Comparative Economic Development - Economics Essay Example

Comparative Economic Development

1 - Comparative Economic Development introduction. What do you think constitutes economic development?

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            There are many schools of economic development. Typically, the debate was between the various forms of capitalism and the various forms of socialism. The former can be defined as the more extreme version of Ayn Rand and Milton Friedman, where the state barely exists, and all power and opportunity exists in the private sector. Everything is liberalized: movement of labor, trade and domestic investment. The idea here is that economies, if left to the market, are self regulating and all reach an equilibrium, since business must conform to market demands or be destroyed. On the other hand capitalism has also found in 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 the powerful economies functioning in the developing world 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.

            But this is not enough. The social development school holds that the mere formation of capital in the free market is not sufficient for true development (Speth, 2008, esp pps 126-147. Development cannot merely be understood as listing numbers such as GDP growth and low inflation. In the Iranian case, there is a move to develop an infrastructure based around education, health care and basic infrastructure, with a religious organization that exists somewhat parallel to the state, and seeks not mere growth, but the development of a humanitarian approach. This was especially the case after the Iran-Iraq war of the late 1980s and the spike in oil prices, that permitted the recovery from that war. Since the Iranians are under siege from Israel and the US, it makes some sense that the state will retain its control over the economy, and, of all the economies dealt with in this essay, the Iranian remains the highest in terms of state control (CIA, 2009)

            On the other hand, the older forms of socialism are largely outmoded. This may be because of this dismal failures (both in terms of human rights and economic development), but also because the IMF and the United States retain such a potent level of control over economic systems worldwide and the loans that might keep them afloat. Socialism, despite its rhetoric, never referred to the rule of the workers or their control over the state system and economy: what it meant in practice was the domination of the state and the party over all elements of social life. Since socialist states could never get over this hump (despite the heroic efforts of Tito in Yugoslavia, cf Schoenbeck, 2008), they ultimately crated a situation where the politics of state building dominated over rational investment strategies. Even in places such as France, where state control in the 1970s was the norm, such policies needed to be abandoned (Rosser, 2004).

            It is likely that the most satisfying definition of economic growth was developed by Joseph Schumpeter. This is because, in reality, Schumpeter belongs to the “social development” school, where economies are not just about numbers, but quality of life and rational development of the person. Because Schumpeter deals with the two poles of a qualitative economic idea: that of creativity and its anti-type, bureaucratization, which typify two types of person and, to a limited extent, two types of economic system (Dahms, 1995). It is the creativity of the population, or, more accurately, that small handful that actually are creative, that creates the economy, the bureaucracy and the managerial mentality that maintains it. However, in modern times, the rule of bureaucracy is the dominant entity, destroying creativity and stunting the growth of truly creative minds: procedure rules over spontaneity, cliches over analysis, inertia over progress. Hence, in Schumpeter’s case, there is a crisis in the west, the crisis of mediocrity, or the domination of the bureaucratic mentality over the creative and individualistic.

            Thus apart from the absolutely necessary capital formation and the development of rational structures, there is also the question of a truly qualitative approach to economics that is immensely important but often overlooked by professional economists. It seems that the Iranian case is the best in this regard, for they are determined, with a great degree of popular support, to maintain Islamic values in a hostile world, and will even deal with the American imposed sanctions on its economy in order to maintain this. At the same time, the religious values of the republic also have an economic function, as these decentralized religious entities are almost as powerful as the state itself, providing a qualitative base to economic development and infrastructure (Rosser, 2004).

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 Being Socialism to Yugoslavia.” The Russian Orthodox Medievalist.

Rosser, John. (2004) Comparative Economics in a Transitional World Economy. MIT Press. Esp pps. 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

2. What makes economic development possible?

            If the examples we have been studying are to be taken at face value, then the freeing of the market mechanism under some kind of state guidance is the best model, at least for the developing world. The Chinese economy is very instructive in this regard (Rosser, 2004; CIA 2009). At one time a poverty stricken command economy on the Stalinist model, the last 20 years have shown a great degree of market liberalization under the control of the party that retains its monopoly on power. This has been wildly successful, China has become one of the top three most powerful economies in the world, industry is taking off and China’s role in world trade is immense. But what is truly worth considering is that this occurred, like South Korea or Taiwan, under a strongly authoritarian state. There may be something to this: a strong state can control or pacify the unrest that develops when the old structures are taken down and the new ones erected. The state, like in all the above cases, can direct investment into sectors that will work: that will develop the most powerful elements of native talent and natural resources. But since the market largely functions, states like Korea and China avoid the pitfalls of the old Soviet Union, where politics dominates over economics and distorts economic aims through a political lens. The recent Russian case under Putin might be another example: no one could deny that the economic policies of Gaidar/Yeltsin were anything short of a disaster. The Russian economy disappeared into the pockets of mafia figures, oligarchs and the shadow economy, and there are really no strong, strict lines between these figures. Tax collection collapsed, and local government fell into the hands of oligarchs, that skimmed the profits off any of the remaining industries. Much of the economic liquidity was skidded offshore to the US or Great Britain. Putin’s reform of the security services and domination over local government was necessary to destroy the most obnoxious oligarchs, or at least to get some to work for the state. Even here, the results were positive, as organized crime has halved, and the Russian economy has retaken its place as one of the world’s most powerful, and that, more than merely 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 being substantial liberalization that has paid dividends, though not to the extent as it has in China. The recovery of the USSR under Putin has also assisted in the development of the Indian economy, as the alliance between Russia and India has assisted it economically and militarily in the battle against the US supported Pakistan. As a matter of course, over the last decade, the Indian economy has seen growth rates of roughly 7.5% a year due to this liberalization as well as trade liberalization and its exposure to world markets.

            But it might be remarked that so far, the state has been the primary actor here: this is not accidental. While the neo-conservative movement might pat itself on the back for the victory of “free-markets,” the reality is that the cases in Mexico, China, India and Russia have all either been state led or state guided (and this is a fine line). While it is true that the profit motive is a powerful one, there is relevance of the political and social, not in the statist sense that failed so badly in Yugoslavia (etc), but also in the sense that recently industrializing states need to find their niche, and this niche cannot be left to short term profit motives. The success of the Chinese or Indian case is that the state has assisted capital in finding its domestic and international niche in a market already saturated. This is something outside of the classic model of Friedman, etc. The fact is that unrestrained capitalism leads to income inequality, the domination of the state by the wealthy and the degradation of the environment.  (also see Speth, 2008,  esp 17-67). The state will and should retain a role, through the older models of central planning are out of the question.

Volkov, Vadim (2002) Violent Entrepreneurs. Cornell University Press

Rosser, John. (2004) Comparative Economics in a Transitional World Economy. MIT Press. Esp pps. 417-448, and 301-337.

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

3. 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, surrounded by enemies, a strong state role is important. This might also be the case for South Korea or Belarus, the latter two also being strong developing economies on the first world model. At the same time, it seems also the late developing economies require state intervention (and hence a strong state) for the sake of the goods described in the answer above. But for advanced economies such as the US or France, the is the problem of Schumpeter. The famous Managerial Revolution is an important qualitative question in the first world states. It seems that bureaucratic procedures seem to dominate over the sovereignty of the individual to develop autonomous economic structures that can contribute in a qualitative, rather than just a quantitative way. Regardless of the advances of the modern economies of the first world, the average family still struggles to make ends meet, even when controlling for the American irrational ideas on spending. The bottoming out of the dollar and massive debts have eroded the earning power of the American: in the 1950s, it was possible for the man of the family to hold down a mediocre job and easily make ends meet, and still have low cost health insurance, union benefits and a retirement account. The insatiability of American spending patterns and an rejection of the monetarist approach to economics has rusted the base fo the American economy, an economy that simply cannot compete with China or India. The American capitalist has responded by adding still more, moving billions of dollars worth of capital overseas to take advantage of cheap labor and a more “compliant” government. If spending power and purchasing power are any indication, the American “muddling” economy has been a failure, where even saving accounts and retirement accounts are no longer safe. Where has the money gone? Does it disappear? Or does it change hands, and to whose hands? (Cf Shutt, 1998)

            Americans, despite the irritating free market rhetoric, are utterly dependent on the state: social security, disability, medicare, college loans, unemployment, food stamps (up to 65 million Americans as of today) government employment (including the military) make a mockery of the American love for free markets. The state even underwrites the investments of the elite abroad (through the Export-Import Bank). Clearly, the state is going nowhere.

            Hence, to help solve the “Schumpeter problem,” the American (and others in the advanced world) needs several issues to restart the economy: first, a complete moratorium on foreclosures (especially for tax arrears), substantial tax decreases for working families, elimination of corporate welfare, a stress on vocational training (rather than the destructive explosion of college students), withdrawal of US troops from abroad, stable money (even on gold, if necessary),  protectionist policies and a comprehensive energy policy written by someone other than Royal Dutch Shell. But, even with regards to states that are forced to remain strong and active, this might increase, rather than decrease, state revenues given the substantial increase in economic activity. To free the individual and the family from the dependence on the state and the obsession with making a living (rather than enjoying life, which are mutually exclusive), should be the backbone of any economic recovery program in the west (cf Buchanan, 1998, and Batra, 2007).

            Hence, what the three authors mentioned here deal with is 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, and hence, the US involvement in the IMF should be terminated. Hence, 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 their first two years. Protection should be the rule rather than the exception and states should be involved in mobilization of resources in order to rationally take advantage of what the topography of the land can contribute. Regardless of the situation os the state in question, the above can serve to stimulate the economy. What is important is independence: both national and personal (and the two are related).

            It seems that the examples of the Indian or Chinese economy might be stressing capital formation over and above the goods of independence. The latter approach would place a stress on small business, and quite possibly tax capital transfers from lower to higher (i.e from small to large businesses), while encouraging transfers from higher to lower. Independence might, from a purely economic point of view, be based on the development of small, locally situated businesses at the expense of concentrated capital formation. Hence, all the above is dependent on a structural approach, and an approach that seeks to control the money supply and hence the purchasing power of the individual.

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. (Esp pps. 77-110)

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