lecture nine, development

today we do Chile

the advent of neoliberalism comes through two roads: (1) revolution from above (happened in Chile, arguably Argentina, Colombia); (2) as a negotiated transitions

these are misnomers, insofar as they all involve negotiations and come 'from above'

no bourgeois State can unilaterally impose economic restructuring on capitalists, without negotiating with them.

however, this said, there was a difference in Chile—had to do with the level of violence used to impose it. the extent to which subaltern classes

Chile is also important in a second respect. one of the novelties of the experiment was that it was quite consciously made to restructure politically, as well as economically. the lower orders would not have the political capacity to push back the neoliberal agenda. it was set up, in short, to make neoliberalism 'safe' for democracy. the turn away from dictatorship to democracy was guided by Pinochet so that democracy would be unable to upset the neoliberal agenda, for elites.

all this said, let's pose the question of why the crisis of ISI leads to neoliberalism? in much of the literature, this is simply assumed.

but this begs the question. it turns 'a' crisis, into 'the' crisis – it didn't have to follow ISI. the solution to previous crisis of ISIs had been a re-vivification of ISI. why, now, neoliberailsm?

let's separate the two issues: (1) where the crisis comes from?; (2) why is neoliberalism the solution?

Chile stands out for being the (1) first country in LA to transition; also because (2) it is not caused by a direct economic crisis, but a political crisis.

Allende didn't 'de-mobilize' his base in the way that other SDs did. as soon as the mobilizations began, Chilean bourgeoisie torpedoed the economy. it was amplified by the US, of course.

Allende survives for two reasons: (1) mobilizations; (2) constitutional commitments of the Army

this broke down in 1973, with the coup

when the Army was in power, the Left was taken care of.

'free market fundamentalism' is the watchword of the new gov't, of course. but the actual pattern of reforms is interesting.

what 'business' wanted, according to Martinez and Diaz, was the continuation of protectionism and corporatism. this was their initial preference.

so the question, immediately, is why these preferences/policy change?

this is true of policy-makers, as well. the Navy is initially in charge, remember, and it's initially hesitant. the Chicago Boys find doors closed to them, initially. advisors only have as much power as capitalists give them. advisors don't sing seductive songs.

things change because of political conflicts in the first few years (in 1975)—they start worrying about the durability of the regime. elites argue to business that the specter of the previous era threatens to return. the right-wingers in the regime point to this.

in the Silva, the story is a bit distinct. there are internationally oriented capitalists, w/ liquid assests.

in any case, the Chicago Boys now find themselves with patrons.

there is, though, a question: why do the old capitalists relent so easily?

the answer is that this is because their power isn't what it used to be. the traditional elites were weakened by Allende's policy, reducing their clout. (worth thinking about here—resistance in first years is evidence of the opposite, remember. we have an underdetermination of theory by data).

but one thing is certain—business has invested an enormous amount of political confidence in Pinochet. somebody who wants to see Chile regain its economic growth. the business sector gave broad support to the government, according to Martinez and Diaz.

this is distinct from the idea of technocratic autonomy. they weren't insulated from political pressure, in the Martinez/Diaz, but the bourgeoisie ceded political power to the technocrats.

Vivek arguing that this is radical theory of State, not pluralist. the bourgeoisie 'cedes' autonomy. they were content to do so, largely because they had just seen it beat the shit out of labour. they have political confidence in Pinochet.

the neoliberal phase goes through two periods, according to Martinez and Diaz—1973-1983, 1983-1990

in the first phase, (1) liberalization, in terms of regulations; (2) privatization. lots of firms are going under in this period, the State had to re-regulate/nationalize failing sectors again and again, remember. neoliberalism is full of rent-producing behaviour. socialized costs, privatized gains. this is not economic dogma, but an intrinsically political project.

to understand neoliberalism, we cannot approach it as 'market fundamentalism'. free-market capitalism has actually required just as frequent interventions in the economy as ISI did. don't take this in the 'obscurantist way'--deregulation should not be confused with non-intervention

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[1] class commitments vs. individual interests?

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you have to establish the fact tht the internationally-oriented capitalists have clout. otherwise if it's a small sector, and you have a large component of the capitalist class not doing so well, the conditions for political stability just aren't in place.

Vivek saying that Silva' acct doesn't take into account how actually autonomous the State is, under capitalism

State actors are interested in growth? only for two reasons (1) warfare, which isn't much of an issue, today; (2) pressures from below, which aren't much of an issue under neoliberalism

we needn't be as concerned with passage of neoliberal policies, as their sustenance. that's why we won't talk about IMF as much. there are instances of attempted transitions that didn't work, in the 70s

States have to 'neutralize' dominant classes, under neoliberalism

lecture eight, development

today rounds out solid discussion. after today a lot is educated guesses (because that's where the literature is)

where there is not educated guesses is a descriptive account of what neoliberalism meant

but we don't have the same set of analytical insights

underlying causes of implosion of the State-led model.

we now need to revisit the issue of the debt crisis, to discuss this in the terms developed in Vivek's book

as Rodrik argues, ISI interregnum (1950-1980) was actually a 'world-historic success' (high relative to normal growth rates in capitalism in first half of 20^th century, and high relative to what followed)

at the same time, ISI was a 'ticking time bomb'. it had certain internal weaknesses (distinct from what neoliberals thought, but still exist). these are political and economic in nature.

economically, ISI could be of discipliary and non-disciplinary nature. in E. Asia, you had the former. in LA and Sasia you had the latter. this generated two problems, which were self-reinforcing: (1) in the absence of discipline, ISI became a gigantic subsidization scheme. meaning it was an ever-expanding drain on the public exchequer. for this to be sustainable, it had to be complemented by steady increases in productivity, expanding the tax base, etc. this didn't happen. the demands on the State outpaced the gains from subsidization. there was, therefore, an ever-tightening fiscal crisis on the State; (2) external debt problem, as well. because the developmental State was not able to transform the external basket that they sold to the world. they didn't quite move up the value-chain, in manufacturing. because these countries were locked into buying capital goods, costs outpaced gains. this was already evident by the 60s; this is why Prebisch is arguing that the only way the development model would survive is if it went whole hog on exports (and, unlike what's stressed in dev. literature, country after country attempted to export; only a few succeeded). firms uniformly opposed because it was not something they could rationally accept to succeed

as a result of this, developing countries are desperate for cheap loans. from 69-79, you get a longer lease on life for ISI because of the very easy conditions on the capital market. by '82, the chickens come home to roost.

in '79 you get the Volcker shock, which means that loan payments being made by LDCs tripled or quadrupled. every one of them comes into serious crisis, etc.

the underpinning of this is the inability of the State to adequately transform the economy, in order to get sufficient revenue from their economy. SK and Taiwan were fine, even though they had large amounts of debt. but their revenues were in good shape, fiscal and export.

the weakness of State-led development, then, was a weakness of one kind of State intervention.

politically, when capitalists changed their preferences away from ISI towards neoliberalism, labour was so enfeebled that it was unable to gather the power to do anything about it. in India, for example, labour was demobilized; elsewhere, it was hemmed in by a maze of corporatist arrangements that made its organizational power moot to what it could give its constituents. official labour movements could do very little to avert it. the only way they could resist was by cutting further deals with political elites, etc.

in Korea, the dismantling of the developmental State occurs prior to the crisis of 1997, in the early 90s. the chaebols start to see the discipline as an encumbrance that they can cast off without threat to their profits.

1. cheap capital roots in petro-dollars?
2. capitalists changing their preferences towards liberalization?

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the smallness of size of mkt was not an inducement to SK firms to hazard export markets. Jamaica, Syria, etc. all stuck with ISI.

in Sweden, capitalists agree to keep labour in the coalition b/c there's not much planning, and no real public sector.

as early as late 19^th century, Sweden embarks on a high-technology export-based strategy. in the 1930s/40s it has a highly developed industrial sector already, despite having 30-40% agrarian strategy and being a 'developmental case.'

at the end of the day, you're dancing to capitalists' tune, and are always on a 'knife-edge'

late development vs. late-late development is important to understanding Sweden in the late nineteenth century. the latter face extraordinary pressures, remember, that the former simply don't face—they're oligarchies, etc.

capitalists never stop pushing for subsidies. in neoliberalism, they want regulations/impositions to be taken away, but not lose State assistance. behind the scenes capitalists are still lobbying States for assistance, etc. you have the luxury of a public posture of laissez faire, but the reality of getting significant structural assistance. they want done away, though, with obligations to labour, and obligations to invest according to plan requirements.

enabling condition for shift to neoliberalism will have to be stratified, but also global. you can't simply say that 'everywhere' you have a shift in the balance of forces. there's an underlying structural cause, which is the shift in the 1960s, through the 70s, early 80s, in the US. of course, independent of these changes, given the enfeeblement of the labour movement, it's likely to develop into something like neoliberalism. but the reason the US is important is because of the extraordinary simultaneity you see in the transitions to neoliberalism.

inflation in ISI—really only a problem in LA, wasn't as much of a problem in other parts of the world.

increased confidence for lenders owing to the fact that this is sovereign debt, not private debt. governments are good for it.

lecture seven, development

last week was about 'state capacity'

readings stressed two points

1. not the fact of State intervention that explains development, but the quality of State intervention.
2. well then what explains quality of State intervention? answer of that literature was State capacity?

that raises the question—well, why doesn't every State have State capacity? that literature has no answer.

Vivek's book tries to answer that question. in that sense it's adding 'causal depth'. in that sense carrying forward institutionalist literature

but the book is also making a theoretical point, that distinguishes it from their work. for the institutionalists, the 'consensual' relationship between States and capitalists is central to the picture of State capacity, remember. each member has its part.

if that's the case, though, then it should be rational for capitalists to support State capacity. the only explanation for failure is problems with State elites—they're too corrupt, too prone to infighting, etc. you end up, then, with State-centrism, in the institutionalist narrative.

to the extent that societal actors are brought into the narrative, it is the landlords—maybe the absence of land reforms, etc.

what isn't contemplated in this literature is the possibility that the industrial bourgeoisie—the treasured partner—might have had something to do with the failure to generate a powerful State.

Vivek's book suggests that there are reasons that capitalists would oppose the developmental State, which have to do with its dual character--(1) States give subsidies, largesse; (2) States discipline

Evans sees cooperation in the first, but assumes it in the second. Vivek's point is that it's not wrong to see cooperation, but of a limited sort—capitalists are willing to cooperate with regard to subsidies, but prone to conflict with respect to the disciplinary aspect.

in Korea that conflict does not emerge, of course, whereas in India it does.

the question asked by Vivek's book is why this is the case—under what conditions it is rational for capitalists to accept/resist?

the ruling assumption in much of the literature – the retort – is that this doesn't matter, because the State was always too powerful.

you can't retort this theoretically, you can only disprove this empirically. which Vivek did—the capitalist class was big enough, in India (and they were larger, as measured by conventional indices, in Korea).

as a consequence of all this, of course, India ends up with an enfeebled capitalist class, that's not properly embedded in the capitalist class.

the last third of the book takes up the question of why the State doesn't reform itself.

was Korea's authoritarianism doing the work, here? on theoretical and empirical grounds, no?

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LR? we are not trying to explain the divergent develoment paths, per se. we're trying to explain the differences in the institutional capacity of the State.

1. LR re: State capacity? perplexing for Vivek, because there wasn't much evidence of landed class intervention in the formation of the PC, etc. it was only industrial associations, industrial elites. it was as if the landed elites had just been pushed out of the political scene. having said this, it is plausible that landlords have reason to oppose State capacity. so Vivek wants to say that it has little to do with installation of State capacity, but the fact of there not having been Land does have something to do with the actual working of the State apparatus. State w/ more equality would have an easier time disciplining capital—planning in capitalism is difficult, remember, because State plan has to map on to capitalist planning. the argument is that LRs leads to a situation where there is less divergence between State preferences and capitalist preferences. in high inequality places, capitalists want luxury goods; not capital goods, infrastructure, etc., which is what the State wants. in short, LR helps the 'principal agent' problem.
2. LR re: rates of growth? yes, important--the first part of the course.

for most developing countries, the size of the domestic market will help ISI be more successful—but it will only expand the constraints, but not eliminate them.

from 1870-1930, agrarian elites 'control' economic policy—export of commodities, etc; not inflationary policies, etc.

In LA, 1930 saw (1) agrarian elites as most powerful class; (2) beginnings of rapid industrialization. this is a puzzle?

for a landed elite, ISI is a kick in the gut—this is a rapid wiping out of the landed class policy. [still not clear why this is the case, necessarily—arithmetically yes, they disappear, but does this mean marginalization? inflationary policies associated with ISI do hurt them]

even if landed elites live on, they live on as junior partners. and they're going to have to increasingly find other ways to be accomodated. a 'passive revolution', war of attrition. gradually undermined.

authoritarianism vs. democracy – conventional argument is that Korea succeeded because it was an authoritarian State, and democracy makes it hard to have a good developmental State. the most plausible version of this argument is that democratic states are subject to competing pressures that make effective planning difficult; a subsidiary argument is that politicians pander, in a democracy, in order to placate constituencies—they therefore dispense rents, rather than act efficiently. in authoritarianism the idea is that you throw capitalists in jail.

this is appealing, at face-value. but let's look at the facts—both France and Japan are democracies, in post-war countries, and pursue successful discipline of capitalists.

what the authoritarian argument takes as implicit is the idea that what you need to discipline is labour (labour of course benefits from democracy). but we're interested in power. remember, capital doesn't rely on the channels associated with a democratic state—it's power over investment remains, whether or not the State is authoritarian. on balance, then, authoritarianism gives you an increase in the power of capital viz-a-viz labour. in this sense, State should have less leverage against capitalism, not more.

on the question of short-term interests, capitalists had to relinquish planning powers to bureaucrats, but never took a hit to profits

competition in ISI was not desired, because that is 'waste' – you don't want scarce resources being squandered, things being overproduced, etc.

nationalization of finance doesn't always have to piss off industrialists, because it helps concentrate investible resources. of course, financiers would have to be weak, and industrialists would have to be sure that this isn't the 'thin wedge' of a nationalization/socialization program.

lecture six, development

the developmental State

Gershenkron + Amsden/Evans/Wade are the bookends to an interesting period in the study of late development.

In the 50s and 60s, when Gershenkron was writing, it was understood that a developmental agenda will need a helping hand from the State. this was policy reality at the time. this was a mainstream assumption of social science.

up until the mid 70s, this consensus starts to come under attack. the economics profession, in particular, was starting to shift towards Keynesianism – that paradigm was coming into crisis not because of its intellectual infirmities (those were clear), but because of the failure of Keynesian policies.

Milton Friedman, domestically, and Anne Kruger in the WB/IMF (in '79, she publishes a three-volume study of trade regimes—systematically falsifying the history of trade regimes)

the turning point comes with the debt crisis. LA countries accumulated debt through the 60s and 70s which resulted, in the early 80s, in almost universal default. this was the opportunity for the whole State-led paradigm to be called into question. by the end of the decade, it became received wisdom that the whole post-war policy paradigm had been a failed argument.

the intellectual case that was made was partly empirical. the economic difficulties of LA were pointed to as a consequence of misconceived State-led policies. what this was contrasted to was the example of E. Asia.

the mainstream argument re: E. Asia was that it had escaped the crisis of the 80s because of an underlying difference—a model which more closely approximated free markets and free trade.

so the alleged contrast was clear: a tarriff regime in LA resulting in slow growth/economic collapse, and 'market fundamentalism' resulting in stellar growth in E. Asia.

it was in this context that Amsden/Wade/Evans emerged.

Amsden's Asia Next Giant (SK) and Wade's Governing the Economy (Taiwan) were very influential, 1989. In the background to these books was Chalmers Johnson's book MITI and Japan, which came out in 1982—but exploded in 1989. Johnson argued that the Japanese miracle (1954-1976) was the result of enlightened bureaucrats—this didn't make much of a splash in the literature, but it influenced Amsden and Wade, who both stressed that they copied Japan.

Amsden and Wade were both funded by the WB. SK and Taiwan actually eclipsed Japanese growth rates in the period of the Japanese miracle.

What they both found was that the free-market description of the development model adopted by Taiwan and SK was wrong. Taiwan and SK both were about as close to a planned economy as you could get—especially SK. They differed in every crucial respect (Taiwan is a bit enigmatic—sometimes met with a 'discreet silence' re: institutional configuration).

States not only refused to be nightwatchmen States, but they were thoroughly interventionist. Note that they don't turn the neoliberal narrative on its head—LA is still interventionist. LA was characterized by pervasive intervention by the State in trade policy and domestically.

This generated a claim: clearly, the difficulty of LA did not arise from the fact that they relied on State intervention. If that were the case, you should have had problems in E. Asia.

This premise grounded their investigations—why did State intervention lead to success in one case, or another?

Neither Amsden or Wade really answer this, except insofar as they provide certain truisms [?]

Evans comes closer. It's the 'quality' of State intervention that distinguishes LA from SK. And the quality of State intervention has to do with the 'institutional capacity' of the State—the degree of capacity that the State has distinguishes 'good' States from 'bad' States. Evans tries to specify the components that add to State capacity: (1) the relevant State agencies have to have strong ties to the relevant economic actors (embeddedness); (2) those links have to be such that they do not degenerate into cronyism/clientilism—in this sense, they have to have the right kind of autonomy from State actors.

His term for this is 'embedded autonomy'

Amsden does describe the kinds of intervention that this State has to make, despite not saying very much about the institutions that produce it—good intervention is distinguished by a certain kind of outcome (Evans is less clear about 'outcome'). The kinds of protection and subsidies that States give to capitalists have to be characterized by reciprocity—there has to be discipline. In both LA and E. Asia you had subsidies and tarriffs. But in LA those subsidies became gifts. In E. Asia the subsidies came with a condition attached to them—the firm had to abide by certain performance standards. Firms couldn't make easy, 'soft' profits.

Amsden and Evans together provide this interesting answer—in one case, intervention imposed discipline; In the other case, States did not (and could not) impose discipline.

This gave critical policy wonks something to hang their hat on. the Left in the 80s was in crisis, of course; the whole collapse of LA had called State-centric arguments into question.

Evans is a descendant of Gershenkron. Of course, Gershenkron said very little about institutional capacity. Evans improves on this—he talks about the nature of the institutions that would be necessary.

The influence of this work was unmistakable. In '93 the WB comes out with a report, The East Asian Miracle. for the first time since the 1970s, the Bank agrees that 'industrial policy' played a very important role. it still makes fictitious distinctions (they call it 'market-conforming' rather than 'market-distorting'), but it was still an extremely important intellectual concession.

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WB responded to 'industrial policy' in Japan argument by agreeing that it was a success—the proviso was that had they not intervened growth would have been better.

SK in two spurts: 1961-1973 (textiles, etc.) to 1973- (heavy and chemical industry: automobiles, steel, synthetics, etc.). The latter are given protection from outside imports, but not made to export right from the start (which was untrue of textiles). Automobiles were given ten years to export—in those ten years, there are administrative ways in which they impose discipline [How is Korea able to discipline capital in these years?]

Vernon's theory of the product cycle – selling commodity with innovative technology in the home market for a while; over time technology diffuses, and initial disadvantages start to disappear; the initial producer takes his technology and starts to sell in another country; that technology, while uncompetitive in the home market is still competitive in an export market. now, diffusion starts to occur in the secondary market.

what the 'flying geese' theory doesn't explain well is 'diffusion'; it's more complicated. consider a natural experiment—Japan invested in N. E. Asia and in S. E. Asia, but N. E. Asia succeeded (b/c they were able to compel the diffusion of the technology). this developmental disjuncture is rich for possibilities for research.

were L-reforms important for State capacity? or important for growth? or both? certainly important for the size of the domestic market, but not for State capacity.

Evans is right to say that we have middle-ground between the State overrunning the private sector and the private sector overrunning the State. we're concerned in a 'joint-project'

for Weiss, cooperation matters. OK – but this only matters when antecedent discipline is in place, it seems. in which case the institutions that Weiss specifies might be insufficient, or misguided.

lecture four, development

the agrarian question

development attends to social formations with a large peasantry—so the 'agrarian question' is essential to the problems of this course, naturally.

one and a half debates on the peasantry that have really mattered

the first generation – from the first decade of the 20^th century to the middle of the 20^th century. trying to deal with the question of what would happen to the peasantry as capiatalism spread. one answer was given by England—by the time that this debate was happening, England was far and away an urban country.

so people trying to understand the fate of the peasantry, looking at England, would expect more or less steady extinction. yet what they found, looking at continental Europe and elsewhere, was different – much slower extinction, if any

(1) economic: what explains the ability of the peasantry to persist, in the face of competition?

(2) political: what should socialists do? Sdem parties rooted in the working-class were concerned about what to do, when the bulk of the population was not w-class. peasants demanding strengthening of individual property, while w-class wanted socialization.

one easy answer was that history will solve this for us. if we wait long enough, the peasantry will disappear. the difficulty, though, again was that this wasn't happening fast enough.

what will happen to the peasantry? if they're not disappearing, why?

this was Kautsky's question.

when Kautsky started this book, he had wanted to show that the peasantry was doomed to extinction. but what he found was that there are actually mechanisms in place that allow the peasantry to exist, however precariously.

the sources of persistence are of two basic kinds: (1) peasants, when faced with more competitive producers, have one advantage—they aren't motivated to produce at the going rate of profit. for peasants the object of production is survival. they'll accept returns on their labour that are far beneath average – peasants will exploit themselves as is necessary. capitalists, however, will only produce at an average or above-average rate of return; they will withdraw at profits lower than this; (2) insofar as peasants are able to hold on to their plots of land, they end up being quite functional – (a) for employers in rural areas, the persistence of the peasantry promises cheap labour (costs of reproduction lowered by tiny plots of land); (b) insofar as they're willing to exploit themselves, they lower the cost of food, benefiting urban employers.

Kautsky and Lenin both recognized that the entrance of capital doesn't result in them following the same path that England did. capitalism can hold in place and accentuate the non-transformation of social relations in agriculture: agribusiness living in harmony with smallholders/small peasants.

the net result of this is not an equilibrium, even-based economic development; but accentuated unevenness.

this then brings up the next question. what do you do about this?

the traditional answer has been land reform. takes care of underemployment, produces income for peasants, and perhaps produces more efficiency (compared to larger landholdings). this last point is dubious (and the others depend on the nature of the land reform, no doubt).

let's talk about the inverse relationship of farm size-productivity.

Lenin versus 'populists' is rehashed, here. Lenin's response was land vs. labour productivity. and the basic point is the same, here.

in other words, giving land to peasants is fine for urban elites, of course. but it's terrible for peasants, welfare-wise.

exceedingly difficult to make judgments of relative efficiency of investments. when you do measure them, the relationship is a tenuous one.

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not that it's not capitalism, but that it's a very backward form of agrarian capitalism.

industrial transitions of late developers are very different, but agrarian transitions are even more different. these 'odd' forms generate endogenous obstacles, political and economic.

an end-run around the problem of the agrarian question through State-based cooperatives, etc.

GR allowed them to boost agricultural productivity without changing property structures.

Kautsky writing in the context of the influx of cheap grain, destroying peasantry; since the 1970s and liberalization, we're living in a parallel phase of rapid agricultural transition.

Patnaik's proposal that the internal market be treated as the 'export market,' which presupposes that you boost internal demand through boosting peasant incomes.

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in sum: Late developers find themselves in a situation where the market isn't helping: agrarian underdevelopment as capital comes in, and foreign endowments lock you into cumulative disadvantages. This is where the State is supposed to come in.

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.

lecture two, development

development is not an automatic outcome in any given social formation—it requires specific social/structural preconditions. most of history characterized by stagnation.

the critical shift was in incentive structures, which compelled producers to build in an orientation towards innovation/cost-cutting in their productive activity. until this happened, you don't get economic growth as an everyday component.

in European history, we are asking, what was an essential characteristic?

this week we focused on, first, a shift in agriculture. and second, we asked what this means for latecomers—both in terms of disadvantages, but there are some advantages, also ('liabilities to 'early development'').

Kemp and Crouzet put it quite well – developing countries aren't going to repeat the path of the early developers. nonetheless, they will have to put certain preconditions in place.

the main precondition is the domestic constraint—the constraint that traditional agriculture imposes upon the economy. there are, in fact, two kinds of transitions that are relevant: (1) within agriculture, the transition from traditional to modern agriculture—from pre-capitalist to capitalist agriculture; (2) away from agriculture, even of a capitalist kind, towards industry.

growth, then, becomes coincident with industrialization (development is often synonymous to industrialization).

today, a defense of the notion that industrialization is central.

why should agriculture be a constraint?

you can look at it from the supply side and the demand side.

from the supply side:

1. agriculture as the main occupation of most of the labour-force – it sucks up the labour supply, inhibiting the deployment of labour towards more productive activity. you have to free up labour from agriculture (the enclosures)
2. if agriculture is not dynamic, then the availability of material inputs for the production process will also be dampened. if the primary sector is stagnant, then industrialists face rising costs of inputs.
3. wage-goods—in early stages of development, most of the wage of industrial workers goes on food consumption. if agriculture is stagnant, it means that real wages will be low (because there will be little money freed up for purchasing, .

from the demand side:

1. very few of those involved in agriculture will be interested in buying goods, which will mean that the domestic market is thin (Lenin vs. Narodniks—kicking the peasants off the land will produce a mkt, according to Lenin. so you create a market by changing property relations, not by increasing wages)
2. even if you dispossess peasants and/or force them to be oriented to the market, it remains possible that their labour remains inefficient/not productive. even nonsubsistence but non-dynamic agriculture will mean that the growth of the market will be slow (and there will be slow growth in demand for industrial goods).

this means that it is absolutely essential for there to be a transition, within agriculture, from a traditional system of agriculture to a dynamic one.

now let's discuss the second transition—from agriculture, to industry.

cf. Kaldor—the main point is that no matter how dynamic your agriculture is, it will never be as high as the growth path you'll get if your main economic activity is industry. industry is capable of generating a much higher growth path than the best agricultural sectors.

there are a number of reasons for this:

1. agriculture grows more slowly than industry is that agriculture is constrained by some irreducible natural limitations (Marx makes this point in Vol II: labour time vs. production time, in agriculture versus industry). capital is 'tied' down, and it doesn't like being tied down. thus you will also have less capital coming in.
2. agriculture is less open to scale economies—it doesn't generate 'increasing returns' (when the same amount of inputs generate greater returns), but gets much faster into 'decreasing returns' (when the same amount of inputs generate decreasing returns).
3. agriculture is also subject to more volatility on the world market, in terms of returns to trade, and decreasing terms of trade. this increases the risk aversion of peasants, which means that they will shun market production.

so for an economy to develop, an economy must not only transform agriculture, but transform 'out' of agriculture.

why not remain an agrarian country?

1. it's politically difficult to sustain – people don't want a lower standard of living. economic development is politically something very helpful, for elites.
2. it's a Hobbesian world out there. States are competing, and countries which are more dynamic economically tend to wipe out weaker countries.

England, by the 1720s, is able to construct a very efficient central State, thanks to the settlement of 1688. these revenues help it build a very powerful military machine, and the Navy. England's defeat of France in the mid-1700s (Seven Years' War), and then in the Napoleonic Wars make Europe sit up and take notice. All of Europe, after 1815, starts a process of transforming its economic structure, and building States that can withstand this English behemoth. this is what drives the impetus to 'late development'.

the foregoing is important because it responds to two criticisms:

1. the West has generated a prejudice against small-scale agriculture (Schumacher) – small-scale agriculture is presented as being inefficient, as a drag on economic growth, but in fact family farming actually generates higher returns. the identification of development with industry is a mistake.
2. from post-colonial theory, via Chaterji, the argument is that the drive to industrialize is the result of post-colonial elites internalizing Reason and Science. the implicit argument in this is that the reason the third-world chose to industrialize is because its elites were socialized into accepting this as the desirable/valid form of development.

for either of these to make sense, there has to be an alternative path of development that you can adduce. is there another way to avoid domestic political unrest, or prevent encroachment by other States? Tanzania was the God that failed.

England was the first and last country where development takes place without the guiding hand of the State. in all the other cases, the State is critical.

the late industrializers will attempt not to repeat the same patterns that England went through, for two reasons: (1) they won't want to (try to telescope it); (2) they can't (England captures certain markets, and the Continental countries will find niches).

you do, of course, have to put certain preconditions in place. if they're not in place, you won't be able to avail of the correct technologies (peasants won't use threshers, etc.). what are these structural preconditions?

1. the transformation of agriculture
2. you have to be able to create a space for your industrialists to grow, so they can survive the threat of England (protection is critical)
3. there has to be a State-guided provision of public goods—of infrastructure.

the key is the first—how do you transform agriculture? this basically means changing property rights; taking property away from some people and giving it to others. wiping out certain classes of people. the difficulty in Europe was that you had just lived through the biggest cataclysm in modern history (Fr. Rev), you have the birth of the modern Left.

for the States in Europe, the trouble becomes two-fold.

1. capitalists are going to be reluctant to attack feudalism.
2. moreover, few states were bourgeois States; they were dominated by agrarian elites. how are they going to undertake agrarian reforms, the intent of which is to eliminate the agrarian elite?

as a result, Continental elites attempt to do this delicately—slow modernization of agriculture. precisely because of this, their growth path is slow, and very different from England. this is what unleashes the tensions that give you 1848, 1871, etc.

the nineteenth century in Europe makes no sense unless you contextualize it in the political/economic fact of modernizing while avoiding revolution.

- - - -

into the 80s, the consensus about France was that the Fr. Rev strengthened peasant property in land. while that improved the conditions of peasants, in some ways (given the removal of arbitrary events), its effect on the larger French economy was largely negative. the idea was that rural France was largely stagnant for sixty years.

there's been a revisionist account, that says these were actually relatively efficient – in terms of land productivity, it's argued. Vivek suggesting that this is a difficult case to make (food prices were quite high, real wages were low, capital formation was slow), and has to do with the resurgence of neo-classical economics.

on Prussia, the suggestion was that Prussian agriculture grew faster after reforms in 1806, 1811 than it did before—but not as fast as it did in UK or in USA. both because of low wages, and because –while farms were relatively large—they weren't large enough.

the English revolution built an efficient, extractive State – but this wouldn't have made much of a difference, had there not been underlying structural revolution. in fact, England has escaped the Malthusian trap by 1640.

the long-term consequences of the early centralization/organization of English landlords is important to explaining a lot of English history.

the Netherlands is politically weaker – why? it's rate of economic growth is not keeping up with England. and it's not able to get the most political bang out of economic buck, which has to do with its State structure (an effectively centralized State, and a political settlement between the Crown and the landed nobility). the English nobility is much more invested in the English State.

what 1688 does is facilitate State-building (a fiscal-military State). it's less clear how useful it is for accumulation. the Marxist presumption was that 1640 brought in capitalism; that's clearly not true. it's partly true that it facilitates capitalism. it's clear that it's major effect is on the extraction of revenues, which is indispensable to the creation of the British empire.

Perry Anderson's argument is that the reason you get capitalism in W. Europe is the 'availability of a certain legal resource', which is already in place – had it not been in place, you would not have had capitalism (Roman law). because of this, the absolutist State sanctifies private property. (the absolutist State, in short, was a transitional form which facilitated the rise of capitalism).

Why is this bogus? first of all, you don't get capitalism where you have absolutism; there was no absolutism in England; secondly, if they hadn't had the legal apparatus, they would have invented it (you don't have a legal sanction for enclosures).

British railway-building overseas begins in the post-1850 era, mainly.

Am. Civil War not driven by drive to centralize; WWI marks the beginning of American centralization.

there is a limit to how much primary-producers can get from demand from industrial countries, because of Ingel's Law (limit to how much consumers in industrial countries will want, of primary goods)