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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