lecture three, development

we've looked at internal constraints – issue of internal constraint, and the barrier it poses.

the way around it was some kind of intervention, State-led. two kinds of transitions: (1) to a modern form of agriculture; (2) away from agriculture, towards industry

now we turn to a second issue – external constraint.

here, Ricardian trade theory has had hegemony. for Ricardian trade theory, the long and short of it is that there are no obstacles. trade is good, regardless of where you find yourself. the implication is that there's no systematic disadvantage to specializing in one field, over another.

naturally, this has led to prescriptions that have recommended the free flow of capital and goods—no barriers to finance, or commodities. the appropriate trade policy is a free trade policy.

Ha-Joon Chang's book is, of course, very clear that there has never been a late developer that has succeeded by following free trade. free trade policies were imposed on colonies, of course—but their subsequent course is not great evidence for the orthodoxy, to say the least.

O'Rourke (like Bairoch before him) observes this, empirically.

for economics this is a 'paradox,' because the theory can't be wrong. if you take the science seriously, of course, it suggests that the underlying theory might be wrong.

Shaikh's attempt, of course, is in this vein. his suggestion is that a new theory of trade is necessary.

we have two countries. industries in Country A are more competitive than Country B. Country B soon runs a trade deficit; importing more from A than B. Gold flows from B to A.

in Ricardo's argument, Prices go up in A, and go down in B. In short, the lack of productivity in its industries is 'solved' by the change in the price level.

in Shaikh's argument, the price effect that Ricardo and Hume predict will be temporary; the more lasting effect will be a decline in interest rates, as Banks will lend out the gold and there will be an increase in supply, which means that inflation will be temporary. there's also the flow of gold back into B, because of higher interest rates. this also minimizes price increases in A.

in short, the competitive disadvantages remain in place.

Country B has to find its competitive disadvantages: primary goods, cheap labour (and low wages don't really work, in the long run—these countries have never developed well. the Indian textile industry didn't die because of tariffs, but because of inferior productivity).

neoclassicals say that's fine.

this is where Prebisch-Singer come in.

first, primary goods face declining terms of trade in the long run.

second, primary goods are extraordinarily volatile, which has a negative effect on investment.

Gunnar Myrdal's concept of 'cumulative causation' is relevant here.

Myrdal made the argument that the neoclassical assumption of balanced growth—that is, growth where initial disadvantages are wiped out by the market mechanism—is a fiction. What you actually find is a process of 'cumulative causation', where 'ex ante' differences between regions/countries are not counteracted, but actually reinforced. Another phrase for this, in the Marxist framework, is “uneven development” – the natural logic of capitalist development is turbulent, crisis-ridden, and uneven.

the consequence here, then, is that Country B is stuck.

the way out, then, is by doing what O'Rourke calls attention to. protecting yourself until gaining a competitive advantage.

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FDI in the 20^th C. overwhelmingly aimed at getting around tariff barriers; foreign firms came in to compete with local firms. there was no spreading of technology, etc.

often, also, FDI went to foreign markets because they weren't competitive on the domestic market. this isn't really going to help domestic producers.

neoclassicals talk about factor endowments as if these are things that countries are just born with ('capital-rich,' 'capital-poor').

the threat from industrializing country can't be understood in 'country' terms – but only in firm terms. there are plenty of firms who may very well benefit from the import of cheap goods and the opening of new markets. the 'national' effect is likely to be conjunctural; you'll have to look at it concretely.

are cheap raw materials/cheap labour functional for global capitalism? can you do without it? well US was never very well-integrated, but it's grown very quickly.

the US, also, has over time substituted raw materials for synthetically produced inputs.

importantly, you can't infer from the fact that firms will have problems that States will care. the reverse plaza accord wiped away manufacturing, to the benefit of finance. why?

Shaikh's argument, re: Central Banks, is that their own ability to influence interest rates operates within constraints set by the accumulation process. they aren't free actors. the supply of money and interest rates are endogenously determined, largely. this doesn't mean that State action is unimportant, just that it operates within limits.