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Economic Development for Transformative Structural Change (pt 3/4)

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None of the countries that actually developed did it without planning & social policies are as integral to strategies of economic development as purely economic policies says C. P. Chandrasekhar at the book launch for The Handbook of Alternative Theories of Economic Development

Lynn Fries: Welcome the The Real News Network. I’m Lynn Fries in Geneva. In this series, we report on talks centered around changing course in economic development. Specifically comments made by panelists here in Geneva at a recent book launch for the Handbook of Alternative Theories of Economic Development, the handbook represents a landmark in the fleld of economic development. This third segment features clips of two key players from the field who share their respective insights into the battle for the kind of inclusive sustainable development presented in the book. We now go back to the UN Library book event moderated by book co-editor, Jayati Ghosh of Jawaharlal Nehru University.

Jayati Ghosh: What you do matters. So the critical thing really is how do you change what you do and how you do it? How do you get that structural transformation? One of the concerns is, of course, that there are various types of constraints to that kind of structural transformation. C. P. Chandrasekhar, who is the Dean of Social Sciences in my university in Delhi, Jawaharlal Nehru University, he has a chapter in this book, which is on planning. It’s interesting because planning has become a bad word, right, in so many places. But, in fact, none of the countries that actually developed did it without some kind of planning. Could I perhaps ask you about these constraint and how planning still matters?

C. P. Chandrasekhar: Today partly because, of course, the collapse of the Soviet Union, the fact that planning came to be identified with highly bureaucratized societies with a central planner determining without an ’íterative’ process how policies are gonna be devised and implemented, it appears that it’s something which has lost its relevance really cannot return. But what is often forgotten in this kind of a discussion is that in countries which were actually market economies, which chose systems of organization in which private decision-making was central to the dynamics of this system, that in these countries there was for a long period of time immediately after the experience of the Great Depression, which seemed to bring sort of starkly upfront the fact that capitalism is a demand constrained system and not a supply constrained system. And that what you need is Keynesian type of demand management policies. And by going through the period of the great American celebration, the Golden Age, in which you had public expenditure, you had welfare state, which was an automatic stabilizer, the whole Idea was that capitalism had resolved its problem cycles because of the fact that it had discovered the ability of the state to intervene to manage demand. That at that point of time, there was from across the ideological spectrum, as it were, a set of arguments, which particularly came up in the context of development economics, the problem of dealing with underdevelopment, that actually you can have significant supply constraints, which need to be relaxed or done away with in market economies. And if you don’t do that, in fact in India we had a very famous economist in the 50s, V.K.R.V. Rao who said Keynesianism is not relevant to India, Because there is so many supply constraints that if the government starts spending in order to be able to address demand constraints you’d immediately get inflation because you’d run up against a supply constraint in agriculture, in infrastructure, etc.

So you if look at it, we’ve had a range of people. You had Arthur Lewis, you had Tinbergen, you had Rosentein-Rodan. And of course you had people like Maurice Dob. Kalec ki came from a more radical tradition. There were a range of people at that point of time who actually spoke of the need for some kind of development planning. And here the idea of intervention was not that you needed intervention in order to deal with microeconomic market failures which come because of the fact that you have public goods, absent markets, externalities of certain kinds etc, but really you needed it in order to deal with grand macro-scale market failures.

And I think there were two kinds of issues, which are highlighted. One, of course, that there existed a set of sectors which had economy-wide externalities, for example, infrastructure, where you needed such large lumpy capital investment. And these were very long gestation projects, very risky, rates of return were not guaranteed. And therefore if you left it to the private sector to undertake these investments, that’s not going to occur. But on the other hand, the absence of these kinds of investments, the absence of roads, highways, boats, communication, etc, would actually hold back development so that unless you resolve that kind of a supply constraint, you’re not going to be in a situation where you would be able to launch a development even within a market framework. And therefore, what you need is, in some sense, intervention by the state, which is planned intervention, in order to be able to insure the emergence and growth of these sectors. Which are crucial from the point of view of addressing the fact that there are sectors which have economy-wide externalities and must be put in place as a prerequisite for development.

And a second feature of that discussion in development planning was essentially the idea that you need a certain degree of investment coordination. You really cannot have a situation in which you have atomistic decision makers, each of whom does not know what the other is going to do. Who then make guesstimates of what is going to be the profile of costs and prices in order to generate some profile of profits and then decide whether to invest or not. You actually need a certain degree of investment coordination. You needed this coordination, it was argued, in particular to address two kinds of constraints. One was the wage goods constraints. These were countries in which you had a pretty backward agriculture, which is actually the sink for much of the population in terms of finding employment but there weren’t obviously enough jobs to go. So you had unemployment, underemployment, disguised unemployment and all of these issues which were dealt with in development literature. And the idea was, can we think of ways in which we can have institutional change, like land reforms which people hardly speak of today even though the most successfully developing countries had land reforms either directly or under occupation, like South Korea. And the other of course was the need to actually ensure that there is increases in productivity in the agricultural sector. With gains being distributed in the appropriate way in order to generate a domestic market as well as to ensure the availability of wage goods as development occurred so that inflation is kept at bay.

The other constraint, which investment coordination is expected to address was the capital goods constraint. That these were economies which because they didn’t see industrialization, particularly those which were under colonial rule for a long period of time, did not have the capital goods to be able to employ their labor force in full. And they were faced with constraints of transformation through trade. So that they couldn’t import these capital goods in adequate measures, so you had to find ways in which domestically you generate investment in order to be able to relax the capital goods constraint. And this is what the Feldman-Mahalanobis model was about.

The one last question, of course, which arises is that – is this all because of the fact that we made the assumption that there weren’t really possibilities of transformation through trade? That you couldn’t export some set of things in order to be able to import whatever you wanted – wage goods, capital goods. So that these notions of supply side constraints was based on an underestimation of the role of trade.

The difficulty with this, of course, is that you did have reason to be pessimistic about the possibilities of transformation through trade; terms of trade effects, the fact that you were primarily producing economies etc. But more importantly, even if you look at the economies which manage to export, you actually find two kinds of tendencies. One, you have the successful South Korean case where you had huge investment coordination because of the seeing power of the state in order to identify the most dynamic area into which you need to diversify in order to be able to export. And, on the other hand, look at the oil exporters, which actually could get large amounts of foreign exchange but because they didn’t have investment coordination, didn’t diversify their economies, and remained completely oil dependent so that when oil prices begin to fall they are faced with a crisis.

So investment coordination is quite crucial in many senses. And need not occur only in countries in which you have complete social ownership and a centralized bureaucracy managing the economy. You need it even in market economies. So long as you come to realize markets are characterized not merely by micro-failures but grand macro-failures, which need to be addressed.

Jayati Ghosh: One of the themes that has been taken up a lot, which is also very much in this book, is the notion that what’s happening in society is not separate from the economy. And that social policies are as integral to a strategy of economic development as purely economic policies. This is something that in fact Katja Hujo from UNRISD (UN Research Institute for Social Development) also done a lot of work on. Can I ask you a little bit about this Katja?

Katja Hujo: UNRISD was founded in ’63 based on the conviction of two famous economists, Gunnar Myrdal and Jan Tinbergen, that the social dimensions of development required more attention .and also better analysis by economists and better social indicators for measurement.

One of the key concerns the handbook addresses is that the current mainstream economics is almost exclusively concerned with poverty alleviation when they talk about economic development. This has led to an understanding of social policy as a poverty reduction instrument, which is problematic as I will try to explain.

As Chandru already mentioned Keynes understood the importance of welfare policies and of wage bargaining systems because he was not assuming an ideal world of full employment and perfect markets. So social transfers financed through progressive taxation were crucial instruments for social development and for macro-economic stabilization in this framework. However, the neoclassical paradigm that has gained so much power over the last four decades has more problems actually to integrate social policies into their framework.

First of all, it’s because given the assumptions of perfect market information and full employment, there’s less need for social policy, from the first place. And second, the cost of state intervention in terms of growth and efficiency are deemed substantial. However, from a development perspective, social policy is a lot more than residual approaches or palliative interventions. It’s a transformative policy instrument which has multiple functions and UNRISD has put that into a conceptual framework of transformative social policies. Which has a function for production in terms of creating and improving productivity through human capital, macro-economic stabilization and demand stabilization, redistribution, very important, but also reproduction in terms of distributing the burden of care within the economy and also of course the traditional role of protection against not only life cycle contingencies like old age or sickness or maternity, but also market risks. And these market risks are not seen as something that is an external shock. It’s really part of how our economy functions. And we are more in an equilibrium of underemployment and unemployment rather than employment situation.

Social policy has feature very much as a development instrument in many of the late industrializers such as Germany or the Nordic countries. It has also been very important in the so-called success stories like the East Asian Miracle or also with regard to the more advanced countries in Latin America. However, those social policies that were so important in East Asia have often been neglected and not really been seen as a crucial part of the success of these developmental states.

For example, also when you look at Latin American and when you look at the more advanced countries, these countries have been the pioneers in universalizing social services and introducing social security already more than 100 years ago. Targeted cash transfer problems and private pension plans cannot play these four complex roles in terms of production, reproduction, redistribution, and protection. They are just too small and basically not able to be used as an economic policy tool. They also do not provide sufficient social protection. We are calling for a more comprehensive understanding of social policy and an integrated perspective and to see, as Jayati mentioned, social policy and economic policy as something that needs to work in tandem. And this would also better reflect the spirit of the 2030 agenda which once more calls for an integrated approach and basically combining the different pillars of sustainable development – the economic, the social and the environmental pillar.

Lynn Fries: We are going to break and be back to report on Q&A in the next and final segment. Special thanks to the panelists and moderator of this discussion. And to the UN LIbrary as host of this Geneva book launch for The Handbook of Alternative Theories of Economic Development. And thank you for joining us on The Real News Network.