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May 14, 2013

A chapter in the European Report on Development by Yurendra Basnett and Jodie Kean highlights the need to include productive capacity in the Millennium Development Goals (MDGs), the set of development targets originally established in 2000 and due for revision in 2015. The chapter makes clear that developing countries can’t pay for health and education without economic growth. An international framework that better recognised the importance of the economy would help countries build the tax revenues to pay for proper social services. Put bluntly, self-reliance would be better than handouts.

Many of the economic challenges of Low Income Countries and Least Developed Countries (LICs) and (LDCs) have until now conventionally been thought of as lying on the demand side rather than the supply side. If only we could break down overseas barriers to trade, the story goes, the economies of LICs and LDCs would respond with increased production.

In my experience many LICs and LDCs simply don’t have the productive base or flexibility to be able to sell much on international markets, and they are unlikely to do so without considerable attention to local productive capacity. I remember a colleague in the Vanuatu Department of Trade coming back from Japan saying that a single potential buyer wanted 20 tonnes of coffee a month. The entire country produced that much a year. The lack of roads and inter-island shipping, insufficient electrification and phone coverage — not to mention the difficulties of the transition from subsistence work to a cash society — meant that the coffee company was unlikely quickly to increase its capacity. For the economy as a whole, the export of most other products besides a few basic commodities like copra was a pipe-dream despite widespread duty and quota-free access to foreign markets.  The economy wasn’t flexible enough to be able to respond to international market conditions, not that such flexibility is ever likely. Tourism has since grown but this has led to over-reliance on a single services export.

In Lesotho, where I worked last year, exports are heavily concentrated  in garment production at a single group of Chinese-owned clothing manufacturers in the capital, Maseru. Although the country is Africa’s biggest garment exporter, it forms only a tiny fraction of global textile and garment production. The industry is over-dependent on government subsidies and the African Growth and Opportunities Act (AGOA) under which the continent’s exports get preferential treatment in the United States. Few  industries other than clothing have had much success, and considerable effort is needed to develop the infrastructure, finance and human resources for export diversification. This won’t happen automatically. It needs donor and government support.

The focus of much of the international community tends to be on smoothing trade flows — trade facilitation — and trade agreements, when the smallest and youngest countries like Vanuatu and Lesotho simply don’t have the ability to take full advantage of these agreements. This isn’t to discount the importance of trade agreements, but they are only part of the story. The economies of most LDCs and LICs are too tiny to be able to supply in enough quality and quantity. Many of these sort of economies are  excluded from global supply chains and their economies lack diversity.

This lack of attention to the supply side and productive capacity is not just about the marginalisation of small countries; it  has theoretical and methodological foundations. The global development discourse has tended to promote liberalisation rather than to intervene in the economy to stimulate agricultural growth or industrialisation. The lowering of tariffs, smoothing of trade flows, trade facilitation and reducing barriers to investment were all a product of the post-Washington Consensus era in which it was thought that freer markets would automatically spark economic expansion. In a sense, the exclusion of explicit economic goals in the MDGs was connected with this line of thinking. Economies would sort themselves out — the international community should only attend to social goals.

The experience of East Asia, as should be well known, teaches us otherwise. Governments need to act in specific ways to stimulate production, using tariffs, domestic taxes and subsidies. Health and education are public goods which themselves contribute to economic growth (so they shouldn’t be excluded from the MDGs). The private sector, left to its own devices, often fails to build infrastructure. An officially-recognised international framework would help countries pursue these interventionist goals.

This emphasis on the supposed automatic functioning of markets has been connected with the prevailing economic orthodoxy under which Keynes was banished and the neoclassical model became paramount. Industrialised and non-industrialised economies were said to operate more or less at full capacity all the time. The lessons of Keynes and his disciples were forgotten, and it was forgotten that economies could in fact perform below full demand for long periods, if not indefinitely.

Shoved even further to the sidelines were thinkers like Albert Hirschman and Michal Kalecki, who showed that developing economies didn’t even have enough capital, never mind being unable to use it fully. Specific government measures were required to develop capital and subsequently to deploy it to full effect.

Within the neoclassical framework it’s difficult to accommodate the likes of Hirschman or Kalecki because neoclassical economics is a tightly-specified and prescriptive world which doesn’t allow for differences between developed and developing economies — still less between developing countries — and which tends to promote more or less the same solutions everywhere. In this sense the shortcomings in the kind of development thinking which underlay the old MDGs are deep-seated and methodological rather than simply about refinements of policy. Hopefully, in a post-2008 world, in which neoclassical economics is under question and in which new sorts of economics are emerging, productive capacity and economic development can be included in any new global development agenda.

2 Comments leave one →
  1. May 15, 2013 10:51 am

    Thanks Dan –

    Absolutely – there are studies that highlight that the most effective sector for giving a high economic multiplier is spending on healthcare, along with education, utilities and so on. Yet development institutions seem to shy away from investing in ‘general’ economic capacity, possibly through being excessively results-driven rather than strategy-driven as in successful Asian economies.

    My belief, having dutifully read polemics like ‘Dead Aid’, is that people (even ‘experts’) simply have a very poor understanding of the amount of investment required in an economy. The common complaint is the spending of $1 trillion or similar in Africa over 50 years. If one ignores the obvious point that much of that ends back up in the funder country through tied aid, (and iniquitous and entrenched economic structures like dumping practices), one sees that if you divide the sum by 50 years and by the population of Sub-Saharan Africa (previously smaller but now around 1 bn people), one realises that the level of investment per person per year is ridiculously low. Are we expecting that $10, or even $100, will be sufficient to help provide adequate investment in electricity, water, healthcare, education, roads, ports, rule of law for businesses to operate in safely, national and local government? … and so on.

    As you say, supply constraints mean that there can an entrenched lack of capacity, and also a relative incapacity compared to better infrastructured countries.

    • May 15, 2013 12:35 pm

      Some very good points. Yes, a results-driven mentality seems to mean that short-term and observable things get funded while slightly more nebulous, strategic or complicated things don’t. ‘Technical assistance’ is often automatically seen by definition as money well-spent. Mea culpa. Building a railway isn’t. Again, I think this is to do with the obsession of much of mainstream economics with measurement, not to mention the trend toward managerialism in development: always, always, pin a number on everything, even if that number is wrong and even if this means omitting big, important, unmeasurable things.

      You’re also quite right about the sheer sums of investment needed and the need for it to be provided externally or via government. One of the more laughable arguments in Dead Aid, from memory, was the bit where Moyo argues that governments should raise development funding on the international capital markets. This, just before the euro crisis saw the governments of developed European countries hung, drawn and quartered by the international capital markets! As if for its infrastructure development the likes of Lesotho could reliably replace aid with sovereign bonds! Even relatively sophisticated Argentina tried tapping the international private debt markets for a large share of its borrowing in the 90s — and look what happened there.

      Equity flows to LDCs and LICs are small if not non-existent, and notoriously volatile. FDI is slightly better but not always in infrastructure, and international corporates tend to be risk-averse.

      The domestic economies of so many developing countries simply don’t have the private capital to fund investment for development. So when neither domestic nor international private funds are sufficient the argument for wholesale private sector provision is clearly nonsense.

      Overall, yes, your point about the sheer size of investment needed is a good one. In an era of aid-fatigue the sums needed are sometimes forgotten. For his problems, Sachs’s The End of Poverty made some good points here.

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