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Peripheral Visions of Economic Development
This book explores peripheral visions on economic development, both in the sense that it deals with specific issues of economic development and underdevelopment in countries at the periphery of the world economy, and in terms of its exploration of the economic thinking developed in those regions, particularly in Latin America. Bringing together an international group of historians of thought, economic historians and development economists from Latin America, Europe and other parts of the world, this volume is highly credited and is an excellent contribution to development studies. This book is divided into four parts. Following the introduction, Part I describes the evolution of core-periphery perspectives in key contributions by Raúl Prebisch, Oskar Lange, Albert Hirschman, Celso Furtado and Homero Cuevas. Part II discusses the links between unbalanced productive structures and external trade in peripheral countries. Part III contains chapters on critical episodes in the development of monetary and financial systems in Latin America during the nineteenth and twentieth centuries. Part IV deals with geographical and institutional aspects of path dependence in the governance of external trade and in the development of liberties, property rights and economic education in Europe, Latin America and Africa. Several chapters make use of hitherto unexplored archival material. Other chapters draw attention to important episodes or literatures that have largely gone unnoticed in the English-speaking world. Yet others combine conceptual innovations with work on new historical data and other sources hitherto not utilized in such contexts. This book is ideal for those who study and research development economics, history of economic thought and economic history, especially in Latin America. Mario Garcia-Molina is Professor of Economics at the Universidad Nacional de Colombia, Colombia. Hans-Michael Trautwein is Professor of International Economics at the University of Oldenburg, Germany.
Routledge studies in development economics
For a complete list of titles in this series, please visit www.routledge.com. 93 Business Regulation and Non-State Actors Whose standards? Whose development? Edited by Darryl Reed, Peter Utting and Ananya Mukherjee-Reed 94 Public Expenditures for Agricultural and Rural Development in Africa Edited by Tewodaj Mogues and Samuel Benin 95 The Global Economic Crisis and the Developing World Implications and prospects for recovery and growth Edited by Ashwini Deshpande and Keith Nurse 96 The Microfinance Impact Ranjula Bali Swain 97 Gendered Insecurities, Health and Development in Africa Edited by Howard Stein and Amal Hassan Fadlalla 98 Financial Cooperatives and Local Development Edited by Silvio Goglio and Yiorgos Alexopoulos
99 State–Business Relations and Economic Development in Africa and India Edited by Kunal Sen 100 Digital Interactions in Developing Countries An economic perspective Jeffrey James 101 Migration and Inequality Edited by Tanja Bastia 102 Financing Regional Growth and the Inter-American Development Bank The case of Argentina Ernesto Vivares 103 Globalization and Development Rethinking interventions and governance Edited by Arne Bigsten 104 Disasters and the Networked Economy J.M. Albala-Bertrand 105 Microfinance, Debt and Over-Indebtedness Juggling with money Edited by Isabelle Guérin, Solène Morvant-Roux and Magdalena Villarreal
106 The Universal Social Safety-Net and the Attack on World Poverty Pressing need, manageable cost, practical possibilities, favourable spillovers Anthony Clunies-Ross and Mozammel Huq 107 Youth and Employment in Sub-Saharan Africa Working but poor Edited by Hiroyuki Hino and Gustav Ranis 108 Financial Stability and Growth Perspectives on financial regulation and new developmentalism Edited by Luiz Carlos Bresser-Pereira, Jan Kregel and Leonardo Burlamaqui 109 A History of Development Economics Thought Challenges and counter-challenges Shahrukh Rafi Khan 110 Economic Complexity and Human Development How economic diversification and social networks affect human agency and welfare Dominik Hartmann 111 Building Businesses in Emerging and Developing Countries Challenges and opportunities Edited by Elie Chrysostome and Rick Molz 112 The Informal Economy in Developing Countries Edited by Jean-Pierre Cling, Stéphane Lagrée, Mireille Razafindrakoto and François Roubaud
113 African Industrial Development and European Union Cooperation Prospects for a reengineered partnership Francis A.S.T. Matambalya 114 Developmental Macroeconomics New developmentalism as a growth strategy Luiz Carlos Bresser-Pereira, José Luis Oreiro and Nelson Marconi 115 Industrial Innovation, Networks and Economic Development Informal information sharing in low-technology clusters in India Anant Kamath 116 Employment and Inclusive Development Rizwanul Islam and Iyanatul Islam 117 Growth and Institutions in African Development Edited by Augustin K. Fosu 118 Public Finance and Economic Growth in Developing Countries Lessons from Ethiopia’s reforms Stephen B. Peterson 119 Peripheral Visions of Economic Development New frontiers in development economics and the history of economic thought Edited by Mario Garcia-Molina and Hans-Michael Trautwein
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Peripheral Visions of Economic Development
New frontiers in development economics and the history of economic thought Edited by Mario Garcia-Molina and Hans-Michael Trautwein
First published 2016 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2016 selection and editorial matter, Mario Garcia-Molina and Hans-Michael Trautwein; individual chapters, the contributors The right of the editors to be identified as the author of the editorial matter, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Peripheral visions of economic development : new frontiers in development economics and the history of economic thought / edited by Mario Garcia-Molina and Hans-Michael Traut. pages cm 1. Economic development–Developing countries. 2. Economic history. 3. International cooperation. I. Garcia Molina, Mario, editor. II. Traut, Hans-Michael, editor. HC59.7.P456 2015 338.9–dc23 2015018320 ISBN: 978-1-138-90922-9 (hbk) ISBN: 978-1-315-69409-2 (ebk) Typeset in Times New Roman by Wearset Ltd, Boldon, Tyne and Wear
List of figures List of tables Notes on contributors
x xi xii 1
M ario G arcia - M olina and H ans - M ichael T rautwein
Core and periphery
2 Core and periphery in the early Cold War: a historical analysis of development theory
N at á lia B racarense
3 Anarchic accumulation, un-effective demand and institutional constraints: Oskar Lange’s critique of capitalist dynamics in the core and the periphery
R oberto L ampa
4 Development economics today: insights from Hirschman and Furtado
D avide G ualer z i and A lan C ibils
5 Classical thought from the periphery: Homero Cuevas on non-basic goods and the standard commodity M ario G arcia - M olina and J uli á n L ibreros
viii Contents Part II
Productive structures and external trade
6 Free trade and protectionism in primary export economies
P ier L uigi P orta
7 CEPAL and the balance of payments constraint in the 1950s
M auro B oianovs k y and R icardo S ol í s
8 The unbalanced productive structure: a reconstruction of Marcelo Diamand’s contributions to economic theory
A riel D vos k in and G erm á n david F eldman
9 A reinterpretation of the ‘unbalanced productive structures’
E duardo C respo and A ndr é s L a z z arini
Money and finance
10 Nineteenth century monetary utopias in Latin America: the influence of French liberalism on the Colombian free banking experiment
A ndr é s Álvare z
11 Distributive conflict and monetary institutions in peripheral economies: the Argentine experience with the Exchange Office of 1867
G erm á n david F eldman
12 The Gold-Exchange Standard in practice: banking devices and international monetary relations, 1890–1914
E ugenia D inivit z er
13 The BIS and the Latin American debt crisis of the 1980s
P iet C lement and I vo M aes
Geography and institutions
14 Trade and colonization: the development of economic thought about two types of transnational governance
H ans - M ichael T rautwein
Contents ix 15 Struggling for institutional change: merchant guilds, trans-imperial entangled policies and Spanish backwardness: Havana in Atlantic perspective, 1792
J es ú s B ohor q ue z
16 The teaching of political economy, circulation of ideas and economic performance: a review of the Colombian experience in the nineteenth century
C laudia M ilena P ico
17 Path dependence and interdependence in institutions: the Nigerian case
D avid F adiran and M are S arr
7.1 The lag of imports in the export cycle 9.1 Price elasticities of exports of a single commodity 9.2 Exports in a multi-sectoral economy 9.3 Unbalanced production structures, costs in hours worked 9.4 Unbalanced production structures, costs in international currency 11.1 Monetary aggregates 11.2 Number of strong pesos for each ounce of gold 11.3 Trade balance and reserve accumulation 11.4 Inflation and income distribution 13.1 Non-oil developing countries’ external debt, 1973–1982 13.2 Average real percentage interest rate on developing country floating-rate debt 13.3 G10 + commercial banks’ exposure to Mexico, 1978–1985 14.1 Heterarchical colonization under medieval trade governance 14.2 Hierarchical colonization under mercantilist trade governance 15.1 Actors, places and institutions 16.1 Real fiscal balance, 1841–1882 A17.1 Constructed institutional indicators A17.2 Subcomponents of civil and political liberties: voting rights and freedoms of assembly, association and expression A17.3 Subcomponents of civil and political liberties: balance of powers A17.4 Subcomponents of civil and political liberties: freedoms of movement, religion and academic activities A17.5 Subcomponents of non-freehold property rights: security, liability to execution and incidence of transmissibility A17.6 Subcomponents of non-freehold property rights: rights to possess, to manage, to use and to capital A17.7 Subcomponents of freehold property rights: security, liability to execution and incidence of transmissibility A17.8 Subcomponents of freehold property rights: rights to possess, to manage, to use and to capital
110 140 141 145 146 176 176 177 181 205 207 214 245 246 272 301 327 327 330 330 331 331 332 332
7.1 Number of circulatory periods required for imports to reach a specified percentage of the increase in exports 8.1 Unbalanced and balanced productive structures 11.1 Export tax collection in Argentina, 1861–1876 12.1 Composition of reported official reserves in 35 countries, end of 1913 13.1 Claims of G10 banks on some Latin American countries, 1976–1983 13.2 External debt of Mexico, 1978–1984 14.1 Conflict minimization and resolution in governance mechanisms 16.1 Revenue of the States of Colombia, 1873–1874 A16.1 Contrast between the questions formulated by the programs of economy in the nineteenth century and the concepts taught in the Colegio de Nuestra Señora del Rosario 17.1 Spearman output of correlation between institutional indicators 17.2 Path dependence/unit root test 17.3 Test for cointegration and interdependence between institutions 17.4 Error correction model output for interdependence between institutions A17.1 List of variables A17.2 Stationarity test for all variables A17.3 Stationarity test for subcomponents of CvPL
109 132 182 190 213 213 234 300 303 313 316 320 322 326 326 328
Andrés Álvarez is associate professor of economics at the University of los Andes in Bogotá, Colombia. His fields of interest are: history of economic thought, particularly of monetary theory and financial and monetary history. Jesús Bohorquez is a doctoral researcher in the department of history at the European University Institute at Fiesole/Florence, Italy. His fields of interest are: institutional economics, European empires in global history, political economy of the Enlightenment and history of capitalism. Mauro Boianovsky is professor of economics at the University of Brasília, Brazil. His fields of interest are: history of economic thought, particularly of macroeconomics, monetary theory and development economics. Natália Bracarense is assistant professor of economics at North Central College, USA. Her areas of interest are: history of economic thought, heterodox economic theory, development economics, and history of US–Latin American relations. Alan Cibils is professor of economics at the Universidad Nacional de General Sarmiento in Buenos Aires, Argentina, where he also chairs the Political Economy Department. His fields of interest are: theories of economic development, monetary theory and policy, and financial regulation and integration. Piet Clement is a historian and Head of the Information and Collaboration service at the Bank for International Settlements (BIS) in Basel, Switzerland. His publications and research focus on BIS and on the history of international financial cooperation, particularly during the post-war period. Eduardo Crespo is professor of economics at the Federal University of Rio de Janeiro, Brazil; he has previously taught at the Federal University of Fluminense, Brazil, and the Universidad de Buenos Aires and Universidad de Moreno, Argentina. His fields of interest are: international political economy, history of economic thought, macroeconomics, economic history and economic development.
Contributors xiii Eugenia Dinivitzer has a PhD from the Universities of Macerata and Paris VIII; she currently works at the Secretary of Economic Policy and Development Planning of the National Ministry of Economy and Finance, Argentina. Her fields of interest are: history of economic thought and monetary theory. Ariel Dvoskin is professor of microeconomics at the University of Buenos Aires, Argentina, and researcher at the National Scientific and Technical Research Council of Argentina (CONICET). His fields of interest are: the theory of value and distribution, capital theory, the theory of effective demand and the history of economic analysis. David Fadiran is a PhD candidate in the Department of Economics, at the University of Cape Town, South Africa. His fields of interest are: institutional economics, political economy, small and medium scale enterprises and development economics. Germán David Feldman is professor of advanced macroeconomics at the National University of General San Martín (MDE-UNSAM), Buenos Aires, Argentina. His fields of interest are: history of economic thought, Sraffian economics, and monetary theory and policy. Mario Garcia-Molina is professor of economics at the Universidad Nacional de Colombia and Universidad Externado de Colombia in Bogotá, Colombia. His fields of interest are: history of economic thought, health economics and decision making. Davide Gualerzi is associate professor of economics in the Department of Economic Sciences “Marco Fanno” at the University of Padua, Italy; he previously taught at the University of Pisa and was assistant professor of economics at Bard College, Annandale-On-Hudson, New York. His research interests are: macroeconomics, growth and structural change, development, and urban and regional studies. His latest book is The Coming of Age of Information Technologies and the Path of Transformational Growth (Routledge, 2010). Roberto Lampa is researcher at the CONICET (National Scientific and Technical Research Council) and professor of history of economic thought and methodology at the UNSAM (Universidad Nacional de San Martin), Buenos Aires, Argentina. His fields of interest are: the history of macroeconomics, economic crises and underdevelopment. Andrés Lazzarini is professor of economics at the National University of San Martín, Argentina, and researcher at the National Scientific and Technical Research Council (CONICET), Argentina; he holds a PhD in Economics from Roma Tre University, Italy and has been research fellow and lecturer at Pavia University, Italy, Universidad de Alicante, Spain, and Jawaharlal Nehru University, India. His fields of interest are: theories of value and distribution, history of economic analysis and economic development in historical perspective.
xiv Contributors Julián Libreros is associate professor of macroeconomics and history of economic thought at the Universidad Jorge Tadeo Lozano of Bogotá, Colombia. His fields of interest are: history of economic thought, monetary theory, Austrian business cycle theory and structural change. Ivo Maes is a senior advisor at the Research Department of the National Bank of Belgium and a professor, Robert Triffin Chair, at the University of Louvain. His fields of interest are: macroeconomic and monetary theory (especially central banking and the contributions of Sir John Hicks), Belgian economic thought (especially Robert Triffin and Alexandre Lamfalussy) and the relationship between economic thought and European integration. Claudia Milena Pico is associate professor of economic history at La Salle University of Bogotá, Colombia. Her fields of interest are: nineteenth century economic and social history, fiscal problems and political power in Latin America, and Colombian history of economic thought. Pier Luigi Porta is professor of economics at the University of Milano-Bicocca, Italy; he is also member of Christ’s College and a visiting fellow of Wolfson College at the University of Cambridge. His research interests are: history of economic thought (and in particular Classical economics), the Cambridge School in the post-war years, and the works of Piero Sraffa, Luigi Pasinetti and Amartya Sen. His research activity covers also recent developments in welfare economics, with special reference to happiness, civil economy and the capabilities approach. Mare Sarr is senior lecturer in economics at the University of Cape Town, South Africa; he received his PhD in economics from University College London. His research focuses broadly on institutions and natural resources. In particular his interests are: the institutional dimension of the resource curse, long run institutional change in Africa and leaders’ behaviour in autocratic regimes. Ricardo Solís is professor of economics at the Universidad Autonoma Metropolitana-Iztapalapa in Mexico City. His fields of interest are: history of economic thought, particularly of monetary theory, and economic history with a focus on central banking and financial development. Hans-Michael Trautwein is professor of international economics at the Carl von Ossietzky University of Oldenburg, Germany; he is also director of the Center for Transnational Studies (ZenTra) of the Universities of Bremen and Oldenburg. His fields of interest are: the evolution of macroeconomics, monetary integration and financial markets, and transnationalization and governance.
1 Introduction Mario Garcia-Molina and Hans-Michael Trautwein1
Peripheral vision is good at capturing movement and in situations with poor light. The metaphor refers to dynamics and to the recognition of patterns in a changing environment, often of great relevance for the system and its observer. Peripheral vision is also understood in the sense of not looking at the things normally and normatively in focus, but instead capturing dynamics at the periphery. The contributions to this book contain such peripheral vision(s), both because they deal with specific issues of economic development in countries at the periphery of the world economy, and because they reflect on economic thinking developed in those regions, particularly in Latin America. The intertwining of the experience of economic development and the thinking about it has a long history. Very early on during the European expansion, scholars and practical men alike presented ideas for the development of the newly discovered and conquered areas in the peripheries. Sixteenth century Spanish missionaries, such as Bartolomé de Las Casas and Vasco Quiroga in Central America or Diego de Borda in India, designed proposals for developing the new lands without exploiting the indigenous populations (Popescu 1986: ch. 6). In the nineteenth century, political independence in Latin America opened new possibilities for economic and social reformers. This was clearly seen by Jeremy Bentham, who tried to convince Simon Bolivar to let him draft the constitution and laws for the new republics (Crimmins 2011: 13–14). Throughout the century, parts of Latin America were turned into fields for social-liberal experiments, such as laissez faire in domestic and foreign trade, free banking and progressive income taxation. In the mid-twentieth century, CEPAL – the Spanish acronym for the United Nations Economic Commission for Latin America and the Caribbean – advanced to a leading role in theorizing about economic conditions and change in the Third World. The school of thought that emerged under the influence of Raúl Prebisch and Celso Furtado, came to work as a reference point for authors in other continents, such as Samir Amin in Africa, Michal Kalecki in Europe and Lance Taylor in North America. CEPAL was a trade mark for the structuralist approach to development economics. While growth theorists in Europe and North America developed highly stylized and reduced models, increasingly with a focus on the transition towards the steady state, economists in the structuralist
2 Mario Garcia-Molina and Hans-Michael Trautwein tradition put a much greater emphasis on the interaction of the structures of production, finance and distribution and on the role of geography and institutions. This made them more open for discussing growth and stagnation in the perspective of uneven development and underdevelopment. The structuralists in the CEPAL tradition are perhaps the best-known thinkers about the periphery from the periphery. Yet, there is a much greater variety in the peripheral visions of economic development to explore and rediscover, across many centuries and many regions, as core and periphery do not remain static but change in time. Countries such as Germany and Italy were once in the periphery. It could be argued that Marx’s chapter on the primitive accumulation of capital or List’s stage theory of development and infant-industry protection were actually based on peripheral perspectives. Which is not, of course, to say that peripheral vision is uniform, as can be seen in the wide range of theoretical positions from radical versions of CEPALism to Cattaneo’s liberal critique of List. As much as the peripheral views and ideas vary, their vantage points are in most cases located some distance from, if not in opposition to, what Albert Hirschman (strongly influenced by his Colombian experience) called the “monoeconomics and mutual-benefit claims of orthodox economics” (Hirschman 1981: 3–6). In other words, those who write about the periphery from the periphery are less inclined to subscribe to the doctrine that the explanation of all economic phenomena can be derived from a “number of simple, yet ‘powerful’ theorems of universal validity”. They are also less likely to hold the belief that “in a market economy, benefits flow to all participants, be they individuals or countries, from all voluntary acts of economic intercourse” (ibid.: 4). Based on the experience of great structural breaks through colonialization and other social turbulences, most of the peripheral visions share the view that history matters, and that economic development in a specific region or country is strongly path- dependent. It is recognized that small initial differences may turn into strong divergence and large gaps, not only between the centres of the world economy and its peripheries, but also between different countries and regions in the peripheries. “Core and Periphery Countries” and “Path Dependence in Economic Development” were the themes of the two consecutive conferences on which this volume is based. The first conference was held at the B.A.U.E.N. Hotel in Buenos Aires in November 2012, the second at EAFIT University in Medellín in November 2013. Both conferences were organized by the European Society for the History of Economic Thought (ESHET) in close collaboration with colleagues from Argentina and Colombia. They brought together historians of thought, economic historians and development economists from Latin America, Europe and other parts of the world. From the more than 100 papers presented at both conferences 16 have been selected for this volume. The book is divided in four parts. The first set of chapters describes the evolution of core-periphery perspectives in key contributions to development economics by Raúl Prebisch, Oscar Lange, Albert Hirschman, Celso Furtado and
Introduction 3 Homero Cuevas. The second set discusses relevant parts of the literature on the links between the productive structures and external trade in peripheral countries. The third set contains chapters on critical episodes in the development of monetary and financial systems in Latin America during the nineteenth and twentieth centuries. The fourth set deals with geographical and institutional aspects of path dependence in the governance of external trade and in the development of liberties, property rights and economic education in European, Latin American and African countries. Dealing with developments of development economics, Part I of the book starts with Chapter 2, contributed by Natália Bracarense. She uses archival material from UN-ECLAC (a.k.a. CEPAL) to present the consolidation of development theory as a subfield of economics in the political context of the Cold War after the Second World War. She sets the focus on the Argentinian economist Raúl Prebisch, who was the first director of research and executive secretary of CEPAL (1949–63), before taking the position of the first secretary-general of UNCTAD. By contrasting pre- and post-war periods, Bracarense shows that Prebisch’s views on the relations between the centres of the world economy and the periphery evolved in a way that was related to contemporaneous development policy. Prebisch moved from a standard structuralist position in the 1940s – one that stressed the binary opposition of centre and periphery when explaining business fluctuations – to a more nuanced and complex explanation in the 1960s, when the Cold War became more violent in Latin America. In the 1940s, Prebisch would castigate standard economic theory for its monoeconomics pretension, “its false sense of universality” in his words (as quoted in Chapter 2). But until the mid-1960s, Prebisch would still believe in the virtuous complementarity between centre and periphery. Bracarense shows that he at that time realized that he could not convince his audience about the compatibility between Latin American development and the interests of the core, based only on pure economic arguments. Thus Prebisch began to present the issue of development by industrialization also in terms of the challenge of preserving the free world. Yet the failure of the Alliance for Progress in the late 1960s and the beginning of the late violent phase of the Cold War, coinciding with the end of Prebisch’s political work at the United Nations, were accompanied by a pessimistic and radical turn in his ideas on core and periphery. Prebisch now stressed the role of unequal distribution and the need for state intervention in the periphery, policies that were, however, difficult to coordinate with the central countries. From a different starting point, these ideas were also important for the Polish economist Oskar Lange and his work on the dynamics of core and periphery. Chapter 3, written by Roberto Lampa, describes how Lange’s theory of economic dynamics evolved from his work on core capitalist economies in the 1930s, to his writings in the 1960s which were more focused on economic development of poorer countries. Lange started from the periphery of the discipline, as he adopted a Marxist point of view already in his 1935–38 papers. In these writings, Lange identified three key elements for the understanding of capitalist
4 Mario Garcia-Molina and Hans-Michael Trautwein dynamics: the accumulation of capital, the (un)effective level of demand and the constraining role of institutions. Lampa formalizes Lange’s arguments in a modified IS-LM model and shows how the combination of time lags with a non- linear investment curve would be enough to obtain limit cycles. The model thus turns out to be related to that of Kalecki (1939). As a result of his experience as economic advisor to Iran, India, Sri Lanka and Egypt, Lange became convinced of the importance of the study of development, instead of assuming the issue away. For Lange, the central problem for an underdeveloped economy was that of generating enough employment in the face of under-consumption, an insufficient economic surplus and institutional obstacles. Accordingly, he proposed measures such as a nationalization of finance, and agrarian reform, in order to mobilize resources for investment. Lampa stresses the continuity between Lange’s reasoning about core economies and about underdeveloped economies. In both cases, anarchic accumulation of capital and persistent inequality of distribution affect saving and the structure of consumption, leading to backwardness and instability. Lampa suggests that Lange’s thinking about developing countries was influenced by Prebisch and Hirschman. The third kind of peripheral vision is approached in Chapter 4, where Davide Gualerzi and Alan Cibils go back to Albert Hirschman, the German-American social scientist, and Celso Furtado, the Brazilian “Cepalista”, in search of what remains important for development theory today. In the light of recent theories of structural change and Transformational Growth, they stress the role of structural imbalances for development. They show that Hirschman’s assessment of balanced and unbalanced growth arose from a criticism of steady growth models, and note that his analysis is based upon the idea of backwardness, rather than on dependency. Gualerzi and Cibils also state that the evolution of consumption patterns – which is important for the transformation process and the rise of new markets – has been overlooked by most of development economics. The exception is Furtado, who rejected what Prebisch called false universalism (or the monoeconomics pretension in Hirschmanite parlance), and tried to introduce social and political factors into the analysis. He argued that the international division of labour – with peripheral countries exporting primary products and importing consumption goods – was linked to a social factor: peripheral country elites adopted consumption patterns typical of central countries. Import substitution was addressed to produce locally those goods consumed by the elite but structural heterogeneity was perpetuated because technology remained imported. Gualerzi and Cibils argue that both Hirschman and Furtado deserve further attention in current work on development economics. Furtado’s ideas were developed in the 1960s and 1970s. This was a period of radicalization, in which the ideas of Marx became more influential almost everywhere in the world. Chapter 5, written by Mario Garcia-Molina and Julián Libreros, deals with an unexpected development in this line of thought. The Greek-French economist Arghiri Emmanuel had presented the idea of unequal exchange between core and periphery by means of a model of Marx’s transformation problem in which countries were assimilated to Marx’s productive
Introduction 5 sectors. In Emmanuel’s model surplus was transferred from the periphery to the core. Hence, the problem of determining production prices was linked to the problem of development. The Colombian economist Homero Cuevas focused on Sraffa’s approach, in particular the standard commodity, and argued that non- basic commodities should be taken into account. What might seem like a highly theoretical problem, turns out to be related to actual development, once it is acknowledged that the international division of labour implies that peripheral countries have sectors that are not linked to the productive structure of the rest of the country, i.e. they become non-basics. The core-periphery division induced a productive structure in which non-basic goods have an important role. Hence, this vision from the periphery poses questions at different levels, even if it was at first sight seemingly unrelated to development theory. The four chapters in Part II relate to productive structures and external trade. In Chapter 6, Pier Luigi Porta discusses the issue of free trade and protectionism in the context of the eighteenth and nineteenth century Italian school of Political Economy. At the time, Italy was mainly a primary product exporter and a late- comer in industrialization. The situation was, to some extent, similar to that of Germany, where Friedrich List in his National System of Political Economy (1842) had argued in favour of infant industry protection, in order to release the productive forces that would eventually make the national interests of developing countries coincide with the cosmopolitan interest in wealth and progress. Porta sets the focus on a critical review of List, published by the Milanese economist Carlo Cattaneo in 1843. Cattaneo argued against List’s protectionist “illusions”, as he trusted that free trade, wage flexibility and other competitive mechanisms would serve much better to foster economic development. However, Cattaneo was not a naive free-trader who would believe in economic progress as a linear deterministic process. Like many other Italian economists of his time (and like List in his reflections on the fates of the Venetian and Dutch merchant republics), he was strongly aware of the reversibility of progress. Standards of living could stagnate and even decline in vicious circles of sophistication and poverty – an experience frequently made by countries in the periphery of the world economy, even in modern times. In his liberalist thinking and focus on incivilmento (a notion probably not properly captured by the English word “civilization”), Cattaneo emphasized the importance of education, skills and knowledge for economic progress. Porta suggests that, in this respect, Cattaneo and his colleagues in Italian Political Economy between 1750 and 1850 ran their arguments along lines very similar to those found in List’s National System. A century after Cattaneo, Raúl Prebisch would study the problem of trade in primary export economies and its effects on domestic growth based on the foreign trade multiplier. In Chapter 7, Mauro Boianovsky and Ricardo Solís point out that this was the beginning of the structuralist interpretation of the balance of payments constraint, as developed by Celso Furtado and his Mexican colleague Juan Noyola at CEPAL in the 1950s. The foreign trade multiplier was also part of Jacques Polak’s monetary approach to the balance of payments at the International Monetary Fund (IMF ). Prebisch’s idea that income elasticities
6 Mario Garcia-Molina and Hans-Michael Trautwein of imports and economic rates of growth were related would be later developed in detail by Anthony Thirwall in the 1970s and 1980s and applied to developed countries as well (e.g. USA). In a parallel line, and published in CEPAL reports and essays collected in his 1961 book, Furtado worked on the idea that there were two restrictions for the rate of growth in developing countries, namely domestic savings and foreign exchange. This idea was fundamental for what came later to be known as “dual gap” approach to economic growth, adopted by Hollis Chenery, Ronald McKinnon and others. Finally, Boianovsky and Solís describe Noyola’s concept of “development disequilibrium” and its central role in a report about Mexico’s balance of payments, written jointly with Furtado. More recently, some of these approaches have crossed paths again, e.g. in Garcia-Molina and Ruiz Tabera (2009), who detail the formal links between two-gap models and Thirwall’s law. Chapter 8 follows up on the Thirlwall theme of a reserve constraint on growth in developing economies. The chapter is written by Ariel Dvoskin and Germán David Feldman and devoted to analysing the contributions of the Argentinian economist Marcelo Diamand. In the 1970s and 1980s, Diamand had developed the concept of unbalanced productive structures (UPS) in which the competitiveness of the primary sector is higher than that of the industrial sector. Dvoskin and Feldman assess the implications of such UPS, akin to the “Dutch disease” phenomenon, for income distribution, the general price level and output dynamics in Latin American countries. They relate how Diamand arrived at the conclusion that UPS generate a chronic scarcity of foreign exchange reserves, which cannot be eliminated by standard strategies of devaluating the currency. Given the real wage structures and levels that tend to be institutionalized with the UPS, devaluation may cause stagflation, as has been observed in many developing countries that attempted to initiate an industrialization process by import substitution. The chapter shows that Diamand’s contribution is useful for understanding, for example, the (re)current challenges faced by the Argentine economy when trying to achieve a sustainable path of economic growth. Part II closes with Chapter 9, a reinterpretation of Diamand’s (1973) “unbalanced productive structures” by Eduardo Crespo and Andrés Lazzarini. This chapter elegantly complements the previous one by providing a formal framework for interpreting the dynamics of USP economies, connecting exchange rates, trade and employment performance. In addition to the well known “Dutch disease” or the “natural resource curse”, the industrial sector can either expand or shrink according to the external constraints and the political conflicts that affect the typical USP economy. As the real wage fluctuates according to economic and politico-institutional factors in a context with sharp distributional conflicts, policy decisions about the exchange rate often lead to high inflation, exchange rate instability and strong fluctuations. Unbalanced productive structures and foreign trade might be seen as two faces of the same coin, and both of them are linked to the centre–periphery distinction. An unbalanced productive structure is not a feature of a single economy by itself, but of a peripheral
Introduction 7 country in relation to the centre. The difference between both structures is caused by and reinforces the patterns of foreign trade. What the best policy is, may depend on particular cases. Note that this nexus of productive structure and foreign trade would be very difficult to arrive at starting from the point of view of the centre, as differences in (for example) productivity would seem to play a secondary role only. But in peripheral perspectives, the nexus is far more important for the whole system. The four chapters in Part III deal with monetary and financial issues, stressing the links between policy strategies and the emergence of theories about economic development. In Chapter 10, Andrés Álvarez explores the influence of French liberalism on the evolution of banking systems in Chile and Colombia between the 1850s and 1870s. The transfer of a “free banking” concept of rather utopian character, beyond hopes of realization in the advanced and state-controlled monetary systems of France and England, into natural experiments in backward extractive economies of the Southern hemisphere is identified with the activities of Jean Gustave Courcelle-Seneuil, a member of the French liberal Économistes. In his function as economic advisor to the Chilean government between 1855 and 1863, Courcelle-Seneuil is considered to have been the “first money doctor”, and Álvarez relates how his ideas about free banking found their way from Chile into Colombia. In the wake of the civil wars that had followed political independence from Spain, liberal economists Miguel Samper and Salvador Camacho Roldán managed, after some difficulties, to introduce private banks to Colombia that issued fiduciary money. However, the free banking system was primitively credit-constrained and did not survive for long. Álvarez points out that, while it lasted, it hindered the expansion of long-term finance required for economic development rather than supporting it. In Chapter 11 Germán David Feldman studies the creation of the Argentine Exchange Office in 1867. This event signified Argentina’s adoption of the international gold standard in a centralized currency board arrangement, at about the same time when the Colombian free-banking experiment took place. Describing the Argentine economy in Sraffian terms of a classical price system, Feldman shows how the fixing of the exchange rate through the Exchange Office provided a specific institutional closure of the distributive conflict over the shares in aggregate surplus. He interprets the adoption of the gold standard as an act in the interest of the local farmers, since it would stop the then recurrent appreciations of the domestic currency and thus prevent further increases in real wages, interest and rent. As Feldman observes, this peripheral constellation of interests stands in (complementary) contrast with the constellation in the core of the world economy, where the adoption of the gold standard has been interpreted as a triumph of “the City”, i.e. the financial sector’s interest in price stability, over the productive sectors’ interests in protecting market shares through depreciation (e.g. by way of bimetallist regimes). The specific role that the gold standard played in peripheral countries is again taken up by Eugenia Dinivitzer in Chapter 12. She sets the focus on the
8 Mario Garcia-Molina and Hans-Michael Trautwein gold-exchange standard arrangements that were common in many countries during the classical gold standard era (before the First World War), as they guaranteed convertibility into gold only indirectly by pegging their currencies to directly convertible currencies, such as the pound sterling. In the literature, the set of countries that adopted a gold-exchange standard is generally identified with the periphery of the world economy. Dinivitzer criticizes this generalization for ignoring a crucial difference between countries that could make use of foreign exchange for matching external stability (convertibility) of their currency with internal stability (liquidity concerns) at times of crisis, and countries that could not. While the former group could build up excess reserves and act, to some extent, in a counter-cyclical fashion, the latter group was forced to play tightly by “the rules of the game” up to the point of leaving the game by abandoning gold parity. Similar to recent experience in emerging market countries, a high share of short-term capital flows was a discriminating criterion: it subjected the respective economies to greater procyclicality. Taking an exemplary look at India and a more general one at the range of banking policy options in different gold-exchange-standard countries, Dinivitzer arrives at a “pre-1914 anatomy of the periphery” more complex and fruitful than the standard classifications in the literature on the gold standard. The last chapter of Part III takes us closer to the present era of globalized financial markets which started with the breakdown of the gold-dollar standard, the core element of the global monetary order after the Second World War. Chapter 13, written by Piet Clement and Ivo Maes, revolves around the Latin American debt crisis of the early 1980s, the first global financial crisis of the floating dollar era – where “floating” relates to both the flexibility of exchange rates and the extraterritorial recycling of petrodollars in the international banking system. While the crisis was caused by the overindebtedness of peripheral countries such as Mexico, Poland, Argentina and Brazil, it threatened the core of the global financial system in the USA, Japan and Europe. Clement and Maes set the focus on the activities of the BIS, the Bank for International Settlements, both prior to the crisis and in its management. Their account of the scrambling for financial transactions data and of the controversial debates about the necessity of a “macroprudential approach” to banking regulation, advanced by BIS economist Alexandre Lamfalussy and others as early as the late 1970s, makes fascinating reading in view of the (re) invention of the macroprudentiality wheel that has been touted so much after the Great Financial Crisis of 2007/08. Part IV deals with issues of economic development related to institutions of civil rights, trade governance and education. In Chapter 14, Hans-Michael Trautwein points out that the analysis of “transnational governance” – i.e. the setting and enforcing of norms for cross-border activities by private agents and other non-state organizations – is an underdeveloped field in modern economics. He argues that some inspiration for thinking about transnational governance in trade, production and migration can be gained by taking account of earlier reflections on cross-border trade and colonization. Trautwein provides a synopsis of
Introduction 9 relevant passages in historical economic writings that span roughly 350 years, from Gerard Malynes (1620) to John Hicks (1969) – including Smith, List, Sombart, Heckscher, Schumpeter and other authors – in order to distil two distinct concepts of transnational governance. Based on examples of merchant communities in medieval long-distance trade, the concept of “heterarchical colonization” describes the multiplication of trade centres and geographical spreading of (largely) symmetric governance structures through network externalities and increasing returns to scale. Referring to trade companies in the mercantilist era, the concept of “hierarchical colonization”, on the other hand, denotes the formation of peripheries through asymmetric governance structures by monopolies of trade and force. The latter concept turns largely on Adam Smith’s strong critique of the Dutch and British East India Companies and its echoes in the historical literature. Smith’s mercantilist antecedents Papillon and Child merit some attention, too. Trautwein argues that the two concepts of trade-based colonization help to distinguish between different modes of transnational governance in present times. One of the helpful aspects is understanding the path dependencies of further economic development that tend to be generated by colonization of either type. In Chapter 15, Jesús Bohorquez deals with a specific episode of transnational governance, the establishment of a new type of merchant guild in Havana, Cuba in the late eighteenth century. He uses this case to show how institutions could change in objectives, functions and structures, once they were transplanted from the metropolis to the periphery, and how this process would be influenced by local conditions. Based on the Iberian model of Consulados, a uniform type of merchant guilds that had existed since medieval times, a few guilds had been established early on in the colonies by the Spanish Crown to regulate the trade in its American Empire. An expansion of the network of guilds took place between 1793 and 1795. An influential document for the set-up of the Havana Consulado was Francisco Arango’s Discourse on Havana’s Agriculture and Means to Promote It (1792). Bohórquez demonstrates how the controversies and compromises about Arango’s Discourse helped to change the institutional structure of Cuban trade away from the imperial standard. He interprets this institutional change as a response to the specific cooperation and conflict between merchants and planters in their competition with other colonies in the Caribbean. Chapter 16 deals with another example of the tension between global and the local meanings of institutions. Claudia Milena Pico examines the case of teaching political economy in Colombia during the nineteenth century and compares two periods: the 1830s, when liberalism had gained influence shortly after political independence, and the 1860s, when the take-off of the Colombian “agro- export model” was about to happen. She sets the focus on Ezequiel Rojas and Manuel Ancízar, who taught the political economy course at the same university at different times, and who were both active and influential in Colombian political life. Pico’s account of their course contents and contexts shows, however, that Rojas’ and Ancízar’s teaching of liberal ideas, based on classical political
10 Mario Garcia-Molina and Hans-Michael Trautwein economy through the lens of Say and other French thinkers, did not match with Colombian reality and had little influence on politics.2 In the 1830s the course content was too general to get a grasp on the specific requirements of economic development in a relatively isolated backward economy. In the 1860s, a more down-to-earth approach that was better informed about the requirements of industrialization was ill-suited to address the social structures and conflicts in an increasingly oligarchic state. Finally, Chapter 17 takes the reader to Nigeria, the most populous country in Africa, to give a precise empirical account of path dependence in the evolution of civil and political liberties as well as immovable property rights – two categories of institutions that are of key importance for economic development. David Fadiran and Mare Sarr employ a new index of these sets of institutions for the period 1861–2011, based on pre-existing (de jure) legislations for Nigeria. They are thus able to look at the interdependence of the institutions from early colonial times, grafted on British imperial patterns, to the present times, in which Nigeria is frequently considered as a failed state. In order to make the concept of path dependence operational for their econometric study, Fadiran and Sarr relate the history and varieties of the concept as well as other relevant notions of institutional economics. They make use of unit root tests to check for the existence of memory in the indices, and use an error correction model to examine the nature of interdependence between the two sets of institutions. Contrary to current clichés about institutions in Nigeria, their results provide empirical evidence for persistence and interdependence that allows for nuanced discussion of colonial heritage and post- colonial structural breaks. All in all, it is obvious that the methods by which the different chapters in this volume describe peripheral visions of economic development vary considerably between them. Sketches of the lives and works of important thinkers are combined with analytical reconstructions and re-combinations of theory (Chapters 2–10, 14). Some chapters make use of hitherto (largely) unexplored archival material (Chapters 2, 5, 7, 13, 15). Various chapters draw attention to important episodes or literatures that have largely gone unnoticed in the English-speaking world (Chapters 5, 6, 8–10, 15–16). Several chapters combine conceptual innovations with work on “new” historical data and other sources hitherto not utilized in such contexts (11, 12, 14, 17). Even though the contexts here are predominantly Latin American, the wider challenge is to develop “the sense of a world consisting largely of peripheries – peripheries that are rich, varied, and worthy of explanation in their own terms” (Tilly 1981: 1).3 In this sense, going back to earlier developments of economies and ideas in the peripheries of the world economy, and comparing them with present reality and research opens up new frontiers in development economics and the history of economic thought. It is precisely because the methods and the scopes of the chapters in this book differ so much, that their conjunction may convey a sense of why peripheral vision is good at capturing movement and in situations with poor light.
Notes 1 The editors of this volume are grateful to a large number of people who have helped to make this project materialize. We cannot name them all, but we explicitly acknowledge support from the local organizers of the two conferences at Buenos Aires and Medellín, Alejandro Fiorito and Gustavo Canavire-Bacarezza, and the members of the two scientific committees: Martin Abeles, Jimena Hurtado, Cristina Marcuzzo, Mauricio Ramírez, Mario Rapoport, Annalisa Rosselli, Alexander Tobón and Luís Guillermo Vélez. Special thanks for editorial assistance go to Akem Forkusam. 2 However, as Andrés Álvarez shows in Chapter 10 of this volume, Rojas’ dissemination of liberal ideas appears to have made an impact on the evolution of the Colombian banking system. 3 Ma and Trautwein (2013) provide a similar perspective on the history of economic thought and development economics in China.
References Crimmins, James (2011), Utilitarian Philosophy and Politics: Bentham’s Later Years. London, New York: Continuum. García-Molina, Mario and Jeanne Kelly Ruíz Tabera (2009), Thirlwall’s law and the two- gap model: toward a unified “dynamic gap” model. Journal of Post-Keynesian Economics 32(2): 269–290. Hirschman, Albert O. (1981), The rise and decline of development economics. pp. 1–24 in Essays in Trespassing: Economics to Politics and Beyond. Cambridge: Cambridge University Press. Ma, Ying and Hans-Michael Trautwein (2013), Thought on Economic Development in China. London, Singapore: Routledge. Popescu, Oreste (1986), Estudios en la historia del Pensamiento Económico Latinoamericano. Bogota: Plaza & Janés. English translation Studies in the History of Latin American Economic Thought. London, New York: Routledge, 1997. Tilly, Charles (1981), Stein Rokkan’s conceptual map of Europe. Center for Research on Social Organization Working Paper no. 229. Ann Arbor, MI: University of Michigan.
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Core and periphery
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2 Core and periphery in the early Cold War A historical analysis of development theory Natália Bracarense 1 Introduction Economists generally insist in analyzing economic theory, including development theory, as if it was created in a political vacuum. Negligence of the historical context is typical of economic debate. The present chapter argues that economic theories result from an historical and social context. The objective is to argue that economic theory is inevitably political. To illustrate this argument, the origins of Latin American structuralism are analyzed. For more than a century, Latin America, among other underdeveloped areas, had been persuaded by universal economic theories to follow an outward- oriented model of development. In the wake of the Cold War, however, an alternative view, namely development theory, was consolidated as a subfield of economics. Over the next 20 years, economists of Latin America established an effective voice of their own, taking the form of Latin American structuralism and dependency theory. Latin American structuralism, in its classic form, suggests that some phenomena need to be analyzed through their structure rather than through the observation of the surface. A structure consists of the relationship between the constituent elements and determines their particular characteristics. The structure, thus, is more important for the understanding of each element than the study of their idiosyncrasies. From this perspective, underdevelopment does not exist without development and vice versa. This framework exhibits a tendency to binary oppositions, drawing rigid boundaries between what is acceptable and what is not, between self and non-self, truth and falsity, central and marginal. One of the classic expressions of structuralism in economics is associated with the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), more specifically, with Raúl Prebisch—ECLAC’s Executive Secretary and a progenitor of Latin American structuralism. Prebisch (1944a) coined the terms center and periphery to economics to elaborate a framework that focuses on the power and influence of the “developed” world in shaping “underdeveloped” countries. This was later replicated by other developing theories including dependency theorists and world-system analysts.
16 Natália Bracarense That this unique moment of intellectual independence for economists of Latin America occurred during the Cold War may at first appear to be a coincidence. But from an historical point of view, it is clear that there is a connection between these two developments. In fact, development theory and the Cold War grew up together and moved into the forefront together. By focusing specifically on the work of Prebisch, the present chapter investigates the evolving views on the core and periphery during the early Cold War.1 It is argued that Prebisch’s views on the core and periphery were in constant flux; while in the 1940s he held a classic structuralist position, by the 1960s Prebisch was led to insert a healthy gray area to his understanding of center and periphery. Due to political forces, however, Prebisch was unable to push forward his more flexible and mutable understanding of North–South relations.
2 Agricultural and industrialized countries: a level playing field While Raúl Prebisch is currently overlooked in U.S. development economics literature, his dichotomous framework remains influential. Indeed, Prebisch’s core–periphery paradigm is widely spread in fields such as international trade, sociology, geopolitics, and international history. Nonetheless, few know the man behind the concept. Prebisch is predominantly recognized for his analysis and diagnosis of Latin America’s development struggles, known as the theory of deteriorating terms of trade, or the Prebisch–Singer thesis.2 Prebisch, however, wrote on a variety of themes, including money, finance, and the business cycle. In fact, his theory of trade, including the terms center and periphery, stemmed from his early theory of business cycles (Prebisch 1922: 293). In the 1920s, Prebisch’s view shared many characteristics with the then- dominant approach to business cycles, arguing that economic fluctuations were natural, recurrent, and inevitable. He believed, moreover, that the upward and downward phases of the cycle were symmetrical: the steeper the expansion, the stronger the contraction (Perez and Vernengo 2012a: 8). A final similarity between Prebisch and most of his contemporaries was the understanding of business cycles as monetary phenomena triggered by changes in international liquidity, which were in turn aggravated by the vicissitudes of market psychology. Cycles could not be explained solely by material factors: the passions and sentiments that stir up the popular masses reinforce the economic conditions (Prebisch 1921: 305–306). Prebisch believed an economic boom was typically represented by an excessive amount of credit, increased investment, speculative behavior, and ungrounded optimism concerning the future (Prebisch 1922: 76). An economic crisis, in contrast, created an uncertain environment in which pessimism prevailed (Prebisch 1933b: 2). One peculiarity of his work, however, emanates from his classic structuralist perspective. Prebisch (1921) noticed that Argentina’s economy was tightly linked with international markets, with the result that changes in liquidity in
Historical analysis of development theory 17 England, for example, tended to spread overseas. Nonetheless, the effects of changing liquidity in international markets were different in Argentina and in England, meaning investor’s behavior was country specific (Prebisch 1922: 307). Prebisch argued that in Argentina, in contrast to England, when capital flows shrank investors resisted reducing the amount of credit in the economy, which sustained the level of imports while exports decreased.3 In addition to the monetary flows, Prebisch believed disruptions in international trade could trigger Argentine business cycles. From his perspective, it was a well-known fact that the movements of Argentina’s external trade constituted the decisive factor in the great changes of its economic situation (Prebisch 1930: 634; Prebisch 1944a: 201). He continued, “we are linked in a very straight manner with the international economy and exposed to all of its changes. When the world market increases its absorption of our products, it affects the development of our local businesses” (Prebisch 1930: 634). External factors not only triggered the boom, they also caused the bust and the turning points of the cycles (Perez and Vernengo 2012a: 10). Prebisch was, in fact, convinced that Argentine business cycles could not be explained solely by domestic variables. After undertaking an empirical study of several business cycles in Argentina he concluded, “I have not observed—neither in the cycles I have seen closely nor in those that I have studied in our history—the existence of domestic factors that are strong enough to explain by themselves our wavelike motion” (Prebisch 1944b: 320). In spite of his understanding that business cycles in Argentina were caused by fluctuations in European economies, at this point in his career, he did not conclude that this was due to his country’s subordinate position in the international market. The first time Prebisch used the terms center and periphery was in 1922,4 when center and periphery connoted geographical entities and had no direct relation with economic prosperity or hierarchical power (Prebisch 1922: 292–293).5 All differences aside, Prebisch’s usage of these terms stressed a characteristic feature of Prebisch’s and other structuralists’ work: from his very early writings, Prebisch understood the world through binary oppositions. Although Prebisch did not initially understand international trade in terms of his later center–periphery paradigm, he approached it through another binary opposition: Argentina was an agricultural economy and contrasted with Europe’s industrial economies. This opposition, however, did not imply a hierarchical relationship, but rather inferred that agriculture and industry were complementary on a global scale (Prebisch 1921: 306). Indeed, Prebisch made no connection between underdevelopment and agricultural specialization at this time of his life. Despite its outward-oriented production of agricultural commodities, Prebisch believed that Argentina was an economic power. His view was not completely unfounded. Early twentieth-century Argentina was the leading exporter of meat and grains and the second wealthiest country in the world after the United States (Dosman 2008: 12).6 His Argentine pride and his dichotomous framework were both fueled by a visit to Australia and New Zealand in 1923, when Prebisch placed Australia,
18 Natália Bracarense New Zealand, and Canada under the same rubric as Argentina: agricultural countries. As these countries shared similar realities, comparisons may well have been inevitable. Economically, according to Prebisch, both Australia and New Zealand lagged behind Argentina, and none of their cities could even remotely compare with Buenos Aires (Dosman 2008: 49). Prebisch, nonetheless, recognized that Argentina suffered serious structural problems that were not present in New Zealand and Australia. The striking inequality of Argentina was in part the result of the colonial legacy left by Spaniards. As a colonial power Spain supported the concentration of land ownership. This culminated in the power of the land oligarchy, preventing the implementation of agrarian reform (Prebisch 1924a: 28). Moreover, the technocracies in Australia and New Zealand prompted Prebisch to conclude that Argentina needed to implement political reforms if it were to keep up with international standards (Prebisch 1924b: 295). Based on these ideas, Prebisch argued that political reforms and the creation of a “state of the art” bureaucracy were considered legitimate policies. Economic intervention and protectionism to promote “state of the art” industries, however, were not. In fact, Prebisch’s early views were redolent of the theory he later famously criticized: David Ricardo’s comparative advantage theory of trade.7 In 1933 Prebisch was sent by the Argentine Economic Minister to Geneva to participate in the Preparatory Commission of the League of Nations’ World Conference. In his speech Prebisch asserted that Argentina must support every susceptible measure to promote free trade. This is an extremely urgent matter. Protectionist policies were adopted in a situation of emergency [the Great Depression], but we should not deceive ourselves of their reach. . . . Restrictions to international trade imply great danger to agricultural and industrial countries alike, as the development of artificial [industrial] activities in agricultural countries, at high production costs, means a significant loss for their national economies, as it constrains their capacity of exporting agricultural products. . . . There is no other way to avoid all these ills but the prompt reestablishment of the international trade through the suppression of all sorts of restrictions and by the liberalization of the circulation of capital, as my colleagues who spoke before me have clearly stated. (Prebisch 1933a: 1) In his speech, Prebisch implied that, as the world economy gain normalcy, agricultural countries should cease promoting industrialization through protectionist policies and should rather focus their effort on what they do best: produce agricultural commodities for the international market. Prebisch believed that any effort to produce something other than agricultural products in Latin America would result in the waste of resources because the geographical condition of the region was best fit to produce agricultural commodities. Prebisch’s analysis was filled with the same determinism for which he would later criticize Ricardo. Latin America should export agricultural commodities to accumulate the foreign
Historical analysis of development theory 19 currency necessary to finance the purchase of manufactured commodities produced abroad at low cost (1933a: 1). Even if Prebisch sounded like a mainstream economist, his speech was marked by a subtle peculiarity: deflationary pressures could also propagate recessions in agricultural countries. Poor export performance could initiate a downturn in economic activity of agricultural countries as it generated relatively stronger deflationary pressures on the prices of primary commodities than on manufactured commodities (Prebisch 1934a: 32). Prebisch observed that in 1933, the price index of agricultural commodities had contracted to nineteenth- century levels, while manufacture prices had not decreased and in some cases had actually risen. In fact, during this period, Gardiner Means’s (1939) work revealed that large corporate enterprises had become the representative firms in the United States, which meant that firms had the power to administer both their wage rates and market prices. In that case, the mainstream view of self- regulating markets that ensured, among other things, balance of international trade did not hold (Lee 1998: 44–67). Such considerations pointed toward deteriorating terms of trade as another instability-propagating factor—one that warranted careful scrutiny and later became the focus of Prebisch’s research agenda. As noted above, Prebisch’s ideas started to take the shape of his later theory of deteriorating terms of trade. But at this point in his career he still defended free trade as industrial and agricultural countries complemented one another. Consequently, he prescribed a gradual liberalization of capital flows to correct the deviations of relative prices created by the Great Depression (Prebisch 1933b: 5–7). After the Preparation for the World Conference, however, Prebisch revisited the role of Argentina in the world. As shown in the next section, Prebisch realized that Argentina held a subsidiary role amongst the world powers. He knew that international markets were interconnected, but until that moment he had not realized they concealed a hierarchical structure. Countries were divided into two groups. At the top were the western industrial countries and at the bottom the agricultural countries. Independently of the size of the Argentine economy and the splendor of Buenos Aires, Argentina, Canada, Australia were equally ignored in Geneva (Dosman 2008: 81).
3 Great industrialized countries and the subordinate agricultural economies: paddle your own canoe Prebisch was ready to return to Argentina when the government requested that he stayed in Geneva for a few more months. He was assigned to negotiate a beef trade treaty with England. The negotiations had an unsatisfactory outcome for Prebisch and reinforced his view that Argentina did not have a voice against world powers (Dosman 2008: 84). The Argentine government also designated him to be its representative in the League of Nations World Conference. His after-the-fact impression was that the international conference was pure fantasy, as it held no real power against the interest of the United States and England. He left convinced that at that moment of global economic instability each country
20 Natália Bracarense had to take care of itself. Prebisch’s disappointments during his visit to Europe were countered by an important discovery: Prebisch became familiar with John Maynard Keynes’s The Means of Prosperity. Enchanted by Keynes’s suggestion of an international monetary authority, Prebisch acquired all of Keynes’s previous writings (Perez and Vernengo 2012b: 14). For about a decade, Keynes’s work informed Prebisch’s policy making (Sunna 2013: 5). Disappointments and discovery alike changed Prebisch’s view regarding the interaction between agricultural and industrial countries in the international market. In 1934 Prebisch became disillusioned with the inadequacy of traditional economics as a guideline for economic policy. Even the great powers relied on protectionism during the Great Depression. If no other country was willing to restore free trade, Argentina had no choice but implement unorthodox policy. After his return from Geneva, Prebisch was given the responsibility for creating the Argentine Central Bank. Correspondingly, he spent most of his time investigating the importance and functions of a monetary authority (Prebisch 1934b, 1935, 1936a, 1937).8 As a result, in the period between 1935 and 1943, his study of the relationship between industrialized and agricultural economies was dominantly related to the role of the Central Bank in mitigating the transmission of fluctuations across countries. He also brought the topic up in some of his lectures at the University of Buenos Aires (Prebisch 1936b). Prebisch taught his students about the deteriorating terms of trade, its relationship with the inelasticity of demand for manufactured goods, and the tendency toward recurrent disequilibria in the balance of payments of agricultural countries (Prebisch 1936b: 566–569). At this point, thus, many of the pieces of Prebisch’s (1949) famous “Manifesto” had already been conceptualized. It is clear that while busy creating and directing the Central Bank, Prebisch’s concern with international trade and transmission mechanisms of market instability still marked his work as the banker, professor, and academic. Apart from the challenges of forming the Argentine Central Bank, Prebisch had to deal with the obstacles imposed on international trade by World War II, which prolonged and reinforced the imbalances created by the Great Depression. When faced with the international trade restriction, Prebisch (1940a, 1940b) argued that countercyclical monetary and fiscal policy would prevent the effects of an international contraction in both trade and capital flows to be transmitted to Argentina. He justified his policy on his study of business cycles, which concluded that business cycles in agricultural countries—distinct from those on industrial countries—did not automatically counterbalance destabilizing forces, and rather had a cumulative causation (Prebisch 1936c). Argentina’s economy changed significantly during the war, undergoing a process of rapid industrialization and accumulation of reserves (Prebisch 1943c). According to Prebisch (1943c: 759), these changes were not temporary, but rather organic. Big firms were producing at full capacity while several small businesses were established, allowing the domestic production of commodities that were usually imported. Economic behavior also changed, with the emergence of entrepreneurial spirit and businesslike mentality that enhanced the
Historical analysis of development theory 21 population’s technical ability (Prebisch 1943c: 759). Prebisch, nonetheless, was concerned with the effects of the end of the war on Argentina’s economy. He now asserted that there was no contradiction between domestic industry and Argentina’s role as an exporter of agricultural commodities. Domestic industrialization did not necessarily mean a reduction of imports, but rather a change in their composition. Instead of importing consumer goods, Argentina would import capital goods in order to complete the national process of import- substitution industrialization (Prebisch 1943d: 790). Despite the fact that Prebisch had used unorthodox policies and wrote reports on their results, it is only in 1943, after resigning from the Central Bank, that Prebisch dedicated more time to elaborate a theory on which he could found his policy.9 He wrote a proposal for a book, bringing together all the pieces that he had elaborated in the past ten years. He realized that the neoclassical framework could not grapple with some aspects of the Argentine economy. Specifically, Argentine business cycles presented idiosyncrasies that required an explanation of economic fluctuation that differed from the theory used to understand its effects on industrialized countries (Prebisch 1943a: 3). At this point Prebisch voiced for the first time the need of a theory that could deal with the specificities of less industrialized countries, expressing at the same time his frustration with the existing abstract frameworks (Prebisch 1943a: 2). Justifying his decision to write a book on money and business cycles, Prebisch stated that [t]he straight contact I have had with the monetary reality of Argentina in the last fifteen years have persuaded me of the necessity to constantly resort to economic theory to understand and better solve practical problems. The practical experience, in turn, is the best source for theoretical elaboration. I have collected doings and observations that I want to systematize in order to arrive at a scientific explanation of the monetary phenomena as they occur in our country, adapting or modifying the general monetary theory. (Prebisch 1943a: 2) Prebisch (1921) had already mentioned that psychological factors of business cycles were different in Argentina and in industrialized countries. Prebisch (1936c) believed the effects of business cycles presented cumulative causation in agricultural countries, whereas in industrial countries they were self- adjusting. In 1943, he finally formulated a formal hypothesis of this difference. According to Prebisch (1943a), recovery phases tended to be accentuated by the financial system’s excessive credit expansion. The excessive inflow of currency during the boom required a proportional outflow during the bust, but the Argentine financial system tended to resist the required adjustments. The inflated amount of credit meant that Argentine imports did not normally decrease to the necessary extent to avoid disequilibrium in the balance of payments during recessions. When industrialized countries experience the beginning of recession, pessimism in foreign markets resulted in decreased liquidity. Prebisch argued that
22 Natália Bracarense while there was a wave of outflow capital from Argentina, domestic banks did not reduce credit immediately. This lagged response of domestic banks caused an internal and external monetary disequilibrium. While imports did not decrease, the revenues derived from exports decreased immediately due to a contraction in demand of primary commodities and a deflationary pressure on their prices. Foreign demand for primary commodities decreased immediately, whereas the domestic demand for imported goods did not. The ultimate outcome of the differential of reactions to a recession was balance of payments disequilibrium (Prebisch 1943a: 3–4). This resulted in an outflow of gold, which in turn triggered a strong wave of pessimism in the domestic market. Based on this formulation, Prebisch believed that business cycles in Argentina were generally more acute than in industrialized countries (Prebisch 1943a: 3). The above paragraph shows the original traces of characteristic features of Prebisch’s theory of underdevelopment such as the deteriorating terms of trade and the differential income inelasticity of demand (Prebisch 1933a, 1934a, 1943a, 1949, 1959a, 1960, 1970). As a solution for the balance of payments disequilibrium, Prebisch reasserted his belief that Argentina should change the composition of its importation to import machinery, material, tools, and other durable or capital goods necessary for its industry, while domestic industries focus on the production of consumption goods to satisfy the domestic demand (Prebisch 1943a: 7). In sum, Argentina should pursue a selective importation policy, eliminating from imports all goods that were not essential to maintain the workings of the domestic industry. He emphasized that he was not advocating a systematic restriction of importation, pursuing an autarky was just as absurd as establishing a free market (Prebisch 1943a: 7). In fact, rather than promoting autarky as the solution for external vulnerability, Prebisch believed that Argentina “had to develop from within [hacia adentro], by strengthening its internal structures and achieving economic autonomy” (Prebisch 1943a: 7). In this conclusion, Prebisch introduced the guidelines for his main policy prescription when working at the United Nations: a development strategy based on import substitution industrialization. To summarize this section, it is clear that after his trip to Geneva, Prebisch gradually changed his view regarding the relationship between Argentina and the western powers. In the beginning of his career, Prebisch viewed the world through a dichotomous divide of agricultural and industrial countries, but thought there was no hierarchy implied in the specialization in one sector or another. Ten years later, he counterpoised the subordination of agricultural countries with the power of industrialized countries. While in 1933 he believed that the deviations from neoclassical economics were temporarily necessary due to the constraints imposed by the Great Depression and WWII, in 1943 he concluded that a permanent shift away from neoclassical economy was required. A new theory that considered agricultural countries’ specificities was necessary if one were to grasp with the problems troubling an economy like Argentina.
Historical analysis of development theory 23
4 The world monetary reform in the center and periphery: wear the trousers The academic and practical work of Prebisch was increasingly marked by its focus on balance of payments disequilibria. The faith in self-equilibrating markets had vanished as Latin American economists witnessed the vulnerability of their economies against the constraints imposed by WWI, the Great Depression, and WWII (Carone 1977). The ills of economic and political instability, however, were not exclusive to Latin America. European reconstruction, the destitution of newly independent countries in Africa and Asia, and the need for world monetary reform were some of the problems afflicting economists in the post-WWII period. While the task ahead of them seemed to be difficult, the great western powers hoped to build a security system in which democratic governments were established as widely as possible, permitting countries to peacefully resolve differences through international organizations. Consequently, some of the most common topics of debate were the restoration of the gold standard, international trade, and the “reestablishment” of economic stability (Asso and Fiorito 2004: 1). As the creation of the United Nations system pulled together economists from different countries, there seemed to be hope for a new and cooperative economic international order (Bracarense 2012; Paesani and Rosselli 2014). The intellectual context, especially the debate between John Maynard Keynes and Harry Dexter White on the International Monetary Fund and the World Bank, deeply affected Prebisch’s work (Prebisch 1943a: 1).10 Like other Latin American leaders, Prebisch thought that the program of Keynes and White was too rigid for agricultural countries and as a result became increasingly influenced by the ideas of John H. Williams.11 U.S. economist and Vice-President of the New York Federal Reserve, Williams had met a young Prebisch in the 1920s.12 Williams wrote an influential critique of Keynes’s and White’s plans as well as a third proposal for the new monetary system, the so called “key currency approach.” Williams (1943) thought that Keynes and White shared more similarities than differences, and disagreed with them on several points (Asso and Fiorito 2004). The establishment of a multilateral system of fixed but adjustable exchange rates, as suggested by both Keynes and White, was too detached from reality (Williams 1943: 654). This complaint was a frequent theme in Prebisch’s (1943a, 1944a, 1948a, 1949, 1950a) work; such disconnect from reality prevented economic theory to serve as a guide for economic policy in agricultural countries. In a 1944 lecture, Prebisch reinforced this view, now using for the first time the terms center–periphery in the sense we understand them today (Prebisch 1944a: 61). He later reiterated his opposition to treating the world’s diverse economic realities as if they were homogeneous, pointing out that “one of the most serious failures of the economic theory in general, from a view point of the periphery, is its false sense of universality” (Prebisch 1949: 54). Similarly, Williams condemned the claim of universality in economics, criticizing both Ricardo’s theory
24 Natália Bracarense of comparative advantage (Williams 1929) and Keynes’s plans for monetary reforms (Williams 1943) on this basis. Asserting that both economists assumed international homogeneity, Williams countered and stated that countries were organized hierarchically. Prebisch approved of Williams’s critique: while he applauded Keynes for turning the free-market chain of causation on its head in his attack on the guardians of orthodoxy, Prebisch felt that Keynes had gone only half the distance in explaining the dilemma of countries outside the core economies. (Dosman 2008: 218)13 Williams’s “key currency approach” suggested that economic theory should take into account the fact that the world was hierarchically divided into countries, regions, and currencies. That being the case, the post-war monetary system should reflect this hierarchy, redefining the responsibility of key countries and setting new rules for their currencies (Asso and Fiorito 2004: 3). Stabilization of the currencies of key countries, principally England and the U.S., was the first step to reestablish international markets. Williams proposed that key countries maintain a fixed exchange rate, while “younger” countries were permitted exchange-rate control or variation (Williams 1943: 656). His argument was based on the fact that “younger” countries had higher imports-to-GDP ratios than key countries, meaning the former were more vulnerable to international trade instability. Along the same lines as Williams, Prebisch (1944a) gave an example, in a lecture on money and business cycles in Argentina, of three countries (A, B, and C) that had different imports-to-GDP ratios (25, 5.3, and 7.1 percent respectively). Country A’s high imports-to-GDP ratio meant greater vulnerability to changes in international trade, whereas countries B and C were not as vulnerable to possible balance of payments disturbances. While Country A represented the situation of Argentina and other peripheral countries, Countries B and C exemplified countries like the U.S. and England (Prebisch 1944a: 40). With the periphery more vulnerable to fluctuations in international trade, afixed exchange rate policy—like the one proposed by Keynes and White— meant economic fluctuations would have the same cumulative effects as under the gold standard. Due to the transmission of core countries’ business cycles, the periphery experienced an outflow of gold or reserves during the bust and an inflow of gold or reserves during the boom (Prebisch 1944c: 191). To support his argument, Prebisch (1944a: 40–61) restated his theory of business cycles in terms of balance of payments adjustments, abandoning his earlier focus on the country-specific behavior of financial markets. The analysis allowed him to view balance of payments and degree of openness to international trade as the principle transmission and aggravating mechanisms of economic instability. In Great Britain the process worked the opposite way, during a recovery there was an expansion of credit, which first stimulated the imports of goods and exports of capital, not affecting exports. As England imported goods and exported capital it
Historical analysis of development theory 25 experienced an outflow of gold. The same fund would then be used by other countries to buy British commodities, meaning that exports of goods only increased in a second moment. The payment for its exports implied gold returned to British shores. As a result, British balance of payments worked as a buffer to business cycles, whereas in peripheral economies it worked as a propeller. So, while the gold standard imposed harsh limits on peripheral countries it allowed the financial oligarchy of London the flexibility and ability to manipulate the international system according to its interests. Monetary stability in England was thus accomplished at the expense of the periphery’s monetary instability (Prebisch 1944a: 65). To conclude, Prebisch (1944a: 66) agreed with Williams that fixed but adjustable exchange rates were too rigid for peripheral countries. Western powers should, therefore, make monetary agreements among themselves and allow underdeveloped countries exchange rate flexibility (Brenta 2012: 5). A system of flexible exchange rates for peripheral countries would reduce their vulnerability to business cycles from without. A more rigid exchange rate policy, on the contrary, had cumulative effects, transmitting instabilities of core countries to peripheral countries (Prebisch 1944c: 191). At this point in his career, Prebisch saw the relationship between the center and periphery as a hierarchal relationship. However, he also believed that the two types of countries could complement one another (Brenta 2012: 2). The unpleasantness of the gold standard was not entirely the fault of England and was, more accurately, the fault of the monetary system itself (Prebisch 1944a: 66).14 As the end of WWII approached and western powers envisioned a new international system, the U.S. would finally assume its responsibility as the core country. Consciously behaving as the center of the world economy, the U.S. would lend its balance of payments surplus so that other countries could afford to import from the U.S. (Prebisch 1943a: 8–9). Moreover, it was in the interest of the rest of the world that the U.S. maintained full employment so that U.S. consumers could use their higher incomes to buy from the rest of the world (Prebisch 1943b: 1).15 As shown in the remaining sections, until the mid-1960s, Prebisch maintained that this virtuous complementarity between center and periphery was possible. Due to this view, Prebisch played an important role as intermediary between the interests of U.S. officials and peripheral countries (Bracarense 2012). Disillusionments with U.S. leaders at the UN and the failure of the Alliance for Progress, however, made him gradually skeptical of the willingness of core countries to cooperate with peripheral countries’ developmental projects.16
5 Center and periphery: quality time As shown above, Prebisch (1948a) believed that the new monetary system should be more flexible and, thus, enable peripheral governments to protect themselves from economic crises started in the core. In a lecture he voiced his frustration with the arbitrary creed on the self-equilibrating forces of the market
26 Natália Bracarense among most industrial leaders, economists, politicians, and journalists in the United States. Their dogma underpinned the assumption that compensatory policies were unnecessary as the system presented no inherent instability (Prebisch 1948a: 8–9). According to Prebisch (1948a: 1), however, the theory founding those arguments was like an old map, unable to give any guidance due to its misrepresentation of reality. According to neoclassical economists, if productivity increased, prices should decrease. In this case if the production of manufactured commodities outstripped the production of primary commodities, the prices of the former would decrease in relation to the prices of the latter, promoting a reasonable distribution of income through changes in relative prices (Prebisch 1949: 95). Applied to international economics, this self-adjusting mechanism implied that agricultural countries would benefit as much as industrialized countries from the technical advancement experienced in the core, the periphery thus had no reasons to move away from the production of primary commodities (Prebisch 1949: 96). Prebisch (1933a), however, had long ago realized that there was a tendency of deteriorating terms of trade at the expenses of peripheral countries, meaning that the prices of primary commodities tended to decrease in relation to the prices of manufactured commodities. Revisiting this analysis, he now concluded that the self- regulating forces of the market did not function properly to correct disequilibrium in the international market (Prebisch 1949: 96; Prebisch 1950b: 167–169). Unsurprisingly, peripheral economies were in a constant situation of balance of payments disequilibrium (Prebisch 1948b). When Prebisch became the Executive Secretary of the United Nations Economic Commission for Latin America, President Harry Truman had just proclaimed that the modernization of developing countries was a vital strategy for combatting Soviet-backed communism in former colonial areas.17 Latin Americans hoped that Truman’s pronouncement would mean that the U.S. would assume more cooperative behavior toward the southern republics. The environment seemed promising and Prebisch met other economists who shared this view with him. Hans Singer (1950), for instance, agreed with the idea that international trade tended to exacerbate underdevelopment. Laissez-faire policies reinforced the discrepancies between peripheral and core countries as well as the inequalities between regions within peripheral countries (Prebisch 1950b: 155; Prebisch 1951: 248–249). Their argument proceeded along several steps. First of all, free trade allowed core countries to retain the gains from technical progress, whereas the periphery transferred to the core part of their yields from adoption of technical progress (Prebisch 1949: 4). Second, outward-oriented development only linked a few geographical areas of the poor countries to the international economic system, creating unbalanced economic structures within the periphery (Prebisch 1950b: 155). From his perspective, an unfavorable position in international trade was the primary obstacle to prosperity for underdeveloped countries and could only be overcome through government intervention (Prebisch 1950b: 153–154).
Historical analysis of development theory 27 Prebisch (1951) did not blame underdevelopment solely on external factors, he also emphasized the importance of social structures peculiar to Latin America to explain it. These structures included excessive specialization on primary goods, lack of productive diversity, and low levels of inter-sector complementarity. Nonetheless, Prebisch and Singer alike argued that underdevelopment could not be satisfactorily explained solely by internal factors. Prebisch (2001: 19) argued that “to attribute to internal factors what very frequently was the result of external factors was a real calamity, a real theoretical calamity.” As expressed in his early work, the external vulnerability of peripheral countries became more evident when studied in the context of business cycles. Following a Harrodian tradition, Prebisch (1946a) and other Latin American structuralists argued that economic growth engendered instability and imbalance (Boianovsky 2010: 222). In the post-WWII period such instability was aggravated by the fact that the United States did not take the responsibilities that came with its position as a core country. In crises the U.S. government protected its economy by implementing tariffs, which again decreased the import coefficient. Prebisch criticized the United States for introducing restrictive policies, claiming it was acting as a peripheral country. This behavior reinforced the negative effects of business cycles on the rest of the world, leaving other countries with no alternative but follow the core’s lead and implement tariffs, quotas, and exchange rate control to protect their balance of payments. Such unavoidable countercyclical policies, based on strong banking and economic systems, became necessary to broach economic stability domestically (Prebisch 1949: 119). Prebisch believed that instead of using protectionist policies, core countries should implement a full employment program to deal with their economic crises. Having written an introductory book on Keynes, Prebisch (1947) was still influenced by the British economist. Prebisch agreed that economic crises in industrialized countries were caused by a decrease in income due to a lack of consumption and investment. Core governments should thus intervene in order to reduce unemployment and promote economic stability.18 A full employment policy in the core was crucial to stabilize not only their own economy but also peripheral economies (Prebisch 1948a: 8). The pursuit of this policy meant the core was taking its due responsibility and promoting stability to the whole system instead of acting self-interestedly. Due to core countries’ low imports-to-GDP ratios, if their governments wanted to mitigate the downturn by increasing public expenditures that would promote investment and, through the multiplier, increase income. Recovery would only pressure the U.S. balance of payments significantly if it had driven the economy toward full employment, in which case the import coefficient tended to increase. This tendency, and its positive effects on the balance of payments of the rest of the world, was the main reason Prebisch advocated that the U.S. government pursued full employment. In other words, core countries should buffer the cycles of the periphery instead of mitigating the cycles at home at the expenses of other countries.
28 Natália Bracarense During the 1946 Havana Conference, many economists at the UN—among them Michal Kalecki and Nicholas Kaldor—agreed with the full-employment proposition, but due to U.S. political pressure the focus was ultimately redirected away from employment policies toward development (Toye and Toye 2004: 90–100). Despite the realignment at the UN, Prebisch did not abandon his view on the importance of employment creation in the periphery, veiling it under the industrialization discourse (Prebisch 1961, 1969). The periphery should also pursue a full-employment policy without, however, blindly replicating the policies designed for the center and indiscriminately increasing government expenditure. They should instead design policies of their own that fit their economic realities (Prebisch 1949: 138). According to Prebisch, core countries could promote economic stability through government expenditure. Peripheral countries could not do the same without first undertaking massive structural reform because they experienced growth not through investment, but rather through exportation (Prebisch 1950b: 157). Export-led growth meant that recessions in core countries would be transmitted to the periphery, affecting the national income of peripheral countries negatively (Prebisch 1949: 139). If peripheral governments tried to counteract the downturn by increasing government spending that would not promote investment or consumption, it would instead increase imports. Before implementing expansionary fiscal policy, reforms that diversified production, thus reducing the level of agricultural specialization in Latin America, were necessary to lower potential pressure on the balance of payments (Prebisch 1953). In fact, specialization imposed two constraints: first, most of the manufactured consumer goods had to be imported and, second, the low productivity of agricultural production meant that most workers in peripheral countries were either underemployed or disguisedly unemployed. Consequently, the majority of the population in peripheral countries had low income, low effective demand, and low savings, which implied they were stuck in a vicious circle (Prebisch 1949: 100).19 The solution was import-substitution-industrialization policies, which in the long run would reduce Latin America’s vulnerability in two fronts: reducing pressure on the balance of payments and increasing productivity through the formation of capital (Prebisch 1949: 125; Prebisch 1951: 286). Thus, government must levy high taxation on imports of consumer goods—which guaranteed that increased income would be spent domestically—and promote both investment in nondurable consumer goods sectors and worker training programs (Prebisch 1949: 100; Prebisch 1950a: 76). Such a policy would, moreover, spare peripheral governments from redistributive policies for two reasons. First, Prebisch (1949) believed that industrialization-led growth would necessarily increase the income of the population due to its positive effects on workers’ productivity. Second, the government should try to increase the population’s aggregate savings, which was more likely to occur within an environment of greater income inequality (Prebisch 1949: 126–127). Although the low-income members of the population would have to initially sacrifice, economic growth would ultimately reduce the income
Historical analysis of development theory 29 gap. Thus, policies designed to promote economic growth should precede redistributive policies. Meanwhile, the elites also needed to collaborate and change their economic behavior, avoiding imports of luxury goods and investing their savings domestically to engender the capital formation in their countries (Prebisch 1949). Prebisch believed that, with the right incentives, both the elite and the rest of the population would be willing to combine their energies in support of the industrialization project, so that peripheral countries would improve their conditions. This effort needed to involve not only members of all classes in Latin America, but also the collaboration of core countries. Although Prebisch understood the role of credit in financing investment and how the government could change the money supply through purchase of bonds (Prebisch 1949: 139–140),20 he did not recommend this type of policy to peripheral governments due to its effects on income and importation, resulting either in depreciation of peripheral countries’ currency and/or into balance of payments problems. Either situation would become a barrier for future importation of capital goods and the project of industrialization.21 Prebisch’s solution regarding the finance of the industrialization effort was, thus, a temporary reliance on foreign loans. The inflow of foreign currency would counterbalance expenses with importation of capital goods, not affecting the balance of payments or exchange rate negatively (Prebisch 1949: 146; Prebisch 1953: 5; Prebisch 1954a: 4–5). According to Prebisch a significant amount of foreign loans was necessary in the first stages of developmental effort. But as long as the loans were strictly used to support import-substitution industrialization, the need for foreign currency would be temporary. As peripheral countries became able to supply consumer goods to domestic markets, their external vulnerability would decrease (Prebisch 1953; Prebisch 1954a: 11–12). Potentially, the loans could be organized by a newly formed international monetary system under which cooperation would benefit both peripheral and core countries, because the industrialization effort of the former would mean an increased demand for capital goods of the latter (Prebisch 1954b: 22–23). Prebisch (1955: 7) was—just like many Latin American leaders were after the proclamation of the Truman Doctrine—very optimistic about the possibility of future cooperation between core and peripheral governments. Well-regulated international credit would eliminate the problem of dollar shortage, which was desirable for both the U.S. and all other countries (Prebisch 1949: 113). His hopes for the future of international cooperation did not stop there. Though Prebisch disagreed with Keynes about exchange-rate policy, he agreed with the British economist—and other scholars working at the UN—that the reform of the international monetary system should be accompanied by a plan to sustain stable prices and an abundant supply of all the main commodities in the international market (Paesani and Rosselli 2014). Through his analysis of deteriorating terms of trade, Prebisch formulated his proposal: during recessions, either the core countries or international organizations should buy the excessive supply of primary products from the periphery, thereby preventing violent
30 Natália Bracarense fluctuations in the latter’s production (Prebisch 1954b: 83). Such policy would work to buffer the business cycle in the periphery. First of all, the demand for and prices of primary commodities would not decrease as steeply as they would otherwise (Prebisch 1954b: 84). Consequently, if a decline in the demand of agricultural goods and a deterioration of the terms of trade were avoided, peripheral countries would not need to reduce their imports from the centers during the recessions, which would work as a buffer for recessions in the center as well (Prebisch 1954b: 86). Second, during the recovery, core countries would not be slowed down by a shortage of primary commodities—the supply of which was sluggish to respond to abrupt changes in the market, especially when compared to manufactured commodities. In sum, during this period Prebisch believed in a hierarchical but possibly cooperative relationship between center and periphery and between individuals of different classes within nations. With the beginnings of the Cold War, however, national government planning in the periphery to promote industrialization and employment would face obstacles (Prebisch 1953: 1). In fact, Preb isch learned this lesson in practice as the U.S. opposed the creation of ECLAC and did its best to discredit the agency and its advice. The problem was not the import-substitution-industrialization effort per se, but ECLAC’s advocacy of state planning and regulation combined with resistance to foreign direct investment (Coatsworth 2005: 133). U.S. leaders had a hard time compromising their faith on the private sector’s ability of advancing economic development in the periphery (Prebisch 1952: 4). ECLAC, moreover, got involved with Central America’s plan of economic integration through the formation of a Central American Common Market (CACM). Although ECLAC did not conceive the plan, it did not sit well with U.S. American leaders—specially considering the forceful dominance of the U.S. in the region (Urquidi 2007: 34–35). This combination scared U.S. leaders, who believed the implementation of ECLAC’s projects could close off opportunities for U.S. multinational businesses in Latin America (Coatsworth 2005: 133). The Truman administration’s Cold War priorities meant that Latin America, which faced no imminent Soviet threat, would garner only modest levels of U.S. economic and technical assistance during most of the 1950s (Rabe 1999). Prebisch did not dispute the lack of communist menace, but insisted that promoting stability in Latin America was important because “avoiding or mitigating periodic crises, which start in the core countries and spread to the rest of the world, will contribute greatly to the perfecting of capitalism for the collective well- being” (Prebisch 1948a: 9). Development programs corresponded to a very simple idea: to expand and organize capital investment in order to promote smoother and stronger economic growth (Prebisch 1953: 1). The idea did not differ so much from Truman’s discourse, but Washington viewed ECLAC’s economic nationalism, and regional economic planning, as constituting a threat to U.S. interests much as they viewed communism as a threat. As Prebisch started working at the UN-ECLAC, he did not see an inherent contradiction between developed and underdeveloped countries. He was aware
Historical analysis of development theory 31 that a policy centered on national plans might face some ideological resistance in the U.S. But he thought that core countries would ultimately understand that promoting cooperation among governments and within peripheral countries would achieve what the free play of market forces could not—an optimal equilibrium and thereby mutual advantages of international trade (Prebisch 1950b; Prebisch 1953; Prebisch 1955: 3).
6 Core and periphery: let’s paint the town blue Afraid that destitution and misery in Latin America could transform it into an attractive venue for communist advance, U.S. economic policy gradually shifted to favor government-sponsored economic planning in the south. This change of heart began in President Dwight Eisenhower’s second term (1957–1961) when Washington first used increased levels of loans to direct local ferment into the “right channels,” and gave way to John F. Kennedy’s ambitious Alliance for Progress, which intended to promote sweeping reforms to satisfy Latin Americans’ needs for homes, work and land, health, and schools. During both administrations, Prebisch saw an opportunity to push his agenda for development through industrialization and tagged along the U.S. government plans. This section shows that Prebisch’s goals became more ambitious and elaborated; he now advocated for a policy to stimulate export of manufactures to the centers and to strengthen trade relations within peripheral countries (Prebisch 1956, 1959b). More than ever, Prebisch (1956, 1958, 1962a) still believed in a possible harmonious complementarity between center and periphery. He reasoned that since the reconstruction of Europe was complete, core countries could focus onto helping the periphery, which would open new trade opportunities to Latin America. Enthusiastic about the promises of cooperation coming from the U.S. government, Prebisch celebrated that advanced capitalist countries finally realized that they must assist the industrialization project of developing nations. Core countries need to pursue a more liberal policy towards developing countries. The greater our exportation of industrial product . . . as well as primary commodities the greater our imports of other industrial production will be. . . . This expansion of international trade would have an implicit element of reciprocity; and I trust that more advanced countries would find it possible to make some concession to the export of manufactured good from developing countries without expecting from them similar concession that could harm their industrial development. (Prebisch 1962a: 72) Prebisch believed that the industrialization effort now be supported by firm foreign financial commitment would achieve several important objectives, such as a balanced relationship between: consumption and investment spending;
32 Natália Bracarense investment on productivity and well-being; investments that save and absorb labor inputs; and national government expenditure and foreign investment (Prebisch 1960: 2–3; Prebisch 1962a: 92). Although the idea of a harmonious complementarity remained, Prebisch modified some of his views. He came to realize that the process of development was more complex than he first thought when he arrived at ECLAC. One important change was that Prebisch noticed that it would be hard to pull together individuals with different interests to collaborate upon his development plan. In contrast to the previous phase of his work, Prebisch started emphasizing the obstacles posed to development by domestic social tension and the world geopolitical divide between the U.S. and the Soviet Union in his texts.22 He used the specter of unrest to leverage more U.S. assistance. During the Eisenhower administration, Prebisch (1956, 1958) adopted the ideas and the president’s wording of directing dynamic elements toward the right channels. He argued that a deliberate social policy was necessary to guarantee that increased output due to improved productivity would be redistributed so that the gradual inequalities created by the system were corrected. That was especially important because the system did not correct inequality spontaneously (Prebisch 1956: 16–17). The previous section mentioned that in 1949 Prebisch believed growth would unavoidably reduce inequality. By 1956 he had changed his mind fundamentally and further argued that growth made no sense if it did not improve the well-being of the population (Prebisch 1956: 16; Prebisch 1984: 181). The stability of the system based on private enterprise, he argued, depends upon the driving force with which the system can forge ahead towards two closely-allied objectives: the rapid and steady improvement of popular standards of living, and the extension of increasing opportunities for economic and social ascent to the most dynamic elements of the community. (Prebisch 1958: 48) To strengthen his argument, Prebisch (1958, 1963) portrayed income redistribution as a preventive measure to social tension. He asserted that the masses had never demanded improvements of their standard of living as they do right now and, unless there is a policy of development that enhance their social and economic situation, they will constitute of an increasing source of national and international tension. (1964: 460) He also tied his new emphasis on standards of living to Washington’s increased interest in the developmental project and government-driven international cooperation. He stressed that the system of private enterprise has tremendous possibilities in Latin America. But the time is of decisive importance. Since development is an
Historical analysis of development theory 33 increasingly imperative social exigency, the rate of growth must be intensive, and to this end a large-scale international transfer of capital and technique must be affected—an operation in which the State will have to play a very important part (Prebisch 1958: 48) According to Prebisch (1962a: 84), foreign investments promoted development without requiring an increase in forced savings. Increased domestic savings as a national plan implied enormous sacrifices that could result in social upheavals and were ultimately incompatible with democracies. When Kennedy became president, Prebisch started also stressing the role of promoting development vis-à-vis the geopolitical conflict between the U.S. and the Soviet Union, Prebisch argued that [e]conomic development is fundamentally a process of formation and exaltation of the national ability towards technology and production. Let us not forget that—despite the social and political costs that the system represents—one of the factors of the Soviet method of economic development that fascinate young generations is that regardless of the starting point of a country, independently of its lack of technical knowledge and of its economic precariousness, it enables the development of technical skills in one generation life span, if this country’s population is submitted to rigorous and systematic technological capacitation. (Prebisch 1962a: 71) In other words, if the U.S. wanted to compete with the Soviet Union in the peripheral world, it would have to meet certain requirements of technical and financial support. Prebisch seemed to have realized that to convince core countries of the benefits they could derive from international cooperation, his argument could not rely solely on pure economics. He thus adopted the discourse of the time in order to convince his audience that the development of Latin America was compatible with the interest of the core. According to him, [t]he difficulties entailed are undeniably great. The provision of capital and technical assistance by the United States in order to enable Latin American enterprises to attempt successfully what would otherwise be undertaken by its own, could be justified only by political considerations of over-riding importance. (Prebisch 1958: 50) The U.S. would need to relegate its investment gains to a secondary plan and give priority to the development of Latin America (Prebisch 1958). Core countries could no longer consider investments in Latin America exclusively as a function of private capital. The problem of development was not only political but a matter of preserving the free world and extending western values deep into the southern hemisphere (Prebisch 1962b: 5).
34 Natália Bracarense Although Prebisch was optimistic about the new context of cooperation for the developmental effort, he noticed the matter entailed a lot of complexities that he had not foreseen earlier in his career. These included both the conflict of existing interests and challenges imposed by the industrialization projects themselves. Prebisch (1962a) observed that, as he had recommended, most of the projects implemented in the 1950s had focused on attending the domestic market. It was clear that the process of industrialization (at least in the most advanced peripheral countries) had nearly exhausted the possibilities of further import substitution for the internal market of nondurable consumer goods. It was therefore necessary to enter into more complex and difficult task of manufacturing intermediary products as well as capital and durable goods and securing access to larger markets. (Prebisch 1984: 181) The emphasis on industrialization to attend the internal market of nondurable consumer goods, nonetheless, prompted the implementation of excessive subsidies to protect national firms. As a result, inefficient firms produced consumer goods at high costs (Prebisch 1962a: 66). The reasons for inefficiency were twofold: first, there was no competition and, second, domestic markets were too small, denying firms of the benefits offered by economies of scale. Given that obstacle, Prebisch (1959b, 1960) suggested that creating a Latin American Common Market was one of the necessary steps to accomplish a new level of industrialization in the region. A higher level of industrialization was indispensable because industrial specialization in consumer goods had not rid Latin America from its external vulnerability. Firms still relied heavily on the importation of raw materials, intermediate goods, and capital goods. This meant that Latin American countries had not reduced their import coefficient, and thereby their external vulnerability, despite their industrialization, and were trapped in stop-and-go patterns of growth (Prebisch 1964: 476–479). More profound structural reforms were thus required (Prebisch 1959a: 38). Inefficiency was aggravated by the fact that only producers attending the domestic market received subsidies (Prebisch 1964: 476). No similar subsidies were given to exporters of manufactured goods. Prebisch (1964) argued that exporters would have more incentives to be efficient, since they had to compete in the international market. Moreover, they would bring more dollars to Latin America, which would improve its ability to maintain the industrialization project without reliance on foreign loans (1962: 67). In sum, the effort in the 1950s had accomplished a few structural changes, but an incomplete process of industrialization meant that Latin American countries were just as vulnerable to external economic fluctuations as they used to be before. More needed to be done and Prebisch thought that the essential changes were compatible with the Alliance for Progress: agrarian reform would avoid social
Historical analysis of development theory 35 tensions and increase productivity in agricultural areas, while education would enhance workers’ skills, which also had a positive effect on productivity (Prebisch 1962a: 75–78). Prebisch’s faith in the promises of the Alliance turned him into an influential advocate for the program in Latin America. In a speech to the Inter-American Economic and Social Committee, he assured other Latin American leaders that the program aimed at lending massive financial resources as a way of facilitating the deep institutional reforms necessary in their countries (Prebisch 1962b: 2). Intending to put some of his colleagues at ease, Prebisch asserted that the U.S. had no intention of constricting the national sovereignty of the countries that accepted the financial aid (Prebisch 1962b: 2). On the contrary, the Alliance of Progress was critical to guarantee that democracy would persist in Latin America. In sum, at this point in his career Prebisch reevaluated the industrialization effort of the past decade and concluded that it had fallen short of reducing the external vulnerability of peripheral countries. He also realized that promoting development was much more complex than he first foresaw due to different interests in play. Although showing some skepticism, his hopes of international cooperation were revived by President J.F. Kennedy’s new political agenda toward Latin America. Convinced that the current political context enhanced chances for inter-American cooperation, Prebisch appropriated Washington’s Cold War geopolitical discourse and positioned the core and periphery as allies fighting together for democracy and against the Soviet threat. The failure of the Alliance for Progress, near the end of the 1960s, and the subsequent strong- handed U.S. intervention in Latin America, however, cast a pall over these hopes (Grandin 2006).23 This period, for several reasons, signified the beginning of the end for development economics (Latham 2011; Bracarense 2012, 2013a) and coincided with the end of Prebisch’s political work at the UN. By the end of the 1960s, as the Cold War entered its late and most violent phase in Latin America, Prebisch, in turn, became very pessimistic and changed his view on core and periphery drastically.
7 Core and periphery: an adequate dichotomy? By the end of the 1960s, it became clear that the relative success of industrialization had been insufficient to prevent a substantial increase in poverty and inequality. Growth had not benefited the low-income part of the population, while the high-income oligarchy flourished (Prebisch 1968: 9–10; Prebisch 1971: 1). Additionally, international cooperation never reached the level necessary for a serious developmental project, the resources were not enough and the ones made available had short-maturity terms and high interest rates (Prebisch 1970: 24). Prebisch and a less optimistic ECLAC started analyzing the effects of industrialization on employment plans and income distribution (Bielschowsky 2009: 175).24 Prebisch (1969) argued that inequality had to be tackled immediately. Inequality in Latin America had skyrocketed, which prevented social mobility
36 Natália Bracarense and was unfavorable to economic development. An extremely wide gap between rich and poor meant that a “considerable human potential is left untapped, since very few dynamic elements [i.e., individuals] succeed in forcing their way up from the lower and middle strata of society” (Prebisch 1969: 31). Moreover, Prebisch continued, “the extremely low income level of half the population . . . prevents the dynamic elements from succeeding and taking advantage of the whole range of opportunities for education and technical training, even when these are offered” (1969: 31). This represented a serious problem because when dynamic individuals could not employ their energy in being creative and innovative, they became resentful and tended to channel their energy toward other ends, such as social upheavals (Prebisch 1969: 32). In this period, Marxists/Dependentistas took up the ECLAC problematic and tried to redefine it radically (Cardoso 1977: 10). Emphasizing the historical impact of international capitalism, dependency theoreticians aimed at grasping the political alliances, the ideologies, and the structural changes within the dependent countries. With a focus on class struggle, they realized that peripheral capitalists were connected with and subordinated to the bourgeoisie of the western world: “alliances are established within the country . . . to unify external interests with those of the local dominant groups, and as a consequence, the local dominated classes suffer a kind of double exploitation” (Cardoso 1977: 13). Prebisch’s exposure to Dependentistas’s analyses prompted him to study the economic surplus and show that peripheral capitalists used a huge amount of their income to engage in conspicuous consumption—imitating the consumption patterns of the centers. The result was a premature diversification of demand with adverse social effects, exacerbated social tensions, and leakage of peripheral income to the centers to the detriment of investment on reproductive capital (Prebisch 1976). His view on the relationship between core and periphery changed in two directions. First, Prebisch (1969: 40) announced a more conflictive perspective, the inefficient social structures were reinforced by foreign investment—as it did in the times of outward-oriented development—and aimed at “serving, in one way or another, the interests of the major centers of which the undertakings concerned were an offshore.” Multinational corporations internationalized forms of consumption more than productive and technical capacities. In fact, there was no attempt to disseminate advanced techniques and such private enterprises either engulfed domestic efforts or pressured them economically into their disappearance (Prebisch 1969: 40). As a result, the majority of the Latin American population “generally had little—if any—access to technology, and decisions were taken abroad without the country’s influencing them to any great extent, however important they may be to its interest” (Prebisch 1969: 41). Prebisch realized that the periphery could never reach the same level of development as the core. He admitted that although the situation of Latin American countries in international markets had changed, it was still marked by commercial, financial, and technological subordination. Latin America should, thus, aim at ridding itself of these subordinated relationships, without any hope of
Historical analysis of development theory 37 achieving economic conditions similar to the prosperity of core countries (Prebisch 1970: 163). Prebisch (1970: 160) also adverted to the fact that international cooperation could translate into greater subordination of peripheral countries, which should be avoided. This change proved to be crucial regarding development theory, as it marked the abandonment of a teleological approach to history. However, by this time, development economists had lost their influence in political and academic circles (Bracarense 2012, 2013b). Second, he noticed that a simple dichotomy between a powerful, modern, and dominant core and a poor, inefficient, and subordinate periphery could not capture the complexity of international relations. He had started to see these complications near the end of the 1950s, but now he was convinced that industrialization could not change the situation dramatically. While members of the Latin American elite emulated some western cultural traits—mainly its consumption habits—foreign enterprises did not work to spread modernity in Latin America as expected. Rather, the contrary happened: not only did they adopt the “backward” way of doing things, they also allied with the landed oligarchy. As a result, the power and privileges the national oligarchy used to control and constrain other members of their society were reinforced by foreign firms, who now enjoyed similar privileges as well (Prebisch 1969: 40–41; Prebisch 1981). In other words, Prebisch realized that nations were not coherent wholes; the majority of the population could not trust their future to a handfull of politicians because elites pursued their own interest, which was generally incompatible with the well-being of the bulk of the population. The industrialization effort did not necessarily represent the aspirations of the majority of the Latin American population. Prebisch (1969: 46) concluded that the plan of development “must not be created only from above; it must come from below, traveling up through all the responsible levels of the administration.” This second change reinforced Prebisch’s understanding of history as a non- teleological process, emphasizing how the interaction between different social layers shaped the way history unfolded. In sum, as the geopolitical struggle between the U.S. and the Soviet Union regarding Latin America ceased to be cold, Prebisch changed his views significantly. Prebisch (1969: 46) argued, as a result of the pressure of circumstances, plans have often tended to be drawn up by a small group of people who have been unable to make use of the piecemeal experience of a host of government departments—the experience of the vast number of people who will have to execute the plan without having had the opportunity of cooperating in the determination of its aims. As a result, Prebisch accepted that the interests of core countries were incompatible with the development of the periphery. The periphery would never reach the same level of development as the core. In this sense, his crumbling dichotomous framework now showed conflict rather than cooperation. Prebisch, moreover,
38 Natália Bracarense realized that international relations could not be simplified by categories as center and periphery, whose one-dimensional goal was to develop advanced capitalist institutions (Bracarense 2013b). Nations were not coherent wholes and while the elites pursue their interest, the distanced masses claimed their rights to participate in the decision process.
8 Concluding remarks This chapter has set the focus on Raúl Prebisch’s work to argue that economic theories result from an historical and social context, being inevitably political. As the international environment changed, Prebisch’s view regarding the relationship between core and periphery went through transformations as well. In the beginning of the twentieth century, Prebisch saw the world divided between agricultural and industrial countries, but believed that their relationship was complementary. For him, such international division of labor did not spring from hierarchical relations. After participating in the League of Nations World Conference, however, Prebisch realized that agricultural countries like Argentina, Canada, and Australia did not have a voice against the interest of the United States and England. So, international trade concealed a hierarchical relation. With the problems caused by the Great Depression, Prebisch witnessed in Geneva the desperation of core countries and understood that at that moment each country had to act independently on their best interest. In the 1940s, while studying how business cycles in the core are the epicenter of economic fluctuations in the periphery, Prebisch hoped that the new international monetary system would engender international cooperation. He had faith the U.S. would assume its position as the center of the world and take the necessary measures to guarantee that the system would run smoothly. In the mid-1950s, Prebisch realized that the United States would not support Latin America’s developmental projects unless the projects were viewed as part of the geopolitical struggles between the U.S. and the Soviet Union. Although his skepticism became more evident, he maintained his hope on international cooperation until the end of the 1960s. Finally, at the end of the 1960s, when the Cold War melted into violent reprisals in Latin America, Prebisch became pessimistic about the possibilities of collaboration between core and periphery. This pessimism led him to a second change in his views, from the 1920s until the 1960s he had held a standard structuralist position, one guided by binary oppositions, drawing rigid boundaries between the central and the marginal. Near the end of the 1960s, Prebisch’s binary oppositions were influenced by dependency theory, which led to a more contingent and complex understanding of the relationship between core and periphery. This change would have been crucial for development theory, as it moved away from a teleological approach to history to a non- teleological one. By the time Prebisch accepted that peripheral countries could/ should not replicate the center, however, he was no longer an academically and politically influential figure.
Historical analysis of development theory 39
Notes 1 This chapter takes Prebisch’s (1984) “Five Stages in My Thinking on Development” into account. However the changes in Prebisch’s understanding of core and periphery relations do not always coincide with the stages he described. 2 The Singer-Prebisch thesis asserted that there is a tendency for deteriorating terms of trade of agricultural products when compared with manufactured commodities in the international market. Consequently, a country specializing in agriculture—most of the underdeveloped countries at the time—would suffer a increasing gap between its standard of living and that of the developed countries. 3 Prebisch only fully elaborated this idea in his 1943 manuscript and 1944 paper, which are both presented below. 4 In the 1920s, the terms were popularly used in Argentina to describe the cities in the coast (the periphery) and the cities in the interior (the center). For Prebisch (1922: 293), the immigrants’ settlement patterns of Argentina made no sense, as the interior was colonized at the same time as the littoral. He believed that this unnatural process of occupation created a relationship of dependency between Buenos Aires—the peripheral “Paris of Latin America” (Prebisch 1924a: 31)—and the interior (or center) of the country. 5 If there was any relation of dominance between center and periphery, as geographical concepts, the relation was the inverse of the expected: with respectively dependent– dominant interactions between the core (i.e., cities in the interior) and the periphery (i.e., cities on the coast of Argentina). 6 In 1914, Argentina’s income per capita doubled that of Italy and was one-third higher than France’s. The railway network expanded from 1563 miles in 1880 to 20822 miles in 1914. Moreover, it had the most advanced public school system in Latin America, which produced a large middle class with expectations of social mobility (Dosman 2008: 12). 7 This first phase of Prebisch’s views on the relationship between industrial and agricultural countries correspond to “stage zero” of his thinking on development. Prebisch (1984) does not label any of his work written prior to 1943. 8 Between the years 1934 and 1937 most of Prebisch’s writings were concerned with the creation and functioning of the Central Bank. Apart from the works cited above, other essays from this period are available in Prebisch (1991). 9 In June 1943, a military coup toppled Ramón Castillo and brought General Pedro Ramirez into power, Juan Peron was also part of the new government. This turn of events changed abruptly the terms of debate over Argentina’s future. Three months later, Prebisch was dismissed from his post in the Central Bank. 10 Prebisch (1984) did not see a difference from this stage of his theory and what he called the first stage. His view on core and periphery, however, changed at some point between 1943 and 1944. 11 Victor Urquidi (1944) sent a letter to Raúl Prebisch on June 2, 1944 referring to John Williams’s (1944) new article on international monetary plans. In the letter Urquidi called Prebisch’s attention to the similarities between his views and Williams’s and advised Prebisch to revisit that area of inquiry. 12 As mentioned in the first section, Williams was a friend of Bunge and was helped by Prebisch when working in his dissertation in Argentina. For details on the relationship between Prebisch and Williams view Brenta (2008). 13 Based on a letter from Prebisch to Urquidi in 1947. 14 Prebisch (1949: 113) later reinforced this view. 15 He later developed this argument (Prebisch 1948a: 10). 16 The Alliance for Progress was program launched by President J.F. Kennedy to help Latin Americans who suffer the daily degradations of hunger and poverty . . . lack decent shelter or protection from disease [and] are deprived of the education or the jobs which are the
40 Natália Bracarense gateway to a better life. Therefore I have called on all the people of the hemisphere to join in a new Alliance for Progress—Alianza para Progreso—a vast cooperative effort, unparalleled in magnitude and nobility of purpose, to satisfy the basic needs of the American people for homes, work and land, health and schools—techo, trabajo y tierra, salud y escuela. (United States of America 1961: 471–474) 17 Prebisch saw the period between 1949 and 1955 as a second stage of his development theory. This corresponds to a fourth approach to core and periphery. 18 Although Prebisch agreed with Keynes’s analysis of the failures of the market system and the need of countercyclical policy, Prebisch criticized Keynes’s views on the interest rate and multiplier (Perez and Vernengo 2012b). 19 Raúl Prebisch believed, as did Ragnar Nurkse and Paul Rosenstein-Rodan, that savings were essential to increase productivity. For more on Nurkse, view Kattel, Kregel, and Reinart (2011). More information on Rosenstein-Rodan is available in Bhagwati and Eckhaus (2012). 20 His understanding of the role of credit during economic booms is also observed in a letter he wrote to Victor Urdiqui (Prebisch 1946b: 1). Speaking of a paper published by Avram Kisselgoff (1945), Raúl Prebisch (1946b: 1–2) argued that during the boom, firms injected money that was previously idle into the system as payment of workers income, which now exceeded current production increasing the amount of money circulating in the economy. The new money that firms borrow from banks during booms played a similar role. As the firms’ inventories decreased, profits increased and that stimulated more investment by the firms (Prebisch 1946b: 2). 21 Prebisch understood that governments could use fiscal policy to change the amount of money available in the economy, a view that is today supported by the modern money theory (MMT) proponents. According to MMT, a government that issues a sovereign currency—i.e., a government that can issue debt and impose taxes on its subjects— would be able to implement the necessary policy to guarantee that workers were always fully employed, meaning that everybody who is able and willing to work should have a job (Wray 1999). Prebisch (1949: 139), however, warned Latin American governments not to do fiscal policy because if they depleted all of their reserves in trying to maintain a fixed exchange rate, the ultimate options left would be unplanned depreciation, deflate the economy, or issue debt (Wray 2012: 164–168)—probably issued in foreign currency in the case of Latin America. Prebisch condemned fiscal policy as a mechanism to achieving economic stability and full employment in the periphery not only because of the general constraints a fixed exchange rate system imposed. Of those constraints depreciation concerned him the most—which, by the way, would be the most likely result of government expenditure in a flexible exchange rate system if it had no reserves of foreign currency. But he also thought that the effects of increased income on balance of payments in an economy that did not even produce non-durable consumer goods would be detrimental. His fundamental fear, however, was the effects of a government- financed boom on its future ability to import the capital goods necessary to promote industrialization. In fact, Raúl Prebisch’s alarm was not in vain, Randall Wray (1999: 88) affirmed that when a country depended on importation of foreign capital to produce its vital commodities, its government did not have much discretion in pursuing a full- employment policy through government spending even in a system of floating exchange rates. 22 This fifth phase of Prebisch’s views on the center and periphery corresponds to what he described as both the third and fourth stages of his thinking on development. 23 Under Lyndon Johnson’s administration Washington began to either organize or patronize a cycle of coups—starting in Brazil in 1964, continuing through Uruguay,
Historical analysis of development theory 41 Bolivia, and Chile, and ending in Argentina in 1976—that completed not the revolution, as Kennedy promised, but the counterrevolution of South America, turning the region into a garrison continent (Grandin 2006: 49). 24 Prebisch (1984) considered this more cynical phase as a fifth stage of his thinking on development. In terms of his understanding of the relations between center and periphery this was a sixth stage. By the end of his career Prebisch was even more aggravated. He argued that authoritarian regimes were the ultimate consequence of peripheral capitalism as they were the only way to overcome structural crisis (Prebisch 1981). Prebisch further asserted that profound changes in the form of appropriation and use of the surplus were the only way around authoritarian regimes. In this sixth phase of his career he advocated a synthesis of liberal and socialist ideals as a way of achieving this goal. Prebisch’s views were strongly affected by political changes Latin America went through during the Cold War. This later stage of the geopolitical conflict and how it affected Preblisch’s work, however, are beyond the scope of the present chapter.
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42 Natália Bracarense Kattel, Rainer, Jan Kregel, and Erik Reinart (2011), Ragnar Nurkse (1907–2007): Classical Development Economics and its Relevance for Today. London: Anthem Press. Kisselgoff, Avram (1945), Liquidity Preference of Large Manufacturing Corporations 1921–1929, Econometrica 13 (4): 334–344. Latham, Michael (2011), The Right Kind of Revolution: Modernization, Development and U.S. Foreign Policy from the Cold War to the Present. Ithaca, NY: Cornell University Press. Lee, Frederic (1998), Post Keynesian Price Theory. New York: Cambridge University Press. Means, Gardiner ( 2011), The Structure of the American Economy. Charleston NC: Nabu Press. Paesani, Paolo and Annalisa Rosselli (2014), The Case for a Supra-national Control on Commodities in the post WWII World: Novel Perspectives from FAO and Kaldor Archives, History of Economic Thought and Policy 1: 5–30. Perez, Estebán and Matías Vernengo (2012a), Portrait of the Economist as a Young Man: Raúl Prebisch’s Evolving Views on the Business Cycle and Money, 1919–1949, Cepal Review 106: 7–21. Perez, Estebán and Matías Vernengo (2012b), ¿Una Pareja Dispareja? Prebisch, Keynes y la Dinámica Capitalista, Estudios Críticos del Desarrollo 2 (3): 158–193. Prebisch, Raúl (1921–1922), Anotaciones de Nuestro Medio Circulante, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 4, Microfilm 1, Folder 2. Santiago: ECLAC Library. Prebisch, Raúl ([1924a] 1991), El Problema de la Tierra, in Obras 1919–1949 vol. 1, organized by Gregorio Weiberg, 376–380. Buenos Aires: Fundación Raúl Prebisch. Prebisch, Raúl ([1924b] 1991), Primer Informe del Doctor Raúl Prebisch sobre sus Estudios Financieros y Estadísticos en Australia, in Obras 1919–1948 vol. 1, organized by Gregorio Weinberg, 401–403. Buenos Aires: Fundación Raúl Prebisch. Prebisch, Raúl ( 1991), El Estado Económico, in Obras 1919–1948 vol. 1, organized by Gregorio Weinberg, 592–644. Buenos Aires: Fundación Raúl Prebisch. Prebisch, Raúl (1933a), Speech in the League of Nations World Economy in Geneva, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 4, Microfilm 1, Folder 4. Santiago: ECLAC Library. Prebisch, Raúl (1933b), La Conferencia Económica y La Crisis Mundial, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library. Prebisch, Raúl ([1934a] 1991), El Momento Presente de Nuestra Economía, in Obras 1919–1949 vol. 2, organized by Gregorio Weiberg, 158–306. Buenos Aires: Fundación Raúl Prebisch. Prebisch, Raúl ([1934b] 1991), El Banco Central de la República Argentina, in Obras 1919–1948 vol. 2, organized by Gregorio Weiberg, 354–395. Buenos Aires: Fundación Raúl Prebisch. Prebisch, Raúl ( 1991), Reglamento Provisional del Banco Central de la República Argentina, in Obras 1919–1948 vol. 2, organized by Gregorio Weiberg, 488–510. Buenos Aires: Fundación Raúl Prebisch. Prebisch, Raúl ([1936a] 1991), Organización del Banco Central, in Obras 1919–1948 vol. 2, organized by Gregorio Weinberg, 544–564. Buenos Aires: Fundación Raúl Prebisch. Prebisch, Raúl ([1936b] 1991), La Baja de los Precios Internacionales y el Mantenimiento del Patron Oro en los Países Agrarios, in Obras 1919–1948 vol. 2, organized by Gregorio Weinberg, 565–575. Buenos Aires: Fundación Raúl Prebisch.
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44 Natália Bracarense Prebisch, Raúl ( 2011), O Desenvolvimento Econômico da América Latina e Seus Principais Problemas, in O Manifesto Latino-Americano e Outros Ensaios: Raúl Prebisch, organized by Adolfo Gurrieri, 95–151. São Paulo: Contraponto. Prebisch, Raúl (1950a), Estudio Económico de América Latina 1949, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library. Prebisch, Raúl ([1950b] 2011), Crescimento, Desequilíbrio e Disparidades: Interpretação do Processo de Desenvolvimento Econômico, in O Manifesto Latino-Americano e Outros Ensaios: Raúl Prebisch, organized by Adolfo Gurrieri, 153–246. São Paulo: Contraponto. Prebisch, Raúl ( 2011), Problemas Teóricos y Prácticos del Crecimiento Económico, in O Manifesto Latino-Americano e Outros Ensaios: Raúl Prebisch, organized by Adolfo Gurrieri, 247–297. São Paulo: Contraponto. Prebisch, Raúl (1952), Seventh Annual Meeting of Board of Governors of the International Bank for Reconstruction and Development Mexico D.F., Mexico. Palabras pronunciadas por el Doctor Raúl Prebisch en la Discusión Sobre Desarrollo Económico durante la Séptima Asamblea anual de Gobernadores del Banco Internacional de Reconstrucción y Fomento, el 10 de Septiembre de 1952, in Project Raúl Prebisch, Collection 4, Microfilm 3, Folder 77. Santiago: ECLAC Library. Prebisch, Raúl (1953), Estudio Preliminar sobre la Técnica de Programación del Desarrollo Económico, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library. Prebisch, Raúl (1954a), Discurso Pronunciado por el Dr. Raúl Prebisch, Director Principal a cargo de la Secretaria Ejecutiva de la CEPAL, Pronunciado en la Sesión Plenaria del 24 de noviembre de 1954, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library. Prebisch, Raúl (1954b), La Cooperación Internacional en la Política de Desarrollo Latinoamericana, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library. Prebisch, Raúl (1955), Exposición del Sr. Raúl Prebisch, Secretario Ejecutivo de la Comisión Económica para América Latina, en el Debate sobre la Situación Económica Mundial, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library. Prebisch, Raúl (1956), Desarrollo Económico y Política Social. Mesa Redonda, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 4, Microfilm 4, Folder 87. Santiago: ECLAC Library. Prebisch, Raúl (1958), Soviet Challenge to America Leadership: America’s Role in Helping Underdeveloped Countries, in Problems of United States Economic Development, 47–55. New York: Committee for Economic Development. Prebisch, Raúl (1959a), La Política Comercial en los Países Insuficientemente Desarrollados (desde el Punto de Vista Latinoamericano), in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library. Prebisch, Raúl (1959b), El Mercado Común Latinoamericano, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library. Prebisch, Raúl (1960), Exposición del Doctor Raúl Prebisch, Representante del Secretario General de las Naciones Unidas y Director Principal de la CEPAL en la Reunión Plenaria del Comité de los 21 Celebrada el día 8 de Septiembre de 1960, en Bogotá, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 2. Santiago: ECLAC Library.
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46 Natália Bracarense Urquidi, Victor (1944), Carta a Raúl Prebisch el 2 de Junio, 1944, in United Nations Economic Commission for Latin America Project Raúl Prebisch, Collection 4, Microfilm 2, Folder 51. Santiago: ECLAC Library. Urquidi, Victor (2007), The Oral History Interview June 18–19, 2000, in The Complete Oral History Transcripts from UN Voices, CD-ROM. New York: United Nations Intellectual History Project. Williams, John (1929), The Theory of International Trade Reconsidered, Economic Journal 39 (154): 195–209. Williams, John (1943), Currency Stabilization: The Keynes and White Plans, Foreign Affairs 21 (4): 645–658. Williams, John (1944), The Post-war Monetary Plans, American Economic Review, Supplement, Papers and Proceedings 34 (1): 372–384. Wray, L. Randall (1999), Understanding Modern Money: The Key for Full Employment and Price Stability. Northampton, MA: Edward Elgar Publishing. Wray, L. Randall (2012), Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. New York: Palgrave Macmillan.
3 Anarchic accumulation, un-effective demand and institutional constraints Oskar Lange’s critique of capitalist dynamics in the core and the periphery Roberto Lampa 1 Introduction Since the epistemological foundations of his scientific production, dated 1935, Oskar Lange clearly identifies three controversial aspects of capitalist dynamics: the irrational accumulation of capital, the un-effective level of the demand and the constraining role played by capitalist institutions (first and foremost, the private property of the means of production and the division of society into classes) on the economic process. The result is a detailed critique to the core-capitalist dynamics contained in his 1938 article “The Rate of Interest and the Optimum Propensity to Consume”. Two decades later, Lange finally focuses on the underdeveloped countries and elaborates also a harsh criticism of peripheral-capitalism, both from a theoretical point of view and in terms of policy. In light of such a premise, this chapter aims first to critically reassess the main contents of Lange’s analysis of capitalist dynamics (as exposed in 1935–1938). Second, to analyse the rather obscure contents of Lange’s reflection on underdeveloped economies (dated 1960–1964), also in order to clarify any plausible source of inspiration. Finally, to show that this latter was but a logical consequence of his previous critique to (core) capitalist economies. In more detail, in Section 2 we expound the foundations of Lange’s critique of capitalist dynamics; in Section 3 we highlight the features of Lange’s 1938 analysis of capitalism, both from a static and a dynamic point of view; in Section 4 we examine Lange’s analysis of the peripheral economies. Finally, in Section V, we draw some conclusions, suggesting that his reflection on underdeveloped economies represents a particular case of Lange’s broader beliefs on capitalism, influenced by his Marxist background.
2 The foundations of Lange’s critique of capitalist dynamics1 Already in his 1935 article “Marxian Economics and Modern Economic Theory”, Lange denied that neoclassical theory may provide a satisfactory description of the intrinsic development of capitalist economies. Since it investigates the economic process “under a system of constant data”, such an approach
48 Roberto Lampa completely ignored both the characteristics of the data (which became the object of economic statistics) and changes in the data (the object of economic history). Therefore, traditional economics was likely to consolidate the view that capitalist economies were naturally stable: It was very generally held among “bourgeois” economists both at the beginning of the twentieth century and in the years preceding 1929, that the economic stability of Capitalism was increasing and that business fluctuations were becoming less and less intense. (Lange 1935: 190) Lange thought that the only way to correct such a bias was to define the assumptions related to the institutional framework within which the economic process operates. His thesis was that Marxian economics could offer an adequate framework both to understand this process and to translate an institutional datum (i.e. the existence of a capitalist society) into the “language” of economics. At this stage, Lange was persuaded that Capital (meant as a social relation of production) was the key concept for treating the problem of capitalist dynamics. However, he was also aware that this social relation had a dual dimension in dealing with both the struggle between capitalist and workers, and the competition among the capitalists themselves. Therefore, Lange adopted a dual perspective on the interaction between the dynamics of income distributive shares, investment and technological change. On the one hand, he recalled the essentials of Marx’s analysis of the business cycle (Lange 1935: Section 8), based on the traditional issue of the industrial reserve army. According to Lange, technical progress is thus accompanied by a surge in unemployment followed by the fall in real wages, which eventually restores the profit rate: For Capitalism creates, according to Marx, its own surplus population (industrial reserve army) through technical progress, replacing workers by machines. The existence of the surplus population created by technical progress prevents wages from rising so as to swallow profits. Thus technical progress is necessary to maintain the capitalist system and the dynamic nature of the capitalist system, which explains the constant increase of the organic composition of capital, is established. (Lange 1935: 199) On the other hand, Lange emphasizes the pivotal role played by the unequal distribution of income in a capitalist economy, which in turn is related directly to the “irrational” accumulation of capital. Since the distribution of income is an historical datum which occurs “independently of the requirements of the maximisation of social welfare” (Lange 1937: 123), in a capitalist economy the amount of saving will be determined independent of the demand for investment. In fact, it will be a result of both social habits and the historical distribution of income
Oskar Lange and capitalist dynamics 49 (since low-income classes are unable to save at all). As a consequence, the accumulation of capital will necessarily be affected in a detrimental way: “saving is . . . in the present economic order determined only partly by pure utility considerations, and the rate of saving is affected much more by the distribution of incomes, which is irrational from the economist’s point of view” (Lange 1937: 127, emphasis in original). In a sketch, according to Lange these are the two nodes of the problem that must be unraveled in the analysis of capitalist dynamics: since the real wage cannot increase above the subsistence level, workers’ savings are assumed to remain negligible relative to capitalists’ savings. As a consequence, the higher the profit share, the higher will be the savings rate. This means that any innovation that strengthens the profit share will be accompanied by a rise in the savings rate. Since technical progress is a mere historical datum, it is therefore impossible to impose a different savings rate from the rate determined by the operation of the cycle which, unfortunately, is “irrational”. Furthermore, Lange stressed that the dynamics of these (topical) economic “data” was likely to interact with institutional factors. Accordingly, this became the field of his application of historical materialism: the full evolution of Capitalism in all its concreteness cannot be explained by a theory of economic evolution alone. It can be explained only by a joint use of both economic theory and the theory of historical materialism. The latter is an inseparable part of the Marxian analysis of Capitalism. (Lange 1935: 201) We can thus sum up that, since the epistemological foundations, Oskar Lange clearly identifies three controversial aspects of capitalist dynamics: the irrational accumulation of capital, the un-effective level of the demand and the constraining role played by the capitalist institutions (e.g. the private property of the means of production) on the economic process. In the following section, we are going to show that all of these elements represented the cornerstone of Lange’s 1938 theory of interest, in which he analyzed the (dis-)functioning of the core- capitalist economies, both from a static and a dynamic point of view.
3 Why is core-capitalism contracting? Lange’s 1938 theory of interest Given such premises, after the publication of the General Theory Oskar Lange believed that the analytical apparatus created by Keynes could have been a useful tool to cope with the problems of capitalist dynamics, evidenced by the 1929 breakdown. In his 1938 paper “The Rate of Interest and the Optimum Propensity to Consume”, he developed a mathematical re-interpretation of the Keynesian system. Above all, he stressed a fundamental relationship between net investment and the level of consumption (equation 3.3):
50 Roberto Lampa Mr. Keynes treats investment and expenditure on consumption as two independent quantities and thinks that total income can be increased indiscriminately by expanding either of them. But it is a common place which can be read in any textbook of economics that the demand for investment goods is derived from the demand for consumption goods. The real argument of the under consumption theories is that investment depends on the expenditure on consumption and, therefore, cannot be increased without an adequate increase of the later, at least in a capitalist economy where investment is done for profit. (Lange 1938: 23, emphasis added) By introducing the level of consumption as an argument in the investment function Lange departed from Keynes’s analysis of long-term expectations, contained in Chapter 12 of his General Theory (as Keynes argued that long-term expectations were merely exogenous, which amounts to assuming that investment is insensitive to current levels of output consumption or national income). To this extent, Lange’s model clearly recalls the contents of his aforementioned analysis, dated 1935: if we assume that both effective demand and the level of saving (i.e. the rate of accumulation) determine capitalist dynamics, then the level of investment must necessarily depend on consumption. To enter more into details, Lange’s “Keynesian” model can be summarized by the following four equations.
(3.2) (3.3) (3.4)
where M is the amount of money held by individuals, y is total real income, i is the rate of interest, c is total expenditure on consumption per unit of time and I is investment per unit of time. According to Lange, M, y, c and I are measured in wage units. Since the amount of money M (in wage units) is given, these four equations determine the four unknowns c, I, y and i. The process of determination of the rate of interest is depicted by Lange in three consequential steps: with a given amount of money M0 and a given initial level of income, say y, equation (3.1) gives us a rate of interest of i0. With y and i0 given, equation (3.2) determines total consumption, C0, and equation (3.3) provides the level of investment, i0. If we find that the sum of total consumption and investment precisely equals total income – and equation (3.4) is confirmed – the system is in equilibrium, if not we must start on a process of adjustment until an equilibrium position in the economy is established.
Oskar Lange and capitalist dynamics 51 However, Lange was evidently aware that, on a macroeconomic level of investigation, equilibrium would have been almost unattainable (Lampa 2013). By means of his crucial assumption – in equation (3.3) – of a direct relationship between consumption and investment, he stresses that an excessive growth in saving (i.e. an excessive contraction of consumption, investment and total income) cannot be counter-balanced by the subsequent decrease in the rate of interest, as it destroys any incentive to invest, “at least in a capitalist economy where investment is done for profit” (Lange 1938: 23). Therefore, Lange firmly rejects the “corollary of Say’s law”, according to which any abstinence from consumption implies automatically an increase in investment: according to him, such a direct relationship holds only until a certain limit (i.e. the optimum propensity to consume), beyond which the collapse of the effective demand will drastically diminish investment itself (ibid.: 14). Hence, the real issue of his under-consumption theory becomes the determination of the optimum propensity to consume, so as to maximize investment (and total income). However, capitalism would have acted as an insurmountable institutional constraint, to this extent: In a society where the propensity to save is determined by the individuals, there are no forces at work which keep it automatically at its optimum and it is well possible, as the underconsumption theorists maintain, that there is a tendency to exceed it. (Lange 1938: 32) Furthermore, starting from Lange’s pessimistic conclusions, as well as from a cryptic note (in which he explicitly stated that in the presence of time lags, the result will be not only disequilibrium but also cyclical fluctuations), it is possible to translate his 1938 theory of interest into a dynamic model of cyclical fluctuation, as we have shown in a previous work (Lampa and Assous 2013). In the first part of our simulation, we developed precisely Lange’s footnote in the most general case, that is by means of an IS-LM model, both assuming a linear investment function and by introducing time lags. As in Kalecki (1937), time lags result from the un-coincidence between investment decisions (e.g. investment goods orders) and the actual investment activity, in the short run the stock of capital, K, and the level of investment, I, are given. Over the longer run, however, we have also assumed that investment changes according to dI/dt = θ[I d – I]
Starting from these assumptions, we have shown that, when cycles do occur, their occurrence is related to both the slow adjustment of desired investment to actual investment and to the negative effect of capital stock on desired investment. If θ is infinitely large so that adjustment is very rapid, the economy will always be on the dI/dt = 0, so that adjustment to the long-run equilibrium will be smooth as long as the determinant condition is satisfied. If the time lag between the
52 Roberto Lampa investment decisions and the corresponding income is large relative to the rate at which the amount of equipment is increasing, the rate of investment decisions can continue to fall even below what corresponds to replacement, simply because the fall in income lags behind. Thus, the introduction of a time-lag between the investment decision and the corresponding income – in accordance with Lange’s framework – is able to explain a cyclical movement even if the underlying situation is stable. In order that the cycle is not highly damped (i.e. that it does not peter out too quickly in the absence of new disturbing factors), we only need to assume that the effect of current investment on total equipment is relatively large, such that the equipment added during the period of the time lag has a considerable influence on the profit rate, and hence on the investment decision. In the second part of our simulation, we have also introduced a different assumption in terms of a non-linear investment function, which actually corresponds to Lange’s original idea (Lampa 2013). In this case, the economy never reaches a stationary equilibrium and we can observe two different scenarios according to the existence of time lags (or not). If there’s a combination between investment lags and the non-linear investment curve, this is sufficient to produce limit cycles. When there is no investment lag, the underlying dynamics implies that there will be a catastrophic drop from the higher to the lower equilibrium, driven solely by the multiplier dynamic. Therefore we have shown that cycles can exist without investment lags. From this point of view, Lange’s dynamic model offers an interesting variant of Kalecki’s model (1939). Kalecki’s theory explained the business cycle in terms of fluctuations in the marginal return on investment, resulting from both the accumulation/decumulation of capital and from the effect of investment on income (Kalecki expressed the level of investment decision as an S-shaped function of income). This argument was justified absolutely by the evolution of expectation elasticity, assumed to be inelastic for extreme values of output and elastic for normal values. Indeed Kalecki suggests that entrepreneurs are assumed to be cycle-conscious, and hence more cautious in their investment decisions following a prolonged boom or a prolonged slump than at the beginning of one of these cycles. However, Kalecki assumes that the multiplier coefficient remains constant during the entire course of the cycle, thereby relying entirely on the non-linearity of the investment function to show the intrinsic instability of capitalism. It is precisely this assumption that Lange and Kalecki disagreed about: There is no a priori reason why this [relationship between national income and investment] should be a straight line. Mr. Kalecki takes it to be a straight line because his statistical investigation has yielded a linear relationship for the United States in the period 1924–35 (pp. 73 and 136). Since we do not know whether this relationship is linear in other years or in other countries, this restricts unnecessarily the generality of Mr. Kalecki’s argument. (Lange 1941: 284–285)
Oskar Lange and capitalist dynamics 53 Unlike Kalecki, Lange based his cycle analysis on the dynamics of income distributive shares and, eventually, the dynamics of the saving rate. In paying more attention to the saving rate, Lange was less bound than his Polish fellow countryman to breaking with Marx’s income distribution analysis. More generally, one can state quite legitimately that Lange’s analysis of capitalist dynamics was closer to Marx’s view expressed in Volume 2 of Capital, according to which equilibrium is an event possible in theory but almost unattainable in practice, at least in a capitalist society.
4 Capitalism’s constraints and the peripheral countries Between 1956 (his appointment as Professor of Economics at the University of Warsaw) and 1964 (his retirement), Oskar Lange was an advisor for several governments of underdeveloped countries, which were implementing multi-annual plans and/or reshaping their own institutions in a socialist way. Yet in 1951–1952, Lange could repeatedly travel to Iran, in order to cooperate with Mohammad Mossadeq’s developmentalist cabinet which, in those days, was nationalizing the Anglo-Iranian oil company. However, his first official appointment as an advisor was in India, in 1955–1956, during the drafting of the second quinquennial plan (1955–1960). In the same occasion, Lange moved also to Sri Lanka, as a consultant of Solomon W.R.D. Bandaranaike’s government, which were promoting socialist policies after winning the 1956 elections. Finally, in 1961, Lange gave several speeches at the Central Bank of Egypt and actively cooperated with Gamal Abdel Nasser’s government, notoriously aimed at creating an Arab Socialist Union. At this stage of his academic career Lange was evidently persuaded that, after World War II, it was no more sufficient to study the problem of economic equilibrium taking economic development for granted, for two orders of reasons. On the one hand, the emergence of a series of socialist economies (China, Eastern Europe) which previously were underdeveloped countries. On the other hand, the victorious national revolutions of many former colonies, which considered economic development to be their chief problem. In other words, the whole problem of underdeveloped countries became “the major international problem” (Lange 1963: 6, emphasis in original). Therefore development economics had to become a fundamental issue in economic analysis. In the following paragraphs, we are going to show Lange’s reflection on development, analyzing both its analytical contents and its implications in terms of policy. In both cases, we are going to highlight the continuity with many issues previously raised by Lange, in the aforementioned 1938 work on the core- economies’ dynamics. 4.1 The dilemma of underdeveloped economies In 1960, Oskar Lange provides a definition of underdeveloped economy, meant as: “an economy in which the available stock of capital goods is not sufficient to
54 Roberto Lampa employ the total available labor force on the basis of modern technique of production” (Lange 1960: 33). By means of an algebraic formalization (which evidently recalls several Marxian categories, first and foremost the organic composition of capital), he also explores deeper into details such a definition. Given the value of the stock of capital goods c and the value of the total labor force employed v, the average degree of capital intensity is: α = c/v
If N is the total labor force employed and w the average wage rate, we have: v = Nw
Then, the total employment is: N = c/αw
Therefore, denoting by N0 the total available labor force, Lange concludes that the economy is underdeveloped whenever N 1. In this case, currency devaluation in this country would reduce the international price of its exports and increases the domestic price of its imports. Only an increase in the quantity demanded for exports from abroad and/or a reduction of the quantity demanded for imports can compensate the deterioration of the terms of trade in order to offset the forthcoming deficit in the balance of trade after devaluation. On the other hand, in the case of a ‘small’ country, it is assumed that the price-elasticity of the international supply for tradable commodities (ε*) and the price-elasticity of foreign demand for the export of local products (η*) are both infinitely elastic, i.e. ε*, η* → ∞. The reason for this assumption is that small countries do not control either the demand or the supply worldwide. That is, they act as price-takers in both the export and import markets. Currency devaluation in these countries leaves unchanged international prices. Thus the BRM condition becomes the following expression: ε + η > 0. Most of the literature takes the assumption that the price-elasticity of export supply is greater than zero and less than infinite (0 0), using the VECM estimation technique, while normalizing one of the institutional variables for each set of outcomes. Table 17.4 presents the output which is mostly consistent with our rank tests. We observe evidence of the existence of a significant level of interdependence between civil and political liberties and freehold property rights for the full period 1861–2011, as seen in equations (17.4) and (17.5); Freehold property rights = 1.397 * civil and political liberties
Civil and political liberties = 0.716 * Freehold property rights
The equations imply that over the course of the past 150 years in Nigeria, evidence of interdependence between the two variables can be observed. We see that both variables are interdependent on each other, although the coefficient for civil liberties in equation (17.4) is larger than the coefficient for freehold property rights in equation (17.5), which is quite interesting. However, determining the direction of causality between political and economic institutions is beyond the scope of this chapter. Hence, we will not dwell much on this debate.13 The second section of the output in Table 17.4 shows the interdependence between freehold property rights and civil liberties, which is no longer significant when we normalize for civil and political liberties. The speed of adjustment is slightly lower than the interaction for the whole sample period, when normalizing for freehold property rights as presented in equation (17.6). When considering that only the freehold property rights and political liberties combination had at least one cointegrating vector for the whole sample period, the number of combinations with cointegrating vectors in the sample period 1914–2011, is quite an interesting outcome. FhPR = 0.966 * CvPL
–0.9655616 0.282128 [0.001]
CvPL, FhPR**, nFhPR
nFhPR, FhPR**, CvPL
–0.0906321 (0.09208) [0.325] –0.083419 (0.0857634) [0.331] 1 – – – – – 1
–1.396548 –0.2673143 1 –
FhPR**, nFhPR, CvPL
Table 17.4 Error correction model output for interdependence between institutions
0.9204133 –0.2475778 –11.03362 –2.94047 1 – 0.8355555 –0.2479132 –1.035667 (0.84348) [0.220] 1 –
1.086468 –0.2999183 1 – –11.98768 –3.317757 1.196809 –0.3347743 1 – – – – –
– – – –
CvPL, FhPR**, nFhPR
nFhPR, FhPR**, CvPL
FhPR**, nFhPR, CvPL
1.195123 (1.006955) [0.235] 1 –
0.4826847 (0.259076) [0.062] –1.642309 –0.4059465 1 – – – – – 1 – 0.3038585 (0.119941) [0.011] –
0.836734 (0.64546) [0.195]
–3.402447 –0.7996641 2.071746 –0.4982852 1
Notes ** signifies the significance of the lagged error term pertaining to the institution. Standard errors are in parenthesis, while the p-value is reported in brackets (only non-0 p-value is displayed). The first variable in the combinations is the variable normalized with a coefficient of unity. The columns represent the variables of the RHS of the interdependence equation, in terms of the normalized variable.
– – – –
–0.6088988 (0.32964) [0.065] 0.179645 (0.16923) [0.288] 1
–0.2939061 (0.33762) [0.384] 1
324 David Fadiran and Mare Sarr CvPL = 11.034 * FhPR + 11.988 * nFhPR
Equation (17.7) shows that the relationship between political liberties and the property rights indices is positive, and the relatively high corresponding coefficients signify a relatively quick speed of adjustment back to the long-run equilibrium. This speed of adjustment in comparison to when political liberties adjust back to equilibrium is faster, which suggests democratization is more important for economic liberalization in Nigeria rather than the alternative. Although we would not want to place much weight on the implication of the coefficients for freehold and customary property rights in relation to civil and political liberties, the fact that their coefficients are very close in magnitude to each other at 11.034 and 11.988 respectively, points to the importance of customary land law (in addition to the importance of statutory law) for democratization in Nigeria. This is significant because the importance of customary land law in the economy is usually neglected and undermined in much of the literature. The outcomes we observe here tell a somewhat different story. This might be the case in Nigeria because of the rigid land transfer laws promulgated by the British administration in the early 1900s.
6 Summary In this chapter we have attempted to determine first whether or not there is path dependence and persistence in institutions in Nigeria, and, second, whether there exists any form of interdependence between political and economic institutions in Nigeria. The results indicate that there is indeed path dependence and persistence in institutions in Nigeria. We argued that many of the institutions promulgated during early colonial times, in addition to any changes experienced over time, will have had a significant impact on the current state of institutions in Nigeria. This equates to equilibrium dependence as conceptualized by Freeman (2010). In analysing path dependence cases, empirical evidence does not suffice, and, to circumvent this, we substantiated the empirical evidence for path dependence, through illustrations of instances of path dependence in Nigeria’s history. We showed that areas of Nigeria’s institutional history, such as resource ownership, Nigeria as a country and freehold property rights, are all prime examples of path dependence in the country. We further showed how persistence and path dependence in Nigeria can be explained by the “increasing returns” ideology. We also argued for long-run co-movement between political and economic institutions. Yet the evidence for interdependence we found was not conclusive as to which institutions influence the other the most, whether political or economic. It became apparent that dependence between economic and political institutions is bi-directional, and the dynamics of interdependence differ depending on the time period/era of Nigeria’s history we are investigating. The
Path dependence in institutions 325 post-colonial era is of more concern to us than any other; and it is quite puzzling that the least amount of interdependence was shown in this period. However, the overall picture remains one of interdependence between the two types of institutions. Such a finding has policy implications for Nigeria in that the strengthening of the governance, and civil and political liberties, should be prioritized in tandem with the strengthening of economic institutions. In addition, attention needs to be paid to both freehold and customary land law, as evidence of interdependence between the two measures of property rights and civil liberties was found. Finally, we are aware of some of the methodological concerns over the use of subjectively constructed indicators for institutions, which means a certain level of caution needs to be taken when interpreting the results obtained. These caveats notwithstanding, our results provide substantial information about the dynamics of institutions in Nigeria, and how they have evolved over time. A country specific study such as this sets precedence for many more of this nature, as avenues through which a better understanding of Nigeria’s institutional setup are opened, thus creating an avenue through which some of Nigeria’s development woes can be examined and possibly addressed.
where the error correction terms are γ11ΔY1t–1 + γ21ΔY2t–1 + γ12ΔY2t–1 with the error correction coefficient being γ11, γ12 and γ13. The above equation also implies that all three variables adjust to two error correction terms at a time, since ECM normalizes for one variable for each estimation. The output is of the form 0 = 1.000 Var1 + γ12Var2 + γ12Var3, where Var1 is the normalized variable.
326 David Fadiran and Mare Sarr
Table A17.1 List of variables Type
Institutions CvPL FhPR nFhPR PolityIV FrHPFr FrHCL HFdPR FIPR FILPR FIPPR VanID WGI
Full variable name
Civil and political liberties Freehold property rights Non-freehold property rights Polity IV series
1861–2012 1861–2012 1861–2012 1960–2011
Primary data Primary data Primary data Center for systemic peace Freedom House political 1973–2010 Freedom in the rights index world survey Feredom House civil liberties 1973–2010 Freedom in the index world survey Heritage Foundation property 1995–2011 Heritage rights index Fraser Institute property 1970–2010 Fraser Institute rights Fraser Institute legal system 1970–2010 Fraser Institute and property rights Fraser Institute protection of 2000–2010 Fraser Institute property index Vanhanen identity 1960–2004 Polyarchy dataset World governance indicator 1996–2011 World Bank
Note All price/monetary values are in “US$2012”.
Table A17.2 Stationarity test for all variables Variable
CvPL FhPR nFhPR PolityIV FrHPFr FrHCL FIPR FILPR VanID
● ● ●
● ● ● ● ●
Notes Test was carried out using DF-GLS and KPSS all at 5% rejection criteria; Polity IV had missing variables, which had to corrected for; FIPR, FILPR, FIPPR were constructed in 5-year trenches for the first 20 years of the variable; the score at the beginning of the 5-year period was assumed to remain the same until the next score was computed.
100 90 80
70 60 50 40 30 20 10 2010
10 9 8 7 6 5 4 3 2 1 0 1832
Figure A17.1 Constructed institutional indicators; CvPL, FhPR and nFhPR.
Year Voting rights (0–20) Freedom of assembly (0–10)
Freedom of association (0–10) Freedom of expression (0–10)
Figure A17.2 Sub-components of civil and political liberties: voting rights and freedoms of assembly, association and expression.
● ● ● ●
Due process of law Freedom of movement
The extent of arbitrary executive power Independence of the judiciary and the legislature ●
Freedom of expression
Freedom of association Freedom of assembly
Table A17.3 Stationarity test for subcomponents of CvPL
● ● ● ● ● ● ●
The extent of arbitrary executive power
Independence of the judiciary and the legislature
Due process of law Freedom of movement Academic freedom
Notes 0 = stationary, 1 = non-stationary; shaded rows signify subcomponents that display unusual behavior. Test is carried out for whole sample and years before independence (upper and lower categories). Rejection criteria is set at 5% level.
● ● ● ●
Freedom of expression ●
Freedom of assembly
Voting rights Freedom of association