What do you think constitutes economic development?
There are many schools of economic development. Typically, the debate was between the various forms of capitalism and socialism. Capitalism can be defined as an extreme version of Ayn Rand and Milton Friedman, where the state barely exists, and all power and opportunity exist in the private sector. Everything is liberalized: movement of labor, trade, and domestic investment. The idea here is that economies are self-regulating if left to the market, reaching equilibrium since businesses must conform to market demands or be destroyed.
On the other hand, capitalism has also found a niche in economies such as France or China where state intervention has been aimed at building up specific sectors of economic life that can compete best within the global market. As a matter of course, this seems to be the trend in global economics. Nearly all powerful economies functioning in developing countries right now have experienced a great degree of liberalization; this goes for India, China, and Mexico where state controls have either been eliminated or redirected to different roles of guidance rather than command.
However, simply forming capital in the free market is not enough for true development, according to the social development school (Speth, 2008). Development should not be reduced to numerical indicators such as GDP growth and low inflation. In Iran, there is a push towards developing infrastructure that focuses on education, healthcare, and basic needs. This effort is led by a religious organization that operates alongside the state and prioritizes humanitarian values over mere economic growth. The country’s recovery from the Iran-Iraq war in the late 1980s was aided by a spike in oil prices which allowed for this focus on development. Due to ongoing tensions with Israel and the US, it makes sense for Iran to maintain control over its economy. Among all of the economies discussed in this essay, Iran has retained the highest level of state control (CIA, 2009).
On the other hand, older forms of socialism are largely outmoded. This may be due to their dismal failures in terms of both human rights and economic development, but also because the IMF and the United States retain a potent level of control over economic systems worldwide and loans that might keep them afloat. Despite its rhetoric, socialism never referred to the rule of workers or their control over the state system and economy. In practice, it meant domination by the state and party over all elements of social life. Socialist states could never overcome this hurdle despite heroic efforts by leaders such as Tito in Yugoslavia (cf Schoenbeck, 2008). Ultimately they created situations where politics dominated state building instead of rational investment strategies. Even in places like France where state control was once normative in the 1970s, such policies had to be abandoned (Rosser, 2004).
Joseph Schumpeter developed what is likely the most satisfying definition of economic growth. He belongs to the social development” school, which considers not only numbers but also the quality of life and rational development of individuals. Schumpeter deals with two poles of a qualitative economic idea: creativity and bureaucratization, which typify two types of people and economic systems to some extent (Dahms, 1995). The economy is created by the creativity of a small handful who are actually creative, while bureaucracy and managerial mentality maintain it. However, in modern times, bureaucracy dominates and destroys creativity while stunting truly creative minds’ growth: procedure rules over spontaneity, cliches over analysis, inertia over progress. Therefore, there is a crisis in the West according to Schumpeter – mediocrity or bureaucratic mentality’s domination over individualistic creativity.
Thus, apart from the necessary capital formation and rational structures, there is also the question of a qualitative approach to economics that is immensely important but often overlooked by professional economists. The Iranian case seems to be the best in this regard as they are determined, with great popular support, to maintain Islamic values in a hostile world. They are even willing to deal with American-imposed sanctions on their economy to maintain these values. Additionally, the religious values of the republic serve an economic function as decentralized religious entities are almost as powerful as the state itself. These entities provide a qualitative base for economic development and infrastructure (Rosser, 2004).
What Makes Economic Development Possible?
If the examples we have been studying are to be taken at face value, then the best model for developing countries is the freeing of the market mechanism under some kind of state guidance. The Chinese economy provides a great example (Rosser, 2004; CIA 2009). Once a poverty-stricken command economy on the Stalinist model, China has undergone significant market liberalization in the last 20 years under party control. This has been immensely successful as China has become one of the top three most powerful economies in the world, with industry taking off and an immense role in world trade. What is truly worth considering is that this occurred under a strongly authoritarian state, similar to South Korea or Taiwan. There may be something to this: a strong state can control or pacify unrest that develops when old structures are taken down and new ones erected. The state can direct investment into sectors that will develop native talent and natural resources most effectively.
However, since markets largely function independently in states like Korea and China, they avoid pitfalls seen in old Soviet Union where politics dominated over economics and distorted economic aims through political lenses. Recent Russian cases under Putin might also serve as an example: no one could deny that Gaidar/Yeltsin’s economic policies were anything short of disastrous. The Russian economy disappeared into pockets of mafia figures, oligarchs and shadow economy without strong lines between these figures while tax collection collapsed and local government fell into hands of oligarchs who skimmed profits off remaining industries with much economic liquidity skidding offshore to US or Great Britain.
Putin’s reform of security services was necessary to destroy obnoxious oligarchs or at least get some working for state resulting positively as organized crime halved while Russian economy regained its place as one of world’s most powerful economies more than just resource extraction (Volkov, 2002).
The same might be said for India, where an older semi-socialist state heavily dependent on the USSR felt itself slipping substantially when both the USSR collapsed and, more recently, the oil price spike forced India into a major balance of payments problem (CIA, 2009). In this case, the Indian state was forced to undergo substantial liberalization that has paid dividends but not to the extent as it has in China. The recovery of the USSR under Putin has also assisted in developing the Indian economy as Russia and India’s alliance has helped them economically and militarily in their battle against US-supported Pakistan. Over the last decade, due to this liberalization as well as trade liberalization and exposure to world markets, the Indian economy has seen growth rates of roughly 7.5% a year.
It might be remarked that, so far, the state has been the primary actor in recent cases of economic development. This is not accidental. While the neo-conservative movement may take credit for the victory of free markets,” in reality, cases such as those in Mexico, China, India and Russia have all been either state-led or state-guided (a fine line). The profit motive is undoubtedly powerful; however, there is a relevance to politics and society – not in a statist sense like what failed so badly in Yugoslavia – but also because recently industrializing states need to find their niche. This niche cannot be left to short-term profit motives alone. The success of China and India lies in how their respective states have assisted capital in finding its domestic and international niche within an already saturated market. This goes beyond the classic model of Friedman et al.
The fact remains that unrestrained capitalism leads to income inequality, domination of the state by the wealthy and environmental degradation (see Speth 2008 esp 17-67). Therefore, while older models of central planning are out of question, it is still necessary for states to retain a role.
Is there a single best system for achieving this development?
The system of economic development depends on the situation of the state in question. In small states such as Iran, which are surrounded by enemies, a strong state role is important. This may also be the case for South Korea or Belarus, both of which are strong developing economies following the first world model. At the same time, it seems that late-developing economies require state intervention (and hence a strong state) for the sake of goods described in the previous answer.
However, for advanced economies such as the US or France, there is a problem with Schumpeter’s Managerial Revolution. This revolution poses an important qualitative question in first-world states. Bureaucratic procedures seem to dominate over individual sovereignty to develop autonomous economic structures that can contribute qualitatively rather than just quantitatively.
Despite advances in modern first-world economies, average families still struggle to make ends meet even when controlling for American irrational spending ideas. The bottoming out of the dollar and massive debts have eroded Americans’ earning power: in the 1950s it was possible for a man to hold down a mediocre job and easily make ends meet while having low-cost health insurance, union benefits and retirement accounts.
The insatiability of American spending patterns and rejection of monetarist approaches to economics have rusted America’s economic base; an economy that simply cannot compete with China or India. American capitalists have responded by moving billions overseas to take advantage of cheap labor and more compliant” governments.
If spending power and purchasing power are any indication, America’s “muddling” economy has been a failure where even savings accounts and retirement accounts are no longer safe. Where has all this money gone? Does it disappear? Or does it change hands? (Cf Shutt 1998)
Americans, despite the irritating free market rhetoric, are utterly dependent on the state. Social security, disability, medicare, college loans, unemployment benefits and food stamps (which currently assist up to 65 million Americans) as well as government employment (including military service) make a mockery of the American love for free markets. The state even underwrites elite investments abroad through the Export-Import Bank. It is clear that the state is not going anywhere.
Hence, to help solve the Schumpeter problem,” the American (and others in the advanced world) needs several solutions to restart the economy. First, there should be a complete moratorium on foreclosures, especially for tax arrears. Second, substantial tax decreases for working families are necessary. Thirdly, elimination of corporate welfare is crucial. Fourthly, there should be a stress on vocational training rather than an explosion of college students which can be destructive. Fifthly, withdrawal of US troops from abroad is essential.
Furthermore, stable money (even if it means using gold) and protectionist policies are necessary along with a comprehensive energy policy written by someone other than Royal Dutch Shell.
Even with regards to states that are forced to remain strong and active during these times may see an increase in state revenues given the substantial increase in economic activity.
To free individuals and families from dependence on the state and obsession with making a living rather than enjoying life (which are mutually exclusive), must form the backbone of any economic recovery program in the West (cf Buchanan 1998 and Batra 2007).
Hence, the three authors mentioned here deal with a method of seeing economics as a national enterprise, with both individual and social goods predominating. Protection and import substitution are necessary for local growth. Therefore, US involvement in the IMF should be terminated. The states active in the global economy have several things in common: first, taxes should be lowered, and all forms of direct aid to business should be terminated. Small businesses should be tax-free for their first two years. Protection should be the rule rather than the exception, and states should mobilize resources to rationally take advantage of what the topography of the land can contribute. Regardless of the situation or state in question, these actions can stimulate economic growth. What is important is independence: both national and personal (and these two are related).
It seems that the examples of the Indian and Chinese economies might be emphasizing capital formation over independence. The latter approach would prioritize small businesses and potentially tax capital transfers from lower to higher (i.e., from small to large businesses), while encouraging transfers from higher to lower. From a purely economic standpoint, independence could be based on developing small, locally situated businesses at the expense of concentrated capital formation. Therefore, all of the above is dependent on a structural approach that seeks to control the money supply and purchasing power of individuals.
Reference
- Buchanan, Patrick. (1998) The Great Betrayal. Little, Brown and Co.
- Batra, Ravi. (2007) The Myth of Free Trade. Touchstone.
- Shutt, Harry. (1998). The Trouble with Capitalism: An Inquiry into the Causes of the Global Economic Failure. Zed Books. (Especially pages 77-110)
- Dahms, Henry (1995). From Creative Action to Social Rationalization of the Economy: Joseph Schumpeter’s Social Theory.” Sociological Theory 13:1-13.
- Schoenbeck, Brittney (2008). “Yugoslavia’s Self Management: Tito’s Failed Attempt to Bring Socialism to Yugoslavia.” The Russian Orthodox Medievalist.
- Rosser, John. (2004) Comparative Economics in a Transitional World Economy. MIT Press. Especially pages 23-113 and 450-575.
- Central Intelligence Agency. The CIA Factbook. CIA Library, 2009 (www.cia.gov)
- Speth, James (2008). The Bridge at the End of the World: Capitalism, the Environment and Crossing from Crisis to Sustainability.Yale University Press
- Volkov,Vadim(2002)ViolentEntrepreneurs.CornellUniversityPress
- Rosser , John.(2004 ) Comparative Economics in a Transitional World Economy.MIT Press.Especially pages 417-448 and 301-337.
