International Economics: Backwardness, Modernization, and Industrialization PDF

International Economics 10. Backwardness, Modernization, and Industrialization Péter Árvai ELTE Faculty of Social Sciences, Department of Economics Development and growth What is economic development? Differences between growth and development Development is much broader: Eradication of...

International Economics 10. Backwardness, Modernization, and Industrialization Péter Árvai ELTE Faculty of Social Sciences, Department of Economics Development and growth What is economic development? Differences between growth and development Development is much broader: Eradication of poverty Economic and political freedom Access to education and welfare services Growth is a necessary condition to promote development INTERNATIONAL ECONOMICS – Péter Árvai 2 Sources of growth How to accelerate growth? Economic theory assumes three factors of economic growth: Labor (L) Capital (K) Technology (A) How to achieve high growth rate from a low level? You have to invest as much as you can You also have to apply the best available technology You have to have pro-growth institutions INTERNATIONAL ECONOMICS – Péter Árvai 3 Development and industrialization Industrialization is a basic condition of creating a modern – developed – economy Heavy industries (iron and steel, machinery, chemicals) are the backbones of a modern economy Creating heavy industries has thus been a high priority in all emerging markets You need, however: technological and organization skills, capital, raw materials, and skilled labor force INTERNATIONAL ECONOMICS – Péter Árvai 4 Barrington Moore Jr. Barrington Moore Jr., 1913- 2005, American sociologist, professor at Harvard University His most important book is: Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of the Modern World (1966) INTERNATIONAL ECONOMICS – Péter Árvai 5 Different paths ”No bourgeoisie, no democracy” Three different development paths 1. England, France, USA: strong bourgeoisie 2. Germany and Japan: weak bourgeoisie 3. Soviet Union and China Three different outcomes: 1. The way to democracy 2. The way to fascism 3. The way to communist dictatorship INTERNATIONAL ECONOMICS – Péter Árvai 6 Economic backwardness Alexander Gerschenkron (1904- 1978), Russian-American economic historian, professor at Harvard University In his most influential essay, Economic Backwardness in Historical Perspective (1951) he claimed that modernization paths were far from uniform INTERNATIONAL ECONOMICS – Péter Árvai 7 How to finance industrialization? During early industrialization, enterprises did not need huge amounts of capital: internal accumulation (light industries, e.g. textiles) The catching-up process of late industrialization required large capital inputs (heavy industries) The role of finance went from private industries to: Development banks The state INTERNATIONAL ECONOMICS – Péter Árvai 8 Different strategies Imitation and learning Possible sources of finance: Co-optation of indigeneous private capital Foreign borrowing Squeezing out of agrarian population Examples: different strategies in Asia: Japan, South Korea, Taiwan, China and India INTERNATIONAL ECONOMICS – Péter Árvai 9 Early industrialization Parliamentary system ”Product” of the private economy Example: England The model led to the anglo- saxon type of capitalism Relying on capital markets instead of banks INTERNATIONAL ECONOMICS – Péter Árvai 10 Early industrialization Steady and balanced growth path Main players: the relatively small private enterprises Low concentration in industries Relatively unconstrained competition INTERNATIONAL ECONOMICS – Péter Árvai 11 Late industrialization Authoritarian political conditions Strong feudal roots Example: Japan The model led to the continental type of capitalism Relying on banks instead of capital markets INTERNATIONAL ECONOMICS – Péter Árvai 12 Late industrialization Very high growth rates Huge enterprises Lack of real competition Supremacy of heavy industries High level of industrial concentration Large role for investment banks and for the state INTERNATIONAL ECONOMICS – Péter Árvai 13 Smith and Ricardo The classical approach to economic development: It is based on comparative advantages, specialization and free trade (with low tariffs) The role of the state is limited: regulation, public goods, providing the framework (institutions) and protecting the poor Its main task is to ensure unbiased prices in order to achieve greater efficiency (”get the prices right”) INTERNATIONAL ECONOMICS – Péter Árvai 14 Friedrich List Friedrich List (1789-1846), German economist, policy advisor Free trade exploits weaker countries High tariffs are needed to protect infant industries ”Incubator effect” Free trade must be adopted only after catching up National(ist) industrial policy Germany, Japan, Central and Eastern Europe Strong linkages between banks and domestic industrial enterprises („Finanzkapital”), state cooptation INTERNATIONAL ECONOMICS – Péter Árvai 15 Historical evolution of capitalism Laissez faire economy Modern mixed economy Ownership Family Corporations + the state Market Free competition Oligopolistic competition Active, public goods, economic policy, State Passive, regulation industrial policy, welfare state etc. INTERNATIONAL ECONOMICS – Péter Árvai 16 Capitalism and socialism Dominant type of coordination mechanism Dominant form of ownership Market Bureaucratic Capitalist market Private economy Socialist planned Public economy INTERNATIONAL ECONOMICS – Péter Árvai 17 The modern mixed economy Dominant type of coordination mechanism Dominant form of ownership Market Bureaucratic Modern mixed Private economy Socialist planned Public economy INTERNATIONAL ECONOMICS – Péter Árvai 18 Different strategies Import substitution Autarky, minimizing imports Protection of domestic industries Seclusion from world markets Export orientation Specialization according to comparative advantages Subsidies to successful enterprises Opening to world markets Frequently, these two strategies went hand in hand INTERNATIONAL ECONOMICS – Péter Árvai 19 Socialist industrialization Lack of private and bank capital State investments, control of the commanding heights of the economy Source: exploitation of the peasantry Autarky, focus on heavy industry High investments, low consumption Many developing countries imitated the model Import substitution INTERNATIONAL ECONOMICS – Péter Árvai 20 The socialist system One party system, totalitarian dictatorship The part and the state are intervowen: party-state Productive resources are state owned Central planning, ignoring the market Soft budget constraint Quantity drive, plan bargaining, shortage economy Lack of innovations, inefficient production INTERNATIONAL ECONOMICS – Péter Árvai 21 The developmental state Rapid economic growth as an absolute priority High savings rate Relatively autonomous and competent bureaucracy with sufficient maneuvering room Commitment to the market, that links subsidies with accountable results Providing appropriate and stable external environment to help rapid growth INTERNATIONAL ECONOMICS – Péter Árvai 22 The developmental state Simultaneous use of export promotion and import substitution, protection of infant industries Selective industrial policy, protectionism Large state R&D expenditures, state intervention to key industries Repression of labor, authoritarian politics State controlled financial system, state directed credits Subsidies linked to performance standards INTERNATIONAL ECONOMICS – Péter Árvai 23 Thank you for the attention! Péter Árvai [email protected]