Statist political economy PDF

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WEEK 3: Statist Political Economy Main argument of statist PE - The state can facilitate faster, deeper, better, more developmentally friendly forms of industrialisation.Liberalism and the state – recap Basic model – individual self-interest/division of labour/productivity/rising output/wealth of na...

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WEEK 3: Statist Political Economy Main argument of statist PE - The state can facilitate faster, deeper, better, more developmentally friendly forms of industrialisation.

Liberalism and the state – recap Basic model – individual self-interest/division of labour/productivity/rising output/wealth of nations (all benefits) Key argument – individuals connected to each other via the market Impacts of liberal ideas -

Hegemonic in Anglo-Sphere

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Very popular in parts of the Global South

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Reflects material/class interests of particular social groups

But liberal ideas were often challenged: -

By proponents of catch-up development

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In times of economic crisis

Core ideas of catch-up development -

States mediate relations between individual and the market

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International relations are economic and political

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Economic growth through free markets is possible but structural diversification is not

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Industrialisation provides basis for a strong state

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In a context of competitive political state system, weak states are dominated by strong states

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States are nation states e.g., national population benefits from national development

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States in weaker/backward/less developed countries need to take the lead in pursuing economic transformation.

How industrialisation generates development -

When labour moves from low productivity (agriculture) to high productivity (manufacturing) activities, national labour productivity rises. Higher productivity increases output, trade, and national income.

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When manufacturing is undertaken on a sufficiently large scale, it generates economies of scale and scope (Rosenstein-Rodin, Verdoorn)

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Manufacturing in developing countries generates the potential for productivity catchup with manufacturing in developed countries, that does not exist in either agriculture or services (Rodrik)

Statist Political Economy believes that the state should push forward industrialisation.

Key thinkers in the Statist Tradition Alexander Hamilton – founding father and first US Treasury Secretary Fredrich List’s infant industry argument -

Critique of free trade theory of Smith and Ricardo

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Critique of UK Imperialism

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Argued for infant industry protection via establishment of protective power

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Argued for colonies

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“American system” – national bank, sovereign credit, promotion of agriculture, industry and science, infrastructure development to achieve continental integration, import tariffs. He believed that this is what Germany needed

List’s Political Realism: -

Centrality of nation states

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Need for strong national economy

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Strong military

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Supported colonies

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“the crowning success of manufacturing industry lies in the possession of colonies” (1841)

List’s concept of productive power -

Different line to Smith

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Smith – division of labour led to specialisation and productivity increases

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List – generating productive power leads to capital accumulation and division of labour

Sources of a nation’s productive power 3 types of capital: -

Natural – land, sea, rivers and mineral resources

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Material – all objects that are used directly or indirectly in the production process such as raw materials and machines

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Mental – skills, training, enterprises, industry and government – skilled workforce

Need to coordinate all three to generate nation’s productive power -

List prioritised mental capital formation as a key component of states’ attempts at catching-up with their more advanced competitors

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The creation of a skilled workforce and managerial cadre was central to the production of higher value goods.

Innovations to Statist Political Economy Mid 20th Century Explosion of Innovation in SPE: Albert Hirschman’s 1958 theory of unbalanced growth (more developed industries provide growth incentives to undeveloped industries) Nicholas Kaldor (1957) – rapid investments ‘learning by doing’ – rising curve of productivity and competitiveness and increasing returns Gunnar Myrdal’s (1956) concept of cumulative causation (positive and negative)

Alexander Gerschenkron’s contribution -

Economic backwardness in historical perspective

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Emphasis on the advantages of backwardness

‘industrialisation always seemed the more promising the greater backlog of technological innovations which the backward country could take over from the more advanced country. Borrowed technology…was one of the primary factors assuring a high speed of development in a backward country entering the stage of industrialisation’

From a theory of absolute backwardness (List) to relative backwardness ‘the more backward a country, the more likely its industrialisation was to proceed under some organised direction; depending on the degree of backwardness, the seat of such direction could be found in investment banks, in investment banks under the aegis of the state, or in bureaucratic controls. So viewed, the industrial history of Europe appears not as a series of mere repetitions on the ‘first’ industrialisation but as an orderly system of graduated deviations’ -

Need for ‘institutional innovation’ to substitute for the market

Disadvantages of backwardness The ‘accumulation of advantages’ can, at least at times, be paralleled by an accumulation of disadvantages

SPE: contemporary applications Alice Amsden: Key Role of State in South Korean industrialisation Robert Wade: ‘Governing the Market’ in Taiwan Ha-Joon Chang: Neo-liberal ideology – Kicking away the ladder

Potential criticisms -

A generic check-list of policies does not guarantee success

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SPE justifies labour oppression

Key Readings Fredrich List and the Infant Industry Argument 

Friedrich List was the first to deal with the problems of industrialization of the latecomers in a comprehensive manner. He was not an economist by training, but a political scientist and journalist. Being concerned with industrialization of the 'latecomers' of his time, Germany and the USA, he developed and formulated the 'infant industry argument' as a significant challenge to the classical theory of international trade, that is, the theory of comparative (cost) advantage.

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With exception to Hong Kong, no country has developed its industrial base without resorting to infant industry protection.

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List was strongly influenced by Alexander Hamilton and Henry Carey. He developed their ideas and presented them in the form of a theory. Yet, his contribution is largely ignored in the literature on the history of economic thought. Therefore, his writings on infant industries can be misinterpreted and misrepresented.

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Purpose of the reading is to clarify some of these issues. It is regarded as being against free and international trade and also seen as a strategy opposed to export orientation. Some limit the infant industry argument to production for the domestic market and that it should be applied across the board to manufacturing sector as a whole.

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The infant industry argument was a reaction to uneven industrial development following the first Industrial Revolution where countries fell behind Great Britain

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Came from Alexander Hamilton who initiated a debate on industrialisation and argued for the protection of US industries from imports from GB.

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Hamilton also drew attention to the need for government intervention in some other areas in the process of industrialisation

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List’s infant industry argument was distinguished from previous contributions to the debate because it was formulated in a wider context of development rather than as an instrument of trade policy.

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The infant industry argument is based on the following principles: first, countries go through five stages of development: o The savage stage o The pastoral stage o The agricultural stage - infant industry protection is necessary for countries at this stage o The agricultural and manufacturing stage o Agricultural, manufacturing and commercial (services) stage

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Transitions from each stage do not happen automatically by relying on market forces Division of labour and accumulation of capital are characteristic results of development – Smith believes they are the cause

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Free trade is suitable for advanced countries after it has developed its industrial base. For countries not yet industrialised, industrialisation would only become possible through free trade if all countries were on the same level of low development.

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List refers to the experience of England, explaining how this country started industrializing with the processing of domestically produced raw materials, flax, wool, cotton, silk, cloth and iron, and later deepened its industrial structure by moving to industries such as fisheries, metals, leather etc.

Kicking away the ladder – Ha-Joon Chang 

Discussing whether we can really conclude that the current push for ‘good policies’ and ‘good governance’ by the developed countries amounts in fact to ‘kicking away the ladder’.

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Contrary to the popular view, this does not have to involve direct policy intervention such as tariff protection or subsidies, but could be done by establishing institutions which can socialize the risk involved in such projects

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Not only one way of protecting infant industries

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Are the developed countries kicking away the ladder so that developing countries can’t reach them?

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Apart from the paucity of convincing reasons as to why this may be the case, the poor growth records of the developing countries over the last two decades suggest that this line of defence is simply untenable. During this period, most developing countries have gone through 'policy reforms' and implemented 'good' - or at least 'better' policies, which were supposed to promote growth. Put simply, the result has been very disappointing.

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Neo-liberal policy reforms have not been able to deliver

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All countries, but especially developing countries, grew much faster when they used 'bad' policies during the 1960-1980 period than when they used 'good' ones during the following two decades. The obvious answer to this paradox is to accept that the supposedly 'good' policies are in fact not beneficial for the developing countries, but rather that the 'bad' policies are actually likely to do them good if effectively implemented.

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developing countries were able to grow faster in the early post-war period (19601980) than the NDCs had done at comparable stages of development, partly because they had much better institutions than the latter countries had had

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when I say 'good' policies here, I mean the policies that most NDCs were using when they were developing, rather than the ones that they are now recommending to the developing countries.

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international pressures for institutional improvements can play a positive role in the developmental process. However, the current push for institutional improvements in developing countries is not done in this way and is likely to end up as another 'ladderkicking' exercise.

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By demanding from developing countries institutional standards that they themselves had never attained at comparable levels of development, the NDCs are effectively adopting double standards, and hurting the developing countries by imposing on them many institutions that they neither need nor can afford.

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There can be 3 objections to this argument: the argument that developing countries need to adopt the policies and institutions recommended by developing countries whether they like them or not, the argument that policies and institutions recommended by the IDPE to the developing countries have to be adopted because they are what the international investors want, the argument that the world standard in institutions has risen over the last century or so, and therefore that the current

developing countries should not consider the NDCs of 100 and 150 years ago their role models. (agreed) 

In terms of per capita income, India may be at a similar level of development to that of the USA in 1820, but that should not mean that it should re-introduce slavery, abolish universal suffrage, de-professionalize its bureaucracy, abolish generalized limited liability, abolish the central bank, abolish income tax, abolish competition law, and so on....