‘Ragnar Nurkse (1907-2007): Classical Development Economics and its Relevance for Today’ presents a selection of papers that casts new insight on Nurkse’s thought, and discusses his relevance for today, in light of the renewed interest in Nurkse amongst development economists. The volume also celebrates the 100th anniversary of this profoundly important thinker’s birth.
About the Author
Rainer Kattel is Professor of Innovation Policy and Technology Governance, Tallinn University of Technology, Estonia.
Jan A. Kregel is Senior Scholar at The Levy Economics Institute of Bard College; the Center for Full Employment and Price Stability at the University of Missouri, Kansas City; and the Tallinn University of Technology.
Erik S. Reinert is Chairman of The Other Canon Foundation, Norway, and Professor at Tallinn University of Technology.
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Ragnar Nurkse (1907â"2007)
Classical Development Economics and its Relevance for Today
By Rainer Kattel, Jan A. Kregel, Erik S. Reinert
Wimbledon Publishing CompanyCopyright © 2009 Rainer Kattel, Jan A. Kregel and Erik S. Reinert editorial matter and selection
All rights reserved.
THE RELEVANCE OF RAGNAR NURKSE AND CLASSICAL DEVELOPMENT ECONOMICS
Rainer Kattel, Jan A. Kregel and Erik S. Reinert
Every larger undertaking, whenever it unites continuously a certain number of men for a common economic purpose, reveals itself as a moral community.
Gustav von Schmoller, The Idea of Justice in Political Economy, 1881.
'I do not know', Alexis de Tocqueville says in Democracy in America, 'if one can cite a single manufacturing and commercial nation – from the Tyrians to the Florentine and the English, – that has not also been free. Therefore a close tie and a necessary relation exists between those two things: freedom and industry.' Tocqueville expresses what could be called a development truism of half a thousand years from late Renaissance city-states to Marshall Plan and Havana Charter. Indeed, during the Enlightenment, civilization and democracy were understood, through the analysis of people like Montesquieu and Voltaire among many others, as products of a specific type of economic structure. When German economist Johan Jacob Meyenn stated in 1770 that 'it is known that a primitive people does not improve their customs and institutions later to find useful industries, but the other way around', he expressed something which could be considered common sense at the time. We find the same idea – that civilization is created by industrialization or, to put it more specifically, by the presence of increasing returns activities – in the nineteenth century in thinkers across the whole political spectrum from Abraham Lincoln to Karl Marx.
Industrialization 'draws all, even the most barbarian, nations into civilization', as Marx puts it. What might be called the historical development consensus saw, in other words, the aim of development in the creation of middle-income economies – with all the accompanying values and culture that in turn were perceived as highly conducive to further sustained development. However, as Figures 1.1 and 1.2 show, the creation of middle-income economies has become a true rarity in the last three decades.
Apart from East Asia's much-praised experience and the enormous catching up taking place in China and, to a lesser degree in India, the rest of the developing world from Eastern Europe to Latin America and Africa is experiencing strong cognitive dissonance.
While many of these countries have seen significant growth in exports and in foreign capital inflows, their income levels have flatlined since 1980 and in most cases actually dropped in the 1990s. (Figure 1.1)
In fact, compared to highly developed countries, most developing countries were on a steady track towards catching up until the early 1980s; the subsequent decades show continuous and significant catching up – and actual surging ahead in the case of some countries such as Singapore – of East Asian economies. (Figure 1.2; see also Wade 2008) The trends follow rather precisely the changes in development thinking from classical development economics up to the late 1970s to the Washington Consensus from the 1980s.
Moreover, as Figure 1.3 shows, in recent decades, most developing regions – again with the exception of East Asia – experienced growth rates that go clearly against the more or less positive trend of the last 200 years from a long-term historical perspective. In other words, the world after the industrial revolution has not seen such a dismal development performance. The Washington Consensus in development mainstream seems to be a failure on an unprecedented scale.
Yet, surprisingly, the decades after 1980 have been called the best development decades in a generation (Rodrik 2007, 13–14; Skidelsky 2008). While Amsden (2007, 2) argues, in contrast, that during these same decades, for most developing countries, 'Heaven slowly gave way to Hell', even the most ardent supporters of the Washington Consensus are forced to admit that there is something similar to the 'China price' in the development statistics of the poorer countries from 1980 onward. If one deducts China's and India's growth from the developing countries' data, there is not much as far as growth and development in the rest of the developing world is concerned. And neither China nor India can be counted as showcases of the neoliberal policies propagated by the Washington Consensus. We will return to this later.
As the World Bank itself admits, the rest of the developing countries, notably in Africa, Latin America and some of the former Soviet republics (in Central Asia, Moldova, Ukraine) suffer from heavy doses of a cognitive dissonance between promised growth and the reality of standing still, if they are lucky, or dropping backwards to income levels of earlier decades: 'Whereas Latin America's income per head grew by 10 per cent in the entire 25 years from 1980 to 2005, it grew by 82 per cent in the 20 years from 1960 to 1980' (Amsden 2007, 6; also World Bank 2006; see also Chang 2007).
Latin America diligently followed policy reform suggestions, yet failed to grow, as the World Bank also admits ( World Bank 2006, 36–29); Eastern Europe and the former Soviet Union were equally willing to apply the policy reforms, and again, according to the World Bank's calculations, the recession these countries saw in the 1990s and which many are still experiencing, is worse than the Great Depression in the USA and World War II in Western Europe (in both cases, countries affected recovered considerably quicker). In fact, for example, 'even if Ukraine managed to grow steadily at 5 per cent a year, starting in 2002, it would take until 2017 to regain its previous peak – implying a transformational recession of more than a quarter of a century at best.' ( World Bank 2006, 33) Indeed, also for most Eastern European countries, the recession was severe and lasted at least 10 years. (Reinert and Kattel 2007, Tiits et al 2008)
Coupled with the change of techno-economic paradigm that completely changed the nature of industrialization (outsourcing) and essentially stripped many maturing and increasingly footloose industrial activities of significant (dynamic) scale economies, Washington Consensus policies emphasising FDI-led growth have created a truly toxic situation for many developing countries where initially the liability destruction was strong and quick but followed by slow asset creation. Thus, 'the failure of the Consensus reform policies lies in the fact that they provided support for the 'destruction' of inefficient domestic industry, but failed to provide support for the 'creative' phase of 'creative destruction' of a real transformation of the productive structure through higher investment and technological innovation' (Kregel 2008). We will return to this topic as well. However, it seems rather obvious that the development community has unlearned how to create middle-income countries.
Yet, there is growing concern and evidence that the current form of globalization not only hurts developing countries that have followed the Washington Consensus policies, but is also harmful to the developed North. The flipside of the unlearning that has taken place in the development community seems to be that we are unlearning how to create middle-class jobs in the developed core countries. For all intents and purposes, nonexisting growth in real wage in USA and Germany over the last decade has given ample reasons to start considering the impact of Washington Consensus trade policies on these countries, the most prominent examples being Samuelson's (2004) and Krugman's (2008) accounts. In 2004, Samuelson argued that continuing globalization and economic integration of world markets in its present form will do permanent harm to high-wage jobs in highly developed countries like the US. In early 2008, Krugman, another celebrity mainstream economist, argued that increased trade between US and developing countries is factually hurting US wages and middle-class jobs and thus increases income inequality. He goes on to prove this not only with US data but also with elaborate modeling.
What Krugman does not realize, or at any rate he does not say it explicitly, is that the problem lies not in the structure or policies of the US economy or even in the growing trade as such, but in the nature of specialization of developing country exports. Specializing in lower-end production or services (also in sectors like ICT) virtually traps developing countries into low-wage jobs and, at the same time, lures the high-wage middle-class jobs away from the developed nations. Thus, while the global production grows, not all countries necessarily benefit from it. And, consequently, 'firms maximize global output but do not necessarily maximize national income' (Palley 2006, 16).
In this introductory chapter, we aim to show, first, how classical development economics, that of Ragnar Nurkse's (1907–1957) generation, epitomized the best development practices of the past 500 years and crafted them into what Krugman (1994) rightly calls high development theory. It is not a coincidence that the post-World War II era, when Nurkse and others ruled the development mainstream, is one of exceptionally good performance for many poor countries. Second, we argue that the alleged death of classical development economics and subsequent rise of the Washington Consensus has to do not so much with increasing modelling in economics, a way of research purposely discarded by many classical development thinkers, as Krugman (1994) claims, but much more with misunderstanding the reasons for East Asia's success and Latin America's demise; we show that the root cause of this misunderstanding – that goes in fact back to 'misreading' key passages in Adam Smith – is the role of technology, or of increasing returns activities, and of finance, in development. Third, we aim to indicate key areas of further research that the current development mainstream should pursue in order to relearn how to create middle-income economies and middle-class jobs.
Classical Development Economics
Pre-Smithian economics saw development as a goal created by increasing returns and innovations in manufacturing and not in agriculture, where stagnant productivity, diminishing returns and monoculture as well as the absence of synergies prevented growth. Furthermore, the targeting, support and protection of manufacturing – that is, of increasing returns activities – were argued in terms of, first, its ability to create wealth; second, its ability to create employment; third, its ability to solve balance of payment problems; and fourth, its ability to increase the velocity of circulation of money. The connection between increasing activities and the creation of more-or-less stable and sustainable states with more-or-less liberal values can be seen as key throughout this entire tradition that reaches until the Marshall plan. Indeed, from as early as Giovanni Botero (1588) and the Staatsraison ('reason of state') tradition, there are clear links between economic structure and the viability of states. This tradition was continued by nineteenth-century social scientists and by Friedrich List, directly linking manufacturing and 'civilization'. In fact, already in early German social science, Veit Ludwig von Seckendorff (1626–92) found that Germany did not have the economic basis to create a society like the one observed and so admired in the Dutch Republic. Seckendorff 's approach to making the state function better was intimately tied to changing the economic basis of the state itself, its mix of professions and industries and their geographical relocation within the realm. In the tradition started by Seckendorff, the Fürsten (Princes) were turned into modernizers by arguing that their Recht (right) to govern was accompanied by a Pflicht (duty) to modernize and, in effect, in the long term create the conditions where the Fürsten, in the end, would be obsolete and the conditions needed for a functioning democracy would have been created. A successful principality carried with it the seeds of its own destruction and the birth of democracy.
The first wealthy states with some kind of republican rule were often islands like Venice and the Dutch Republic. The absence of arable land both led to an absence of a feudal structure and contributed to the creation of a diversified economic structure including activities subject to increasing returns. This makes Florence, with power also by landowners, so interesting. There the corporazioni (guilds) and the burghers fought for power among themselves, but very early (twelfth to thirteenth centuries), they had banned the families that owned the surrounding land from participating in politics (these continued to trouble Florence for centuries through alliances with other cities).
There is, then, a long history of trying to move the vested interests of the ruling class from land to manufacturing. The rulers who had a manufacturing strategy also tended to have a policy against the land-owning nobility, starting with Henry VII in England in 1485.
In sum, there are a number of basic principles of development that can be observed in action from fifteenth-century Tudor England to the Marshall Plan. Despite all the theoretical and historical diversity that makes up this tradition of more than 500 years, one very simple formula sums it up rather effectively: a nation is better off with an inefficient industrial (increasing returns) sector than with none at all. Yet, part of this consensus is also the understanding that possessing an industrial sector, however inefficient, should be followed by increased trade in order to create competitive pressure for the industrial sector. Classical development economics, while in itself a highly diverse group of economic and policy ideas as well as economists, is till today perhaps the best-articulated and theoretically grounded expression of the above-described development consensus. And, as Krugman (1994) argues, the 'irony is that we can now see that high development theory made perfectly good sense after all'.
The group of economists commonly referred to as classical development economists, or pioneers of development or of high development theory, is typically seen to consists of four to six key thinkers: Paul Rosenstein-Rodan, Hans Singer, Arthur Lewis, Albert Hirschman, Gunnar Myrdal and Ragnar Nurkse. While of this group, Nurkse's contribution is the strongest in terms of economic theory, Hirschman's accomplishments are perhaps the most far- reaching in terms of influencing mainstream social science and development. Up to this day, it is relatively typical to find accounts that juxtapose precisely two thinkers as representing almost exactly opposing ideas about development, namely, balanced vs. unbalanced growth. However, as Hirschman later acknowledges, the differences between him and Nurkse were minor at the end of the day, and in large part, they shared a very similar outlook (Hirschman 1984; see also Nurkse 1961, 241ff).
In what follows, we base our brief account mostly on Nurkse's ideas, accompanying them with bits and pieces from the other pioneers, mostly from Rosenstein-Rodan and Hirschman.
The high development theory developed by Nurkse and others rests on two key ideas:
First, financing for development has to come to a large extent from the developing country itself ('Capital is made at home'; Nurkse (1961, 141)).
Second, the key areas to be financed need to exhibit increasing returns in order to trigger dynamics of development or, as Myrdal (1957) argued, virtuous circles of growth.
What makes Nurkse's contribution so important is the fact that he is the only thinker from this group to, first, incorporate both key ideas into a coherent theory of development and, second, to draw clear relationships between these notions. Indeed, this is precisely the reason Nurkse favored the balanced growth approach over the unbalanced one (the difference, simply put, being between whether one industrializes in numerous or just a few key areas): the former was deemed by Nurkse (1961, 241ff ) to be financially more stable than the latter.
Excerpted from Ragnar Nurkse (1907â"2007) by Rainer Kattel, Jan A. Kregel, Erik S. Reinert. Copyright © 2009 Rainer Kattel, Jan A. Kregel and Erik S. Reinert editorial matter and selection. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents
Preface; The Relevance of Ragnar Nurkse and Development Economics; The Life and Times of Ragnar Nurkse; Nurkse and the Role of Finance in Development Economics; Early Development Theory from Sun Yat-Sen to Ragnar Nurkse; The Roots of the Unequal Exchange; Nurkse and the Latin American Development Tradition (Prebisch/CEPAL); Industrializing the Periphery; Ragnar Nurkse and the Law&Economics of Development; The Influence of Keynes and Schumpeter on Nurkse's Development Theory; Nurkse Meets Schumpeter; Is the Accumulation of International Reserves Good for Development?; International Currency Experience and the Bretton Woods Agreement; Some Reflections on Nurkse’s ‘Patterns of Trade and Development’; India and Development Economics; Notes