POL 4410: Week 10

Domestic Development

Structure

1.Inward vs. Outward looking Development

2.Pre-War: Fascism, communism, social democracy, and liberal democracy

3.Post-War: Embedded liberalism, ISI, and export-oriented growth

4.21st Century: Education and technology (Celtic, Baltic, and East Asian Tigers); China and India; Africa

What is development?

• Increase in per capita income.

• How to achieve this? Economists view this as coming either from increases in capital/labor ratio or from ‘augmenting’ labor. All with a fixed technology.

• Technology transfer could improve technology

• Neo-endogenous growth theory predicts that technology is itself an effect of investments in education.

Inward-facing development

•Self-sufficiency in all goods, including high-end goods. But what if you can’t produce everything?

•Develop own capital stocks, human capital stocks, and technology.

•Capital stock must come from domestic savings

•Cannot import educated workers

•Cannot import technology

Inward-facing•ADVANTAGES: self-reliant, can

produce all kinds of goods, no concern about economic volatility, no need to have austerity measures

•DISADVANTAGES: limited range of goods, must save to invest, need to reduce consumption demands, poor access to Western technology, difficult to earn foreign currency

Outward-facing development

•Rely on international demand for your goods. Potentially remain producing low-end goods.

•Borrow capital so as to invest more than you save.

• Import Western technology and skilled workers.

• Import intermediate goods in order to produce final goods.

Outward-facing

•ADVANTAGES: earn foreign currency, receive foreign capital and technology, freedom for citizens

•DISADVANTAGES: subject to economic shocks and austerity programs, may not be self-sufficient in important industries, influence of foreign owenership

Inter-war Strategies

•Great Depression leads to crisis of outward facing economic liberalism.

•Replaced by FASCISM, COMMUNISM, SOCIAL DEMOCRACY

Economic Liberalism

•Gold standard required prices and wages to drop during times of economic crisis.

•Trading system meant domestic firms had to compete with ruthless foreign firms.

•High unemployment if wages did not drop

•Democracy vs. technocracy.

•High politics and heavy industry

Fascism•Italian fascism begain in

1922 with Benito Mussolini.

•Fascists disdained liberal order but also feared the working classes.

•Alliance of farmers, petty bourgeoisie, and heavy industry vs. working class and ‘effete liberal bourgeoisie’

Fascist Economics• Fascist policy was often contradictory:

celebrated agrarian life but pro-industry.

• Supported large cartels in industry

• Kick-started economies with reflation, deficits, spending. Full employment policies

• Worked by repressing workers in order to keep prices manageable. This encouraged private investment.

• Abandoned gold standard and developed quasi-imperial trading zones. Large tariffs to protect domestic industry

Nazi Development•Hjalmar Schacht was architect

of Nazi economic policy

•Massive public works schemes ended unemployment in 3 yrs.

•5% GDP budget deficits but no inflation. ‘That’s what stormtroopers are for’

•Nazis reneged on all foreign debt and created mercantilist trade zone in Eastern Europe

Communism

•Bolshevik Revolution in 1917 overthrew Kerensky.

•Communism would require capitalism, then socialism. But Russia was barely past feudalism.

•Civil war 1918-1921 meant ‘war communism’ - all factories owned by govt, all production planned, private enterprise banned. Requisitioning and rationing.

NEP to Stalinism• Peasant hoarding and military mutiny led to New

Economic Policy 1921-1930.

• NEP permitted private agriculture and domestic trade (industry, finance, and foreign trade remained govt controlled).

• Impressive growth but failed to lead to industrialization. Foreign threats loomed. Stalin’s Five Year Plan from 1928 forced collectivization of farms. Workers also squeezed. Heavy industry was focus.

• Consumption went from 82% to 55% of GDP. Soviet Union fully industrialized by 1937.

Stalinist Production

•Gosplan

•Since prices were centrally set, profits and losses were irrelevant.

•Stakhanovism

•Incentives to misrepresent

Social Democracy• Liberal democracy was under threat. But

Keynesian demand management provided a solution.

• Massive public works schemes. Leave gold standard and inflate economy to encourage demand.

• Permit inflation and try not to direct heavy industry.

• Support working class with social insurance

New Deal • Roosevelt left gold in 1933

• Attempts to cartelize and set prices reminiscent of fascism, rejected by Supreme Court.

• Move from industrial policy to public sector spending. Works projects: WPA, CCC, TVA

• Introduction of Social Security in 1935

• National Labour Relations Board, 1935

• Promotion of trade: RTAA 1934.

Sweden•Famous Red-Green alliance and rise of

Social Democratic Party

• ‘Crisis Policy’ of public works, cost 3% GDP, devaluation.

•Social insurance: unemployment 1934, universal health care, child care, maternity benefits, pensions. Cradle-to-grave.

•Saltsjobaden accord. Labor got high wages, full-employment, social insurance. Business got labor peace, free trade, and property rights

Next class

•Postwar development

•Current winners and losers.