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POLITICAL ECONOMY OF DEVELOPMENT:
THEORETICAL FOUNDATIONS
NEOCLASSICAL APPROACHES TO DEVELOPMENT
METHODOLOGY
HYPOTHETICO-DEDUCTIVE METHOD
-takes axioms and hypotheses and deduces the logical way human society should develop
-Focus-WORLD OF APPEARANCES
CLASSICAL ECONOMISTS/LIBERAL THEORY
Society: atomised individuals competing against one another
THATCHER: ‘no such thing as society, only individuals’
-human behaviour strives to maximise pleasure and pain-UTILITARIANISM
UTILITY can only be known subjectively by the individual
Therefore (deduce)…how can we satisfy our needs? –THE MARKET
MARKET: EXCHANGE
-we need to maximise exchange in order to maximise human happiness
-therefore spread of market will increase happiness of people all around and optimal distribution of
goods
MONEY: a means to barter. Price tells you UTLITY
ADAM SMITH: ‘invisible hand’-because of notion exchange, market will somehow maximise human
happiness
RICARDO: Theory of ‘COMPARATIVE ADVANTAGE’
-theory about trade. If each country specialises-maximises exchange with the rest of the world
-FREE TRADE
-NO TARIFFS
MARGINAL UTILITY-JEVONS, MENGER, WALRAS
‘water-diamond’ problem
e.g.
Water, if you increase or decrease by a little, not such a big deal
Diamonds, if you increase or decrease by a little, BIG DEAL
GENERAL EQUILIBRIUM
-free market would tend towards an equilibrium
e.g. supply and demand
PARETO OPTIMALITY-free exchange will always achieve the best outcome
NECESSARY CONDITIONS FOR ASSUMPTIONS TO WORK
1. Perfect competition (with a monopoly can set the price)
2. Perfect knowledge for all market participation e.g. know the price of every comparable good
in the future
3. No externalities (something which exists outside the exchange and has an impact on you)
e.g. pollution or advertising could change social context
4. No transaction costs. E.g. goods straight to market
RESPONSE?
Make it a commodity e.g. POLLUTION: sell carbon
CRITICISMS
Assumptions don’t fit real world
Theory is IDEOLOGICAL in nature and has an INTERNAL LOGIC
POLICY CONCLUSIONS FROM NEOCLASSICAL LOGIC
How is the state seen?
States tend to be rent seeking/incompetent/self serving/corrupt
-use their position to get an income
How is the world market seen?
Trade and investment flows are mutually beneficial-POSITIVE SUM GAME
Free market-non hierarchical and neutral
WAR-seen as a political function of states. Therefore, more free exchange=less war
How is development seen?
Measure development by how quickly exchange is growing e.g. GDP growth
GROW GDP by encouraging an unfettered private sector
Trickle down effect
Nations are homogenous e.g. as long as GDP increases, all will benefit
Sub optimal outcomes (such as poverty) occur because the market is WEAK
POLICY CONCLUSIONS
Role of state (minimal)
-Ensure market can operate (laws, respect of property rights)
Maximise trade and remove barriers
Maximise sphere of market: COMMODIFY EVERYTHING POSSIBLE
EVOLUTION OF NEOCLASSICAL DEVELOPMENT PRACTISE
Modernisation theory (50s-60s)
Neoliberalism (70s-00s) Washington Consensus
Post Washington Consensus (90s)
MODERNISATION
ROSTOW-stages of economic growth
Basic assumptions: development: GDP growth; due to domestic and foreign savings, agents of
development are the capitalist class, technocratic elites, US Aid
NEOLIBERALISM
Oil prices
Debt Crisis
Volker Shock
Bretton Woods
Inefficient market is better than an efficient state
DEBT AND SAPs-conditionality agreements
VOLKER SHOCK: Increased interest rates so countries went bankrupt
Therefore US lent money and conditions e.g. privatisations
SAPs-programmes countries HAVE to implement to get funds
International trade and finance should be the engines of development
Attract FDI, commodify, financial deepening export led growth
MONETARIST LOGIC
High inflation and current account deepening is caused by excess money supply e.g. governments
printing money
THEREFORE-lead to a cut back in government spending
Inflation rates decreased
Devaluing the currency….therefore country’s exports will be cheaper for foreign buyers and imports
will be more expensive
POLICIES
1. Import liberalisation
Increased competition-now have to compete with the rest of the world
Increased productivity of capital and labour (shut down small firms in South)
2. Currency Devaluation
Production costs decrease
Import demand declines
Profits of export sector go up
(NB. But, if every country tries to maximise exports, who will be importing?)
3. Macroeconomic reforms
Cut back on spending
Privatisation
Shift government spending leads to the provision of public goods
Deregulate economy
Domestic financial liberalisation
Labour market reforms-get rid of unions
Open economy to investment
Overhaul legal system to protect private property rights
Political democracy
e.g. IRAQ 2003
USAID had major responsibility for restructuring Iraqi economy
Private sector led growth prioritised
Privatising the private-gave contract to a company to implement USAID approved
recommendations to begin supporting the privatisation of strategic industries
To assist legislative reform to allow privatisation of state industries including agriculture
COALITION PROVISIONAL AUTHORITY 2003
BRENNER-in charge of Iraq
Set laws-100 military orders
Privatise 200 state owned companied
Flat tax-15%-no distinction between individuals/foreign companies=perfect competition
Illegal to limit foreign ownership
Illegal for Iraqi farmers to save seeds from one season to the next
-THEFT of PPR’s of seed company
NEW INSTITUTIONAL ECONOMICS
RESIDUAL:
-Technology
-Institutions
-Politics
-Culture
Key Thinkers-NORTH, COASE, WILLIAMSON, RODRIK
Role of the state:
COASE-1960. ‘The problem of social cost’-transaction costs create inefficiency
NORTH-1981. The predatory rent seeking state model
NORTH 1990. Institutions-models of political transaction costs and path dependency
RULES OF THE GAME
New institutional economics argues that in order for markets to operate perfectly, institutions are
needed to reduce transaction costs
Institutions are seen as providing the rules of the game and establishing norms of behaviour
TRANSACTION COSTS
Institutions lower transaction costs, making markets more efficient
1. search and information costs
2. bargaining and decision costs
3. Policing and enforcement costs
NORTH (1990)
Democracy lowers political transaction costs
Lower political transaction costs implies greater access to the political system and an increase in the
ability of agents to bargain over changes that affect their welfare
PROPERTY RIGHTS
BENTHAM (on the function of property rights)
a. Preventing conflicts over resources-in the extreme can take the form of civil war or
international wars
b. Creates stable expectations and encourages investment and long run planning
c. Prevents free riding
WDR 97-02
GETTING INSTITUTIONS RIGHT
State capacity largely viewed as a technical issue
Capability approach-role of state should match its capability
1. Rule of law
2. Non distortionary policy
3. Invest in basic services and infrastructure
4. Protect the vulnerable
5. Protect the environment
RODRIK 2003
Outlines how some economies have managed to develop without following the Washington
consensus e.g. east asian economies.-adapted policy recommendations to their own circumstances
Property rights-definitely needed
But-the forms that fulfil these functions can be very different
BATES, 1995
NI fails to analyse costs of corrections or provide alternatives
NI also fails to adhere to commitment of individuals
BARDHAN, 2000
Argues there have been TWO basic theories:
1. imperfect information
2. economies of scale versus TC (need to check what this is)
-both are important but it doesn’t explain the whole story
e.g.
Persistence of dysfunctional institutions (self serving institutions)
Institutional impediments resulting from conflicts
Collective action problem with conflict
Nuanced role of state
BILATERAL conflict enforcement mechanisms are more costly than multilateral
MARXISM
THEORY OF INTERNAL RELATIONS
1. What is unique about individual agents, agencies, or situations
2. What is general to more people and agencies, their actions, and their products within the
time frame of contemporary capitalism
3. What is specific to people, agencies, their activities, and products due to their emergence
and functioning within capitalist society, anywhere and at any time. Remaining levels move
beyond capitalism
TOTALITY AND INTERNAL RELATIONS
Basic idea of Marx’s framework is that each part ontologically incorporates in what it is all its relations
with other parts up ot and including everything that comes into the whole
Social relations of capital, credit, money
e.g. treated as part of the totality-logical construct that refers to the way the whole is
present through internal relations in each of its parts
MARX’S THEORY OF VALUE AND EXPLOITATION
FOCUS: material process of social reproduction in capitalism
THEORY OF VALUE
Starting point: LABOUR
Transfers of exploitation
Types of exploitation
-household
-slavery
-capitalism
CAPITALISM
-exploitation is impersonal (mediated by market relations)
-Workers freely exchange their capacity to work (labour power) for a wage
-How free workers are systematically exploited under capitalism
EXPLOITATION IN CAPITALISM
-‘FREE WAGE’ bargain is misleading: asymmetric relationship between workers and employers
-Extraction of surplus value is systemic feature of capitalism
-Workers sell labour power for a wage
-Wage is determined by value of goods and services consumed or controlled by the workers
(equivalent exchange)
-The value created by the workers is an independent magnitude
-Value created-value appropriated by the working class-surplus value
‘Workers are exploited because they work for longer than it take to produce the goods that they
command. In the rest of the time they produce surplus value’
Exploitation does NOT imply ABSOLUTE poverty
Exploitation DOES imply RELATIVE poverty
‘MODERNIST MARXIST’
-Development of forces of production is the agency of history, and determines the relations of
production
-Optimistic view of ‘modernisation’ of ‘backward’ societies
Neglect of internal dynamics of the society
APPEAL OF MODERNIST MARXISM TO NEW ELITES
-Explained forms of oppression, consistent discourse on state power
-National project
-State led developmentalism (power to the technocracy)
-Democratic centralism as the mode of organisation of society; single party as the vehicle to build the
nation
SOCIALISM IN POOR COUNTRIES
-Legitimacy of socialism derives from rapid development
-Soviet style socialism is a programme of crash modernisation through forced industrialisation
-Specific form of primitive accumulation
IMPORTANCE OF THE COLLECTIVISATION OF AGRICULTURE
-Raise productivity and surplus for industrialisation
-Develop relations of production
-Destroy backward world views
COMMUNIST MANIFESTO
Condition for capital: wage labour
WAGE-LABOUR: rests exclusively on competition between the labourers
Advance of industry, whose involuntary promoter is the bourgeoisie, replaces the isolation of the
labourers, due to competition, by the revolutionary combination, due to association
Development of modern industry cuts from under its feet the very foundation on which the
bourgeoisie produces and appropriates products
UNDERDEVELOPMENT, DEPENDENCY INTERPRETATIONS OF MARXISM
-High productivity and technical progress are essential for socialism; only capitalism can deliver these
outcomes
-Core-periphery
-De-linking
PRIMITIVE ACCUMULATION
-Establishment of capitalist relations of production through the formation of a capitalist class and a
class of wage workers
Implications:
-capital accumulation does not result from abstinence or thrift by individual capitalists
-key element in rise of capitalism is REORGANISATION OF SOCIAL RELATIONS
CONCERN FOR HISTORICAL PROCESSES OF:
-value formation (extraction)
-class formation
-state formation
ANALYSIS OF ACTUALLY EXISTING CAPITALISM
-Destruction of previous modes of social reproduction
-Patterns of determination and relations of power
-Centralisation and concentration of capital
-Intensification of labour
-Financialisation of social relations