connection is crucial in order to foster rapid industrial growth. The state must thus be embedded in forms of social relations order to be effective (Evans 1995, 41). The government must thus not only be insulated from external influences but a rather mutual reinforcement between the state and society is the key for economic success: 16

However political legitimacy is notoriously difficult to measure especially within authoritarian regimes Gilley (2006) provides a comparable measure for 72 countries and shows a considerable positive correlation between governance, welfare gains but also democratic rights and political legitimacy. 17 Especially Thailand and Korea had been examples with extraordinarily high corruption (Leftwich 1995, 407). The view is sharp in contrast to the proposition of good governance as one of the main determinants for economic growth proposed by the World Bank (Kaufmann & Kraay 2002; Kaufmann et al. 2009). However, the view is consistent with the results of Quibria (2006) who notes that some of the successful East Asian economies successfully developed without high standards of governance. Hence he questions the positive association between good governance and growth which is put forward by the World Bank. For an elaborated discussion of the role of Good Governance for economic development see Jomo (2012). According to Quibria (2006, 111) the phenomenon is based on a naive view on institutions which has two major misconceptions in it. Firstly good governance measures mostly start from an implicit model of governance based on western institutions. Secondly the goal of good institutions is confused with process how to get there. Institutions which are a desirable goal and work in developed countries does not necessarily fit in the framework of development economies and help to achieve economic growth.

19

“A robust and coherent state apparatus facilitates the organization of industrial capital; an organized class of industrialists facilitates a joint project of industrialization, which in turn legitimates both the state and industrialists.” (Evans 1995, 228)

The interactions between the state and the economy had been coordinated by the corecenters of strategic economic bureaucracies as described above.18 Probably the most important feature of all bureaucracies is their technical competence. Several senior technocrats had been influential in shaping the developmental consensus within the country. The institutions were attracting the best managerial talent available, most of them had been the best graduates with common educational background or party loyalties. This feature not only ensured a high degree of bureaucratic capability but also enhanced the sense of community and identity with the national interest and fostered political legitimacy. Additionally foreign educated and trained expatriates had been engaged as senior advisors or consultants who in turn helped to preserve the autonomy of the institutions (Leftwich 1995, 414). Embedded Autonomy Peter Evans concept of embedded autonomy is combining both previously described aspects of the developmental state within one concept. Firstly, bureaucratic autonomy originating from historical circumstances resulting in the above all principle of development including a Weberian type rational-legal bureaucracy preventing the possibility of rent-seeking. Secondly, the East-Asian state corporatism which is referring to the embeddedness of the developmental elite within society necessary for industrial transformation due to the need for society wide coordination of resources. Erik Olin Wright (1996) interprets the term embedded autonomy as attempt to integrate two political dimension into one conceptual space. The first political dimension is the degree of the state apparatus conforming to the Weberian rational-legal bureaucracy which guarantees autonomy to manipulation by rent-seeking groups (horizontal dimension in figure 5). The second political dimension refers to the degree of embeddedness and thus the density of ties and networks of bureaucrats to the civil society.

18

Other examples of similar important pilot agencies as the Japanes MITI described by Johnson had been the Economic Development Board in Singapore, the Ministry of Finance and Development Planning in Botswana, or the Economic Planning Board in Korea. In Taiwan three institutions: the Council for Economic Planning and Development, the Industrial Development Bureau and the Council for Agricultural Planning and Development had been most important and in Malaysia the task was concentrated in the Prime Minister’s Department particularly the Economic Planning Unit, the National Development Planning Committee as well as the Implementation and Coordination Unit (Leftwich 1995, 412–413).

20

Figure 1: Dimensions of Peter Evans embedded autonomy

degree of Weberian rational-legal bureaucracy (autonomy) high

high

low

developmental state (South Korea)

degree of embeddedness of state elite into civil society

bourgeois clientelist state (Brazil)

(India) low overdeveloped post-colonial State

(Zaire) predatory State

Source: own depiction referring to Wright (1996, 178–179)

Second, the Weberian state-society relationship characterized by bureaucratic efficiency which is according to Weber the most efficient and rational way to organize human life. The Weberian bureaucracy is linked to powerful actors in the government elite which impedes favoritism and complements best the dynamics of capitalist accumulation and growth (Evans 1995, 30). He further complements Webers advocacy for a rational bureaucratic state by the modernization theorist Hirschman and Gerschenkron emphasizing the role of the state for industrial transformation (Evans 1995, 31–32). Flying Geese Model of Development Since several authors focused on the political economy of the developmental state and figured out the relationship between the state and the economy Amsden (1989) illustrated the economic policy of Korea in detail. The government took a strategic role in selecting and developing industries which had been critical for the productive transformation of the economy. According to Öniş (1991, 124) industrial policy of the developmental state is characterized by three features which distinctly distinguish them from economic policy proposed by neoclassical economist or even associates of the New Development Economics: Leftwich (1995, 2, 1995) 1. The process of development and thus the building up of infrastructure, education and research has the priority above direct ownership and control of industrial production. 2. The state serves a key role in the promotion of cooperative labor-management relations. 3. The state undertakes a leading role in the creation of comparative advantages19

19

Since the Flying Geese model has been adopted by the new development economics it became to be known as the idea of dynamic comparative advantages. A discussion emerged whether industrial policy should defy or conform comparative advantages (Lin & Chang 2009). Since the idea of dynamic

21

In contrast to the neoclassical postulations of profit maximization and conforming to comparative advantages, the state heavily intervened and created price distortions by subsidizing and directing capital to strategic industries before cautiously exposing them to international competition. Again, even thus the East-Asian Model conform with the New Development Economics in the aspect that competition is seen as useful, its starting point of analysis is not the market but rather the state and how to achieve economic transformation. The market is therefore seen as an instrument for industrial policy which is employed for exposing international competitive pressure to carefully identified industries (Öniş 1991, 124). The original flying geese model derives from Akamatsu (1962)20 describing the sequential emergence of import, production and export of a certain product along the passage of time. The model is built in the background of the international system after World War 2 including a dominant Western European industry and the rise of economic nationalism in developing economics. During the first stage the economy imports foreign consumer products with a destructive impact on the domestic handicraft industry. Following the structuralist assumption that foreign capital went into the exploitation of land and mineral resource to produce primary products. The process results in an international division of labor and the specialization of production within the developing country (Akamatsu 1962, 7). Figure 2: The original flying geese paradigm

production

imports

exports

time Stage 1

Stage 2

Stage 3

Stage 4 Source: own depiction referring to Akamatsu (1962)

comparative advantages allows for market failures there even can be a need for selective industrial policy. However, from a theoretical point of view the difference is that within the framework of new development economics the comparative advantages (even thus it is dynamic) are given or determined by the market and need to be identified. A methodology how to identify the dynamic comparative advantage is presented in (Lin & Monga 2010)). According to the East-Asian Model of development, comparative advantages are not given but need to be created. 20 Akamatsu firstly used the phrase “Ganko-Keitai” in two Japanese articles 1935 and 1937. In his English publication in 1962 the term was translated in “flying geese pattern” (Kojima 2000, 377).

22

During the second stage domestic production of formerly imported consumer products started. Akamatsu (1962, 13) argues that domestic demand is already prevalent since the products had been imported during stage one.21 After imitation of technologies the main problem thus is to support domestic production to gain international competitiveness and “recover the home market from the hands of foreign industries” (Akamatsu 1962, 13). The process is therefore accompanied with arise of economic nationalism as well the import of capital goods and raw materials (in the case raw materials were not present in the country). In stage three, when the domestic consumer product industry reached some larger scale for mass production, the production reaches international competitiveness the country starts to export on overseas markets. On the same time the production of more capital or technology intensive goods is assumed to start and substitutes the formerly imported goods from stage two (Akamatsu 1962, 14–15). Since advances increased in the production of the consumer good, the country reaches the status of an advanced country and exports begin to decline because the production of consumer goods is taken place in less-developed nations. The country then reached the fourth stage of the flying geese patternis (Akamatsu 1962, 16). The name flying-geese (original: wild-flying-geese) pattern is referring to the V which is formed by wild geese when flying in orderly ranks just as if they were in formation (Akamatsu 1962, 11). The inverted V shape in the graphical representation (see figure 6) is thus compared with the flying geese. Besides the simple pattern of import, production and export of consumer goods to later capital goods there are two more interpretations borrowing from allegory of flying-geese.

comparative advantage

Figure 3: Multisequential flying-geese model for a particular country

Textiles

Chemicals

Iron & Steel

Automobil

Electronics

time Source: own depiction referring to Kasahara (2004, 9)

The second one has already been indicated formerly. It refers to the sequencing shift of production from crude and labor-intensive (low-technology) goods to more elaborated and 21

This argument heavily draws on the theory of Albert Hirschman (1958).

23

capital-intensive

(high-technology)

goods

(Akamatsu

1962,

16–17).

The

gradual

development indicates that there is a structural order of products or industries and the spillover of formerly introduced industries generate the conditions for the following ones in the sequence. The subsequent industries thus literally fly in the wake of the formerly introduced industries and during the shift within the production structure it gradually develops in terms of capital, technology, education and income. A typical sequence of industries is represented in figure 7. Kojima (1960) provides a theoretical Heckscher-Ohlin type model comprising two-factors and two goods which can explain the structural change from labor-intensive to capital-intensive industries either by increases in the wage rate or by rationalization of industries. The, what he calls, Kojima Model I (Kojima 2000, 380) thus assumes that sequencing of industries occurs naturally guided by growth of demand, capital accumulation and technological progress. The third pattern of flying–geese refers to inter-economy sequencing of industries describing the transmission of the pattern from leading economies to late coming industrializing countries. The leading country will lose its advantage in certain sector e.g. textiles since the wage rate increases. A follower economy with a much lower wage rate will thus start to produce in the textile sector.

comparative advantage

Figure 8: Multisequential flying-geese model of a particular industry

Japan

ANIEs

ASEAN

China

Vietnam/India

time Source: own depiction referring to Kasahara (2004, 9)

Vernon (1966) faced the doctrine of comparative advantage with the role of the product cycle incooperation innovation and economies of scale for explaining international trade and FDI patterns. Vernon (1966, 191–195) argues that due to prevalence of knowledge as well as high incomes new products are more likely to be introduced in the most advanced economy. When the demand increases several economies of scale start to come out which emerge due to standardization and are accelerated by the upcoming of competition (Vernon 1966, 196). Since the product has a high income-elasticity of demand the market will quickly expand to other advanced countries and later in the phase of standardization production will 24

spread to less-advanced countries induced by FDI of monopolistic or oligopolistic companies which help to overcome capital and knowledge constraints of the developing economy. Inspired by the product-cycle theory of Vernon, Akamatsu (????) and its students Kojima (1973) and Ozawa (1991) enhanced the flying-geese paradigm by incorporating the role of multinational firms and foreign direct investments. In the pro-trade oriented FDI model by Kojima (2000, 382–383) the production of a certain good in a less-advanced country is facilitated by FDI of multinational firms in the leading economies. Since labor cost rise in the advanced country as a result of economic success the monopolistic or oligopolistic firms not only try to expand their markets but also want to reduce production cost. In establishing manufacturing bases multinational firms transfer capital, technology and skills to the less advanced countries. According to Ozawa (1992) transnational cooperation in this way recycle their market and by the way facilitate structural upgrading of the less-advanced economies. In this way certain industries have been relocated from Japan to the first tier NIC (South Korea and Taiwan) to the second tier NIC (Thailand, Indonesia) and finally to China as well as the next following generation Vietnam or India (Kasahara 2004, 12).

4.2

Latin American Neostructuralism

Latin American Neostructuralism is more or less a collection of policy orientations and proposals mainly forwarded by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) rather than an academic and elaborated theoretical framework. However Leiva (2008b) suggest that it meets the criterions of a paradigm according to Fine (2002).22 The paradigm emerged in reaction of the neoclassical experience in the 80s and recalls the traditional Latin American thinkers of structuralism in the 70s. One of the main thinkers is Fernando Fajnzylber who coined the term, lies the foundation in two publications “Changing production patterns with social equity” (Eclac 1990) and “Sustainable development: changing production patterns, social equity and the environment” (Eclac 1991). Neostructuralism is seen as a structuralist reaction and answer of the new-historical conditions. The term “neo” signifies the adaption of export-led oriented policies but the analytical basis remains structural at least according to Bielschowsky (2009, 182). According to Leiva (2008a, 3) neostructuralism distinguishes itself from the neoliberal framework and draws the conclusion from the structural adjustment phase that economic development itself is not sufficient and finally is not possible as long as political legitimacy is not ensured. It thus emphasized the relationship of economic development to a participatory process, democratic governance as well as social coercion and equity. However, the aim is to increase the society’s capacity and to achieve international competitiveness (Leiva 2008b, 22

Leiva (2008b, 4–5) identifies and compares three development paradigms: the old Latin American Structuralism, Neoliberalism and Neostructuralism.

25

11). It distinguishes form the idea of comparative advantages in which the international competitiveness of commodities is the key for economic development. In contrast develops the notion of systematic competitiveness incorporating the entire social systems which is competing on a world scale. Technical change and increases in productivity are determined by institutional, political and cultural factors. Economic policy must therefore account for the entire system on cannot only focus on allocation, optimization, efficiency and externalities. The consequential need for interdisciplinarity of economics is probably the most delimiting feature to the NDE. In the 2007 publication the approach of social cohesion and its importance for economic policy especially in developing countries confronting an economic transformation process is elaborated. The approach tries to include the Latin American historical legacies as well as cultural peculiarities into an economic framework providing policy recommendations (Eclac 2007, 19–32). Its analysis in this aspect totally differs from approaches of the NDE such as social capital. The concept further distinguishes from NDE in the sense that it neglects the idea of one model fits it all. A general blueprint for economic development thus cannot be developed but is dependent on historical legacies, local peculiarities, as well as the technological circumstances and the international context. However the neostructuralist agree with the idea of an export-led growth model. Even if the mode of insertion into world economy must be purposeful and cannot be left to the market alone, neostructuralist assume that there is a relatively easy on-ramp to globalization which is neccesary to go for economic development. Active industrial policies which encourage more sophisticated manufacturing exports including a higher degree of value added are thus supported (Leiva 2008a, 8). It should be mentioned that in contrast to the NDE, it is assumed that there is a dichotomy between spurious economic growth meaning a catching up of the economy via the exploitation of cheap labor and genuine or innovation based growth which is due to increased productivity and incorporation of technical change. Competing in international markets should thus be achieved by research and development, integrating into global value chains, rapidly adapting to new technologies, products as well as service technologies and the establishment of production networks and cluster. An active promotion of private-public partnerships as well as state-civil alliances shall increase the society’s capacity to innovate and increase productivity. It coincidently promotes an open regionalism and therefore campaign for making the WTO regime compatible with regional based initiatives. Bielschowsky (2009, 182–183) emphasizes three analytical similarities between structuralist and neostrcuturalist thinking which he founds in a) the contrast between the productive and social structure of the economy, b) the state’s contribution to development and social equity and c) the analytical starting point from Latin American characteristics of underdevelopment. 26

Leiva (2008a, 2008b) in contrast criticizes the neostructural approach for abandoning the analytical key characteristics of the old Latin American structuralism. Firstly, the neostructural perspective jettisoned the core-periphery paradigm which regards the process of development and underdevelopment as a single process interrelated in one world system. Dropping this characteristic feature is a grand step towards the predominant discourse of new development economics and a theoretical as well as political retreat from traditional Latin American thinking (Leiva 2008b, 9). The rupture with the old structuralism becomes evident since the integration into the global economy is seen as the key to development rather than the source for underdevelopment. Internationalization of production structures as well as foreign capital and multinational cooperation are welcomed (Leiva 2008b, 23 endnote 11). Secondly, the neostructural approach fosters the promotion of a genuine based economic growth associated with the assumption that productive transformation is compatible with social equity. According to Leiva (2008b, 10) it is a myth that accumulation can be delinked from distribution which is based on the ignorance of power relations embedded in production, distribution, and consumption (Leiva 2008b, 14). Thirdly, neostructuralism is founded on political myths and weakly grounded on an analytical apparatus mainly due to the disregard of economic structures and class relations as well as the logic of capitalist accumulation. On the basis of this argument Leiva (2008b, 16) question swhether neostructuralism can be regarded as genuine alternative to neoliberalism.

4.3

New Development Economics

The World Bank 50s anniversary was accompanied with massive public protest against the Bretton-Woods Institutions. The Fund annual meeting in Madrid was hemmed by the critic’s slogan “50 years is enough”23 (Yusuf 2009, 34). The in June 1995 appointed President James Wolfensohn responded to the critics with the attempt to convince civil society of the Banks relevance. The appointment marked the next change in the international development politics. Wolfensohn was supported by two Nobel laureates: Amartya Sen which is famous for his many-sided view of development and welfare (his suggestions mainly influenced the human development index introduced in 1990 by the UN and Douglass North famous for his work on institutions. In Wolfensohn’s proposal for a comprehensive development framework, he challenged the World Bank and the IMF not to focus only on structural adjustment but respect structural, social and human dimension as the other side of the coin (Wolfensohn 1999, 7). Unlike in the phase of SAP, the focus shifted from macroeconomic stability and economic growth to poverty and inequality reduction as well as human development including education and health (Owusu 2003, 1661). Nonetheless the World Bank still

23

see also Danaher (1994).

27

believes that the best way to reduce poverty is economic growth (Dollar & Kraay 2002) there is an overall orientation of all policies towards poverty reduction and human development.24 The turning point for a new consensus within the World Bank after the failures and critics of the Washington Consensus was pushed forward by Japan view on development. Its influence showed up in the WDR 1997 “The State in a Changing World” (World Bank 1997), in which the World Bank acknowledged the role of the state for economic development at least in principle “as partner, catalyst and facilitator” (Menzel 2000, 210). The policy shift in the important development institutions is accompanied by advances in development economics differing from traditional neoclassic economics. Joseph Stiglitz calls them “New Development Economics” (NDE) (Stiglitz 1986). One of the main features of this new economics is the departure from excessive beliefs in market fundamentalism. The role of the government apart from assuring property rights and macroeconomic stability has been strengthening due to several reasons. Traditional neoclassical paradigm admits that markets are imperfect in certain cases when external economies or public goods are considered. Stiglitz (1986) establishing the “Imperfect Information Paradigm” assumes that since information are imperfect in virtually all cases that markets only under exceptional rules lead to efficient allocation, thus market failure are rather the rule than the exception. New development economics focuses on information, learning, incentives as well as incomplete or missing markets. The neoclassical framework therefore had been broadened by including institutions and path dependencies, adverse selection and moral hazard or multiple equilibria and poverty traps. Industrial and developing countries thus can be hardly compared because they are functioning with different production functions and in different organizational ways (Meier 2005, 119). Since Joseph Stiglitz became chief economist of the World Bank in 1997 the neoclassical view of the World Bank became under assault (Stiglitz 1997; 1998). Stiglitz was thus called the “rebel within” (Chang 2001). According to Stiglitz (2004, 3) the NDE provides the theoretical underpinning for the believe that in early stages of development markets will not lead to efficient outcomes. The upcoming of early development economics was accompanied by the comeback and resurgence of ideas and concepts deriving from high development theory. The theories of poverty traps subsequently had been illustrated by models including multiple equilibria and the big push is modeled by the existence of coordination failure, scale economies and imperfect tradability (Rodrik 1996). Ray (2000) furthermore stresses the role of inter-industry links and demand complementarities in a Hirschmanian tradition. However the new 24

Since 1990 the United Nation Human Development Report (UNDR) publishes the Human Development Index with a focus life expectancy, education and income.

28

development economics not only depart from market fundamentalism to an emphasized role of the government and industrial policy in the development process but also stress some more interdisciplinary subjects such as the concept of social capital (Woolcock & Narayan 2000)) or the role of institutions (North 1993; Easterly 2002). Ros (2001) attempts to reintegrate the ideas of early development economists such Rosenstein-Rodan, Nurkse and Lewis into the new growth theory and shows a wide range of theoretical congruence between both. Already within the 80s new trade theories based on economies of scale as well as imperfect information suggests selective and country specific interventionist industrial policies (Deraniyagala 2003, 87). New Development Economics are neither in favor of a strong overarching role of the state such as the most modernization theories proposed nor do they conform with a minimalist state such as had been favored during the Washington Consensus, in contrast NDE is seeking to exploit the complementarities between the state and the market (Ndulu 2007, 322). A shift from market-liberalism to a more moderate view can thus be interpreted as a convergence towards the East-Asian model of development. While the policy implication may converge, the market remains the starting point of analysis for the NDE, East Asian models in contrast interpret the market as a tool which can be helpful for achieving economic growth. Methodological Issues Irrespective to the fact that the NDE capture some ideas of early development economists and empowers them by the Imperfect Information Paradigm the foundation remains the one of the neoclassical framework. Relative to the analytical power of the imperfect information theoretics, other methodologies have been rejected as unnecessary and obfuscating (Fine 2003a, 6). Gore (2000, 796) argues that the changes since Wolfensohn made the Washington Consensus more humane but at the same time conserved key features of the world view of the dominant paradigm. The analytical focus on domestic policy mostly combined with a provision of a blueprint and the assessment of short term performance remains the analytical basis of the post-Washington Consensus. The explanatory framework is characterized as national, in contrast to the global framework of the Latin American Neostructuralism and the East Asian models of development. Since Gore focuses the analytical framework of the Post-Washington Consensus, Fine (2003a, 3) emphasizes the methodological individualism as the main methodological characteristic. Economic theory suggests that every phenomenon is explained by individuals which are maximizing their utility. The emphasis to ascribe any economic outcome by individual optimization means to reduce economic theory to individual behavior. Fine (2003a, 7) even 29

argues that nearly everything can be explained applying some informational imperfections or externalities, however this does not mean that it is more or less superfluous to include any other theoretical insights. However the use of the analytical toolbox of neoclassical economics is justified by the large explanatory power of the analytical powers rather than the plausibility of the theories. Stiglitz (1993, 111) for example prefers to explain hierarchical relationships by analytically describing situations in which they have efficiency advantages in decision-making processes rather than just accepting that there are other reason beyond the exercise of power. Another example is the try to rescue the idea of the utility maximizing individual by endogenizing preferences (Stiglitz 1993, 112) instead of accepting the case for irrational behavior of human beings. Interdiciplinarity and history The ignorance of other analytical concepts especially structure or power as explanatory factors make the application of universal concepts such as production, utility, inputs, and outputs to a entirely ahistorical and asocial theories (Fine 2003a, 7). Since economists are searching for common regularities which endure for different countries and time periods a general blueprint for economic development is possible and preferable. However this assumption rejects the need for historical analysis as well as interdisciplinary country specific research. In consequence to its predilection for mathematical models and methodological individualism economics is conspicuously absent in transdisciplinary communication in development studies and the social sciences as a whole (Schelkle 2000, 225). Accepting the analytical tools of neoclassical economics means to somehow tame the logic of the market and accept also the occurrence of market failure. Regardless of whether the NDE believe that market failure exist and prevail their analysis starts with the “market primacy assumption” which imply that “in the beginning there were all markets” (Chang 2002, 546). In this view markets are natural phenomena and all other non-market institutions developed only because some market failure became prevalent. This view is best illustrated by the emergence of public choice theory in which James Buchanan provided a landmark. Providing a theory which explains legal order he proposes that the state developed as a reaction of a market failure namely to a collective action problem in providing law and order as well as the security of private property. Indeed, this view is heavily criticized by several economic historians as well as the East Asian developmental models who states that in the beginning their haven’t been markets, they almost always deliberately engineered by the state since the arriving of the capitalism (Chang 2002, 547). Economic Imperialism and Social Capital In contrast to the neoliberal economics the NDE does not neglect the influence of noneconomic factors but in contrast social theory is somehow experiencing a revival in economic 30

theory. Besides the establishment of the imperfect information paradigm the emergence of public choice theory carried the economic analysis (meaning methodological individualism) into political science. Since economist recognized that economic theory especially development economics needs a broader understanding the focus shifted to social and institutional aspects. Probably the most popular concept of the NDE for analyzing the interrelationship between institutional features and economics is called social capital. According to the World Bank25 “social capital refers to the institutions, relationships, and norms that shape the quality and quantity of a society's social interactions. [X] Social capital is not just the sum of the institutions which underpin a society – it is the glue that holds them together.” It thus fills the gaps of nearly everything which is not regarded in standard economic analysis. Since the neoclassical approach applying the methodological individualism has removed interdisciplinary connections to social and political theory nearly completely a whole bulk of theories should be incorporated again under the umbrella of social capital (Fine 2003b, 138). The role of social relations which had been incorporated in earlier theories of development but had been neglected during the Washington Consensus is brought back in the this concept (Woolcock & Narayan 2000, 227). Coping with all the social and political theory Woolcock & Narayan (2000) distinguish four dimensions of social capital: A) The communitarian view which equates social capital to the degree of community in civil society looking at the number and density of local organizations such as clubs, associations and civil groups. B) The network view accounts for horizontal and vertical relationships and their combinations, social capital thus can have different outcome depending on whether intracommunity ties or intercommunity ties prevail. C) The institutional view regards social capital as a dependent variable arguing that the capacity of social relations depends on the quality of institutions. D) The synergy view tries to combine the network and institutional aspects and their interactions to develop institutional strategies for transforming situations such that formal institutions and social capital complement each other. Eventually, there seems to emerge a consensus about the importance of social relations for economic development there is hard dissent how to cope with it. Even thus the World Bank acknowledges that “obtaining a single, true measure of social capital is probably not possible” (Woolcock & Narayan 2000, 239), its attempt is to quantify it and its contribution to economic development. The usual economic treatment of social capital is thus to measure it and cope with it as an explanatory variable for regression analysis (e.g. Knack 1999). A systematic theory and analysis of exploring interdependences of social capital as well as the discussion whether social capital even contains attributes of capital remains absent. 25

The notion of social capital became exceptional prominent again in the last years and even resulted in the opening of a dedicated website with this topic at the World Bank in 1998 (http://go.worldbank.org/VEN7OUW280)

31

Furthermore the question remains whether social relations and their interdependence can be understood by treating them as a variable. Social capital used as substitute for culture, institutions and behavioral patterns should be instead subject of a multidisciplinary endeavor. Cultural beliefs are a basic determinant of institutional structure. Not economics but psychology, sociology, anthropology, law, and history must provide answers regarding the origins and the interconnections to economic development. Finally an interdisciplinary research is needed for understanding institutions, cultural beliefs and social relations and their interdependence to economics (Meier 2002, 30). Good Governance Since the beginnings of development economics there has been a discussion about the influence of the regime type on economic growth. Following Weiner & Huntington (1994, 11– 18) developmental theories can be distinguished between the compatibility assumption and the conflict school. The theory of the developmental state can be attributed to the conflict school since it assumes that the austere politics require some authoritarian form of government. Öniş (1991, 119) for example proposes that the developmental state “is inconsistent with the vision of a pluralistic form of democracy”.26 Market oriented economist in contrast are often adherents of the compatibility school, pointing to the coherence between democracy and the market and thus see democracy as beneficial to economic growth (Brusis 2009, 100). The World Bank 1983 firstly draws attention on the quality of government for economic development. Its relevance was undermined by the “Governance and Development” Report (World Bank 1992). Afterwards the “WDRs loosened salvo after salvo at the recalcitrant issue of governance, as defined by the Bank” (Yusuf 2009, 39): “[X] governance is defined as the manner in which power is exercised in the management of a county's economic and social resources for development. Good governance, for the World Bank, is synonymous with sound development management.” (World Bank 1992, 1)

According to the World Wide Governance Indicators which were published since 1999 by the World Bank, they capture six dimensions namely: 1. Voice and Accountability, 2. Political Stability and Absence of Violence, 3. Government Effectiveness, 4. Regulatory Quality, 5. Rule of Law and 6. Control of Corruption.

26

This proposition is different from Leftwich (1995, 401) assuming that the developmental state is functioning irrespective of the political regime. Examples with democratic respectively quasidemocratic governments had been Singapore, Malaysia and Botswana. However, Singapore score only -2 (1965-2010), Malaysia 1 (1969-1970) and 4 (1970-1995) and only Botswana scores 6 (19661986) and 7 (1987-1997) according to the Polity4 Indicator ranging from -10 (fully autocratic) to +10 (fully democratic) (Marshall et al. 2011). According to this statistic, Botswana would be the only democratic developmental state. In contrast, following Öniş ((1991, 116)) the specifity of developmental state is bounded to East Asia and Botswana is not included.

32

The World Banks proposal for good governance is thus far from political neutral concerning the question of regime type. Dimension one Voice and Accountability is according to Kaufmann et al. (2009, 6) “capturing perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.”

Especially with respect to the East-Asian model of development this would not necessarily conform to definition of “sound development management”. The concept of good governance is therefore criticized to conform to the perception of the liberal democratic western states (Kiely 1998). However, the indicator of good governance shows a strongly positive correlation with GDP per capita which induce Kaufmann & Kraay (2002) to propose a causal relationship from good governance to economic growth. Quibria (2006) challenges this view and notes that some of the successful East Asian economies successfully developed without high standards of governance. He therefore questions the positive association between good governance and economic growth. According to him, the phenomena are based on a naïve view on institutions which has two major misconceptions in it. Firstly good governance measures mostly start from an implicit model of governance based on western institutions. Secondly the goal of good institutions is confused with process how to get there. Institutions which are a desirable goal and work in developed countries does not necessarily fit in the framework of development economies and help to achieve economic growth (Quibria 2006, 111).

33

5 Summary The end of the cold war and the failure of the grand theories (Menzel 1992, 15) did not lead to the end of history in development economics. However the Washington Consensus didn’t hold for long and another paradigm shift is in progress or already succeeded. Table 2 summarizes the old development paradigms and compares them concerning some characterizing features. Table 2: Comparing old development paradigms Modernization Theory

Dependency Theory

Washington Consensus

Theoretical background

Keynesianism

Marxism

Neoclassic

Body of professionals

World Bank

ECLAC

World Bank

World Vision

growth via industrialization

reducing dependency

growth by “getting the prices right”

Key Problem

Market Failure

Imperialism, Neocolonialism

State Failure

State

World System

Market

world system theory

methodological individualism

Key agent Methodological starting point Key Concepts

Balanced vs. Unbalanced Growth, Big Push, Vicious Cycle

Dualism between core and periphery

Liberalization, Privatization, Deregulation

Trade Theory

infant-industry argument

Theory of unequal change

comparative advantage

Policy Implication

Import-SubstitutionIndustrialization

Global Socialism

Structural Adjustment Program

Explanatory framework

national

global

national

interdisciplinarity

high

high

low

monoeconomics

no

no

yes

Source: own characterization

The rise of the Newly Industrializing Countries and critiques of the Washington Consensus led to rethinking in development economics and with the establishment of the ImperfectInformation-Paradigm of Joseph Stiglitz also the World Bank changed some of its core assumptions. The New Development Economics thus is a step towards the East Asian Development Model since selective industrial policies are no longer rejected. The paradigm shift after the Washington Consensus however does not yet show a full globalization of development policy analyses as Gore (2000, 800) proposed. In contrast some differences such as the role of democracy and transparency are exaggerated with the rise of the good governance agenda within the World Bank. Besides this, there are several methodological 34

differences between the three existing development paradigms after the Washington Consensus (see table 4). Table 4: Comparing early development paradigm

East-Asian Development Model

Latin American Neostructuralism

New Development Economics

Theoretical background

Modernization Theories

Structuralism and Neoclassic

Neoclassical Synthesis

Body of professionals

World Bank

ECLAC

World Bank

World Vision

Economic Growth

participative growth

Poverty reduction

Key Problem

Embedded Autonomy, State Business Coorperation

Technological Change, Genuine Growth

Information-asymmetries, market failure

Developmental State

Global System

Market

Key agent Methodological starting point

methodological individualism

Inductive

key concepts

State Business C

Trade Theory

Flying Geese (Dynamic comparative advantages)

Systemic competitiveness

Dynamic comparative advantages

Selective Industrial Policy

Selective Industrial Policy

Selective Industrial Policy

global

global

national

high

high

limited

negativ

positiv

positiv

Policy Implication Explanatory Framework interdisziplinarity monoeconomics Democracy and Economic Growth

Source: own characterization

35

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