WORKSHOP: ALTERNATIVE ECONOMIC MODELS FOR RICH COUNTRIES AND THE GLOBAL SOUTH

Berlin, Date: TBA

Concept note

As Leo Tolstoy claimed in Anna Karenina, “happy families are all alike; every unhappy

family is unhappy in its own way”. This wisdom, however, can hardly be applied to the

development success of countries: it appears that success stories in development and

transition are all very different.

Contradictory statements about the reasons for economic success abound: economic

liberalisation and free trade are said to be the foundations of rapid growth in some

countries, whereas successes of other countries are credited to industrial policy and

protectionism; foreign direct investment, which is normally considered a factor

contributing to growth, played no significant role in the developmental success of Japan,

South Korea, and pre-1990s China. The privatisation of state enterprises, foreign aid, free

trade, liberalisation of the financial system, and democratic political institutions are all

factors, to name just a few, which are usually believed to be pre-requisites for successful

development, but it is easy to point out success stories not associated with these factors.

In the 1970s, the breath-taking economic success of Japan, which had transformed itself

into a developed country in only two post-war decades, was explained by the ‘Japan

incorporated’ structure of the economy, involving special relations: (a) between the

government and companies, led by Japan’s Ministry of International Trade and Industry

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(MITI); (b) between banks and non-financial companies, known as the bank-based

financial system; (c) between companies and workers, known as lifetime employment.

After the stagnation of the 1990s, and especially after the 1997 Asian financial crisis that

affected Japan as well, these same factors were largely labelled clear manifestations of

‘crony capitalism’ and held responsible for the stagnation.

Furthermore, during the recent Great Recession of 2008-09, dominant views on economic

development changed again, coming full circle. The US resorted to measures previously

considered inflationary and even socialist, including the nationalisation of banks, the

expansion of the fiscal deficit and the expansion of the money supply.

ALTERNATIVE MODELS IN DEVELOPED COUNTRIES

As we approach the third decade of the 21st century, more hope than ever rests on the

Dialogue of Civilizations idea, which is an intellectual and practical response to the ‘clash of

civilisations’ theory proposed by Samuel Huntington a quarter of a century ago.

On the one hand, the proliferation of the digital economy and advances in globalisation are

making countries more and more interdependent and forging the whole world into a single

unified economy and social system.

The economic upturn after the Great Recession of 2008-09 has continued for over 10 years and

is one of the longest economic booms in the history of the world economy; unemployment

rates are at historic lows, business is enjoying favourable conditions; profit rates are high due to

low wages, interest rates, and resource prices.

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Many developing countries, mostly in East Asia, but not only there, are successfully catching up

with developed Western countries. Living standards across the world as a whole – economic

well-being, life expectancy, and educational levels – are, on average, higher than ever. Despite

ongoing regional and ethnic conflicts, casualties of war as a percentage of total population are

lower in the 21st century than in any other time in recorded human history.

And yet, there are some worrying trends that could undermine prospects for global prosperity

and peace. First and foremost among them is the increase in income inequalities within major

economies: the gap between the rich and the poor has been growing since the early 1980s in

the US, in most European countries, and in many countries of the Global South. It is

approaching the historical highs of the beginning of the 20th century. This trend represents

exactly the opposite of the idea of ‘inclusive development’ that is promoted by the UN and

other international organisations.

The rise in income inequalities within major countries since the 1980s doesn’t only pose a

threat to social stability, but also to globalisation. The continuation of these trends could result

in two outcomes. First, there may be social upheavals in some countries, where social tensions

due to growing inequalities will become unbearable and produce social turmoil. Second, the

rise of income and wealth inequalities means that there are groups of people that are not

gaining from globalisation; this creates fertile ground for the rise of nationalism and ethno-

populism. When globalisation is properly managed, it is good for growth and income

distribution and does not lead to nationalism. But if it is accompanied by a decline in real

incomes for large groups of people, nationalist political forces gain additional grounds to

instigate anti-globalisation and isolationist feelings.

In turn, the rise of nationalism may lead to conflicts, if not wars, between countries, with a

collapse of international trade and capital flows, like in the 1930s. Once again, the world could

then go down the familiar 20th-century historical track and there could be a pause or even a

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reversal of globalisation, like during the Great Depression, when the outburst of protectionism

led to the decline of the international trade and capital movements. This is a worst-case

scenario: the world descending into social and national conflicts.

To prevent this worst-case scenario from materialising, new ideas need to emerge from open,

equal, and cooperative exchange. Is there a chance of reforming global capitalism, so as to

make economic and social development inclusive and to give globalisation a human face? Or is

capitalism so incapable of reform that it needs to be replaced with a more advanced social

system?

Economics is a social science, and hence, interests of particular social groups matter a great

deal. If social forces, especially those that control the media and/or the government, can

benefit from particular policies even though these policies are harmful to other social groups

and are not socially optimal, we might expect these policies to be presented and promoted as

the best and most efficient.

There is a very important notion of Pareto-optimality in economics, defined as the best of all

possible equilibriums, whereby the wellbeing of any single individual cannot be improved

without the deterioration of the wellbeing of another individual. Public choice theory offers

explanations as to why, in democracies with free media, decisions can be sub-optimal and

analysis of what kind of political institutions and rules are required to ensure optimality. But it is

the discipline of political economy that can answer the question of why these rules and

institutions are not adopted.

ALTERNATIVE MODELS IN DEVELOPING COUNTRIES

In 1960, Rosentein-Rodan, widely regarded as the founder of the big push theory,

favoured India, Burma, Argentina, and Hong Kong to achieve 3% annual growth per capita

for a 5-year period. India, Burma, and Argentina all achieved about 1.5% growth, whereas

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Hong Kong did much better. Chile, Egypt, Ghana, and Jordan were also reputed for their

unusually good growth prospects. But no one seems to have selected South Korea or

Taiwan.

Unfortunately, development thinking in the second half of the 20th century can hardly

be credited for ‘manufacturing’ development success stories. It is difficult, if not

impossible, to claim that either the early structuralist models of the big push, financing

gap and basic needs, or the later neoliberal ideas of the Washington Consensus that have

dominated the field since the 1980s, have provided crucial inputs to economic miracles in

East Asia, for instance. On the contrary, it appears that development ideas, whether

misinterpreted or not, contributed to a number of development failures: USSR and Latin

America in the 1960s-80s demonstrated the inadequacy of the import-substitution model,

which led to the debt crisis and the ‘lost decade’ of growth of the 1980s in Latin America

and dead end of the Soviet economic model in the 1970s-80s. In contrast, every region of

the developing world that became experimental ground for Washington Consensus-type

theories, from Latin America to Sub-Saharan Africa to the former Soviet Union and

Eastern Europe, revealed the flaws of neoliberal doctrine by experiencing a slowdown or

even a recession in the 1980s-90s.

To reiterate, neither structuralists nor neo-classical developmental theorists can claim

credit for even one case of an economic miracle. Big push and import-substitution models,

as well as the economic liberalisation theories that inspired economic policies in different

countries and different periods, never led to outcomes that today could be characterised

as economic, much less social, success.

Neither the policies of multilateral institutions nor dominant development theories can be

held responsible for engineering development successes, let alone economic miracles.

Japan, Hong Kong, Taiwan, Singapore, South Korea, Southeast Asia, and China achieved

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high growth rates without much advice or credits from the IMF and the World Bank, and

the in cases of Hong Kong, Taiwan, and China, without being members of GATT/WTO for a

long time.

Economic miracles were manufactured in East Asia without much reliance on

development thinking or theoretical background but simply through the

experimentations of strong-hand politicians. The 1993 World Bank paper, ‘East Asian

Miracle’ admitted that non-selective industrial policy aimed at providing better a business

environment – through education, infrastructure, and coordination – can promote

growth, but the issue is still controversial. Structuralists claim that industrial policy in East

Asia was much more than creating a better business environment and that it actually

involved picking winners, whereas neoliberals believe that liberalisation and deregulation

should be largely credited for the success.

It is said that failure is always an orphan, whereas success has many parents. No wonder

that both neo-classical and structuralist economists claim that East Asian success stories

prove what they were saying all along, but it is obvious that both schools of thought

cannot be right at the same time.

Why has a gap emerged between development thinking and development practice? Why

were development successes engineered without development theories, whereas

development theorists failed to learn from real successes and failures in the Global South?

It appears that development thinking in the post-war period went through a full

evolutionary cycle – from the dirigiste theories of the big push, the financing gap, and

import-substituting industrialisation (ISI) of the 1950-70s to the neoliberal deregulation

wisdom of the Washington Consensus (1980-90s), to the understanding that catch-up

development does not happen by itself in a free market environment. Yet over the last

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two decades, there has still been a lack of understanding as to what particular kind of

government intervention is needed to manufacture fast growth.

The confusion in development thinking of the past decade may be a starting point for the

formation of a new paradigm. There is an emerging understanding that without

mobilisation of domestic savings and industrial policies there may be no successful catch-

up development.

The rise of China, if it continues, could be a turning point for development economics

because for the first time in history, successful economic development on a major scale

has been based on an indigenous, non-Western economic model. Because the Chinese

growth model has been so successful in ensuring catch-up development, there is no

surprise that it has become extremely appealing in the developing world. The

attractiveness of the Chinese model of economic growth today could be compared with

the popularity of the Soviet model of catch-up development in the ‘third world’ in the

1960s. Even though the Soviet model collapsed, the Chinese model became the logical

and natural heir of the Soviet model. China no longer has a centrally planned economy,

but it is by no means the model of a liberalised market economy that is recommended by

the advocates of the Washington Consensus and even the post-Washington Consensus.

This general principle – that good policies are context-dependent and that there is no

universal set of policy prescriptions for all countries at all stages of development – is

definitely shared by most development economists. But when it comes to particular

policies, there is no consensus. The future of development economics may be a theory

explaining why at particular stages of development (depending on per capita GDP,

institutional capacity, human capital, resource abundance, etc.), one set of policies (tariff

protectionism, accumulation of reserves, control over capital flows, nationalisation of

resource enterprises – to name a few areas) is superior to another. The art of the

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policymaker is to switch the gears at the appropriate time in order to avoid the

development trap. The art of the development theorist is to fill the cells of ‘periodic table

of economic policies’ at different stages of development.

An emerging theory of stages of development could hopefully put different pieces of

knowledge together and reveal the interaction of various ingredients of growth. A successful

export-oriented growth model, like the East Asian tigers, seems to include, but is not limited to:

Building strong state institutions capable of delivering public goods (law and order,

education, infrastructure, healthcare) needed for development;

Mobilisation of domestic savings for increased investment;

Gradual market reforms;

Export-oriented industrial policy, including tools like tariff protectionism and

subsidies;

Appropriate macroeconomic policy – not only in the traditional sense (prudent, but

not excessively restrictive fiscal and monetary policy), but also exchange-rate policy

that undervalues the exchange rate via rapid accumulation of foreign exchange

reserves.

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