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Gianni Vaggi

DevelopmentThe Re-Balancing of Economic Powers

- Presents a recent history of development theories and debates from 1950 to the present

- Presents a theoretical framework to discuss different issues related to growth, multifaceted development and power structures

- Stresses the role of economic powers and structures, paying particular attention to the issue of financialization

- Argues that development is a dialectic relationship between people's empowerment and the existing social and economic structures

This book provides a brief history of the notion of development and related policies. Readers will find an overview of the main development notions and debates from 1950 to the 2015 Sustainable Development Goals. The author argues that sustainable development is equal to empowerment within a specific historical setting; development is a dialectic relationship between people's empowerment and the existing social and economic structures. The book examines some well-known growth theories from Harrod in 1939 to contemporary debates views about the role of the state and the market. Some major structural changes are also examined from economic growth in Asia to international finance: the author contends that contemporary issues on development can be better understood with the help of the founding fathers of economics, from the Mercantilist era to Marx. They help to understand the difficult relationship between development and market forces within different models of social and economic reproduction. The author contends that the main development challenge is that of building a global partnership in a system with enormous differences in economic powers and offers some examples of how to re-balance the existing economic powers particularly in trade and finance.

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Development

The Re-Balancing of Economic Powers

Gianni Vaggi

Pages: XV, 172.

Palgrave Macmillan, 2018.

Basingstoke.

https://www.palgrave.com/it/book/9783319548784

DOI: 10.1007/978-3-319-54879-1

eBook ISBN978-3-319-54879-1

Dedication

This book is dedicated to my wife Franca, for her continuous support and patience.

The book has been written for my students from the courses in Economics of Cooperation and

Development at the Department of Economics and Management and in the alike Master program at

the University of Pavia. I have had the privilege of teaching in similar Master’s programs in

Colombia, Palestine, Kenya, and Nepal.

Sharing the classroom experience with the students is a professional and human gift.

Development is about the future and the future is theirs.

I want to thank Marta Marson, who has greatly helped me in improving the book. An anonymous

reviewer provided very useful suggestion.

Table of contents

Introduction

Chapter 1. In the Beginning There Was Economic Growth

1.1 Harrod: when the economic cycle becomes a growth theory

1.2 ’Trickle down’ growth and convergence. The neo-classical theory of

economic growth

1.2.1 Equilibrium growth

1.2.2. Convergence

1.2.3 The “steady state” and the technical progress puzzle

1.3 Off the main track: dualistic economies and technical change

1.3.1 Lewis: the dualistic structure and surplus labour

1.3.2 Kaldor and technical progress

1.3.3. Beyond economic growth: basic needs and employment

1.4 The structures of capitalist economies and the international division of labour

1.4.1 The structuralist approach in Latin America

1.4.2 Gunnar Myrdal: circular cumulative causation

1.4.3 The Marxian approach and the international division of labour

1.5 Market efficiency and rational agents

Chapter 2. Towards a Broader Definition of Development

2.1 Human Development and the Millennium Development Goals

2.1.1 The Bruntland Report, 1987

2.1.2 The Human Development Report, 1990

2.1.3 The Millennium Development Goals, 2000

2.2 Poverty

2.3 Beyond GDP

2.4 From the Millennium Goals to Sustainable Goals

2.4.1 The road to the SDGs

2.4.2 Old and new goals

2.4.3 On ends and means

2.5 Changing views on international cooperation

2.5.1 The Washington Consensus and conditionality

2.5.2 From aid effectiveness to global partnership

2.6 Bridging empowerment and ownership

Chapter 3. The Economy Strikes Back: Convergence, Divergence and Imbalances

3.1 Rising Asia

3.2 International financial markets

3.2.1 The bright and dark sides of international finance

3.2.2 Financial markets and developing countries

3.2.3 The temptation of cheap money

3.3 Increasing inequality

3.4 Secular stagnation. Three paradoxes about savings

3.5 Imbalances

3.6 Discouragement

Chapter 4. The Founding Fathers and the Long-Run Visions

4.1 The age of merchant capital. Trade and power

4.2 Food surplus and reproduction

4.2.1 Physical surplus

4.2.2 Reproduction and the productivity of agriculture

4.3 The Enlightenment: justice and prosperity

4.4 Adam Smith and the productivity of labour

4.4.1 A new principle of wealth

4.4.2 Investments, the spirit of monopoly and imbalances

4.4.3 The labouring poor

4.4.4 Natural progress and developing countries

4.5 Ricardo, free trade and the falling profit rate

4.6 Marx and the laws of motion of the capitalist mode of production

4.6.1 The modes of production

4.6.2 Capital accumulation and crises

4.7 Conclusions

Chapter 5. Sustainable Reproduction, Use and Exchange values

5.1 Sustainable reproduction

5.1.1 Value in use and value in exchange

5.1.2. Re-production cycles and sustainability

5.1.3 Overcapacity and secular stagnation

5.2 Achieving use values through exchange values

5.2.1 Going micro

5.2.2 Institutions for markets

5.3 When Structures Should Change

5.3.1 The state and economic growth

5.3.2 Beyond economic development

5.4 Neo-Mercantilism and its features

5.5 Financial Mercantilism

5.5.1 The Mercantilist reproduction cycle

5.2 The financial reproduction cycle

Chapter 6. Making the Global Partnership Work

6.1 ‘To the lighthouse’

6.2 Last but not least

6.2.1 When means are more important than ends

6.2.2 Country ownership

6.3 Re-balancing: reducing distances

6.4 Sweet and sour trade

6.5 Financing for development

6.5.1. Different types of financing for development, FfD

6.5.2. Development bonds

6.5.3. Separate markets for development finance

6.6 The road to dignity

6.7 Conclusions

References

Index

Introduction

The aim

Too long for a paper, too short for a book, read it as a pamphlet. This is not a textbook, as it is not

exhaustive and cannot go deeply into specific topics. End notes and references might help, but

perhaps you should read it as a pamphlet with two main propositions.

First, development is a process involving the empowerment of people and countries, which can be

either supported or constrained by the social and economic structures existing around them.

Second, the re-balancing of the economic powers of the different stakeholders is a necessary

condition for a decent development process.

Today we are in a very convenient position because there is a wide-ranging consensus that

sustainable development should be interpreted as a process of empowerment. Since 2015, we have

had 17 Sustainable Development Goals, SDGs, with three dimensions of sustainability: the social,

environmental the economic dimensions.

This book contends that a process of development must take into consideration the social and

economic structures which represent the landscape in which empowerment should be achieved.

Development is a dialectic process between people’s empowerment and countries’ ownership and

the surrounding social and economic structures. It is urgent that we put the view of development as

freedom into a broader perspective that includes social and economic forces, especially considering

some of the major structural changes that have taken place in the international economic setting

since the ’80s.

The holistic view of sustainable development is replete with many different goals, but in the coming

years development will concern decisions about technology, trade and finance, three main themes

of Sustainable Development Goal 17. Who is going to decide, and based on what criteria?

Development as empowerment requires the re-balancing of economic powers regarding those

choices. Re-balancing is not the automatic outcome of a market economy: policy action is needed.

The re-balancing of economic and negotiating powers is the major challenge that development

cooperation will face in the coming decades, particularly in the areas of trade and finance.

The content

In Chapter 1 we see that in the ’40s and ’50s development was regarded as an increase in income

per capita. From the very beginning, development economists were not a unanimous group but

broadly divided according to two visions: a mainstream one and a critical one. The mainstream

approach emphasized convergence in income per capita between rich and poor countries and the

‘catching up’ by developing countries; moreover, economic growth was to spread to all people of

the country: this is the ‘trickle down’ type of growth.

The heterodox group included authors who emphasised the structural change/dualistic view of the

economy: economists in the Keynesian tradition and the neo-Marxian writers. These economists

stressed the role of social and economic structures and of the international division of labour.

Chapter 2 describes how the notions of development and international cooperation have evolved

from being equated with economic growth, development has expanded to include dimensions such

as health, education, natural resources, good governance, and human rights.. Three major steps are

discussed: the 1987 Brundtland Report, the first Human Development Report of 1990, and the 2000

Millennium Goals (MDGs). Health, education, environment and gender are important components

of the notion of human development.

The 2012 Rio+20 Conference led to the Sustainable Development Goals, SDGs, with the

environmental dimension forcefully entering the picture. This section examines the major novelties

of the SDGs with respect to the MDGs, incorporating some thoughts on the issue of sustainability.

Sections 2.5 and 2.6 examine changes in the approach to international cooperation, which has

moved from the donors-beneficiaries relationship and from the Washington Consensus

conditionalities to a broader view of global partnership. Empowerment and ownership are two

concepts which highlight the changing views on development cooperation.

Chapter 3 discusses two major changes which have characterized the international economic

landscape since the late ’70s. First, the spectacular Asian growth, China in particular, which is

deeply changing the international economy and development cooperation. Many Asian countries

are now ‘new donors’, and poverty reduction, Millennium Goal n. 1, has been achieved thanks to

fast growth in China. Should the Asian growth be a model for all low income countries? The second

major transformation concerns finance: in 1980, financial markets were very small; now they are

almost 10 times larger than the World GDP. A large stock of finance and large number of new

financial tools represent good news considering all the means needed for sustainable development.

However, financial crises have become a widespread and recurrent phenomenon, and not only in

developing countries: from Mexico’s default on its foreign debt in 1982 to the 2007 sub-prime crisis

in the United States.

Both changes are structural in nature: they are here to stay.

There are two more changes which characterize the present economic landscape. The first concerns

the worsening income distribution in high income countries and in many emerging ones. Income

and wealth are now highly concentrated in the top 10% and top 1% of the population. The second

change is related to the slowdown in economic growth in high income countries since the 2007

financial crisis: this is the issue of secular stagnation (Baldwin and Teulings 2014). The world

economy is also characterized by two ‘imbalances’ with very few signs of a tendency to redress

them; they concern trade relations and migrations.

The ‘facts’ highlighted in Chapter 3 remind us that economic forces can decisively affect the

conditions in which development should take place. What about development as empowerment and

freedom? What is left of the holistic view of development? A pause and some reflections might

help, and for that we look for assistance from some ‘Founding Fathers’ of economic thought.

Chapter 4 provides a sketchy view of some leading thinkers from the Mercantilist period to Marx.

The chapter follows a chronological order, but many themes crisscross development debates today:

human rights, the role of trade, natural resources and basic needs, labour productivity and

employment, capital accumulation and technology, self-interest and profitability, and crises.

Trade is regarded as a source of wealth by the Mercantilists, but it is considered as a possible reason

for wars during the Enlightenment. Natural resources and labour occupy centre stage with Petty and

Quesnay, who analyse the conditions for the reproduction of society and for whom a surplus of food

production is at the core of economic potential. It is not just a question of economic growth, the

issue of human rights and of governance in a non-hierarchical society dates to the Enlightenment

and to Montesquieu’s separation of powers, based on checks and balances.

In 1776, Smith described how the division of labour increases labour productivity and how the

accumulation of capital leads to better technology, a sort of embodied technical progress, with the

rate of profit becoming the guide to investment decisions. Smith and Ricardo attacked Mercantilist

doctrines, but their support of free trade is much more articulated than what appears in the

mainstream interpretation. Marx provided an analysis of the crises of a capitalist economy while

also examining the interplay between the economic forces and the other aspects of society, what he

termed the ‘superstructure’. The classical economists highlighted the difference between use values

and exchange values in the process of economic and social reproduction.

Chapter 5 revisits the sustainable development goals in the light of sustainable reproduction. The

SDGs largely focus on end goals, which can be regarded as ‘strategic use values’ to be pursued

inside economic and social structures which are dominated by ‘exchange values’. Section 5.1

examines the issue of sustainability in different types of re-production cycles; the universal,

capitalistic, sustainable and financial reproduction cycles combine use and exchange values in

different ways. Secular stagnation is re-examined in light of the Marxian analysis of crises.

Sections 5.2 and 5.3 present different approaches on how to achieve sustainable development within

the capitalist economy. These range from Randomized Control Trials, RCTs, which focus on micro

and localized experiments, to the analysis of specific incentives and market games. Another

approach recognizes a fundamental role of institutions as possible mediators between the micro and

the macro levels. Neo-structuralist and neo-Keynesian authors emphasize the macro-constraints to

growth facing developing countries. Views related to de-growth and to the circular economy focus

on the limitation of natural resources and favour a different system of production and consumption

in which sustainability requires the abandonment of the idea of economic growth.

The two final sections highlight the essential features of neo-Mercantilism, demonstrating that we

have entered a period of Financial Mercantilism whose reproduction cycle moves directly from

money to more money and is completely dominated by the realm of exchange value. Chapter 6

concludes. There is a widespread consensus on sustainable development as a process of

empowerment through freedom and ownership, together with the 17 SDGs and the 3 dimensions of

sustainability. The main challenge in the coming years will be on how to make global partnership

work within social and economic structures characterized by deep-rooted economic and power

imbalances. The path towards sustainable development is more important than its definition.

Sections 6.2 and 6.3 highlight some conditions for global partnership, the topic of SDG 17.

Development can only be achieved through negotiations and dialogue, and it must be based on

fairness. However, different stakeholders have very unequal political and economic powers. The re-

balancing of the negotiating powers among the different partners is the leading principle moving

along the path toward global partnership. This partnership involves some critical issues: finance,

technology, trade, and capacity building. Which decisions will be taken and how they are going to

impact the future of sustainable development. Re-balancing means that developing countries, Low

Income ones in particular, must have a much stronger voice than in the past and they need more

policy space. Sections 6.4 and 6.5 provide some examples of re-balancing in the case of trade and

finance. Improvements in the institutional and administrative capacity of developing countries,

which are the necessary component of an effective development dialogue. Section 6.6 focuses on

development as dignity.

The story of development has started with economic growth, to move on to empowerment,

ownership and freedom and now it ends up with negotiations and re-balancing. Not a very attractive

conclusion, but a very realistic one if we want to progress with global partnership for sustainable

development.