NS 4053 Winter Term 2015 Monetarist Structuralist Debates

NS 4053 Winter Term 2015 Monetarist/Structuralist Debates

Overview • Structuralism – Cristobal Kay Handbook of International Political Economy • Neo-Liberalism – Robert Looney Handbook of International Political Economy • Deepak Lal, Preface, Handbook of Emerging Economies • Debate between the two schools in the Latin American context has carried on since the 1950 s • The debate represents two somewhat opposed views of how economies grow and expand • Each school has had its ups-and-downs as events have unfolded • Neo-liberal view mainly that of the international financial organizations and free market economists • Structuralism mainly indigenous to Latin America and has not been a factor in other parts of the world. Embodies many of the historical and social factors unique to Latin America 2

Structuralism I Structuralism • Often compared with Marxist, and institutional perspectives • Latin American Structuralist school emanated from ECLA under Raul Prebisch • Structuralists perceive the economies in Latin America as being inflexible and confronting manor constraints or structural barriers • They distrust the price mechanism and justify government intervention in the economy as accelerating the process of economic development and structural transformation • They regard distinct asymmetries in international political economic structures and relations as having a detrimental impact on Latin America 3

Structuralism II • By contrast the neo-liberal position emphasizes flexibility in which prices dominant and government intervention is discouraged • Neo-liberal position in Latin America often associated with the Chicago School of economic thought – many graduates became finance ministers • Characteristics and originality of structuralism • Key propositions of structuralism concern the world market economy and unequal exchange • The center-periphery model • Idea is that the disparities between the center and the periphery are reproduced through international trade • Thus the periphery’s development problems are located within the context of the international political economic system. 4

Structuralism III • This analysis of the world economic system directly challenged prevailing orthodox theories and continues to generate controversy • The argument that the center and periphery countries are linked in a series of asymmetric relationships a sharp break from theories such as Rostow stage theory • Rostow maintained all developed countries (DCs) were once underdeveloped and that present day underdeveloped countries can evolve into DCs following similar polices and states • Structuralists consider such theories deficient as they do not take into account • the different origins, structures and dynamism of the peripheral economy or • The changing nature of the world-system 5

Structuralism IV • Structuralism grew out of dissatisfaction of neo classical economics which did not seem to contribute to an understanding of the development problems of he periphery. • Structuralists wanted to develop an alternative based on major obstacles to development in Latin America and one that could be used to propose remedial policies • Structuralism is historical –examines the origins of developing counties into the dominant capitalist system as producers of agricultural and mineral primary commodities. • Structuralists term this pattern of development in the periphery and the “primary-export model” or “outward oriented development model • Wanted to distinguish it form the industrial-export model and autonomous development model of the center 6 countries

Structuralism V • Structuralist approach goes beyond economics • Emphasizes the part played by institutional and social factors in the functioning of an economy. • Key element is the role of the state in the development process. • Structuralism was influenced by Keynesian economics in its advocacy of manor increases in government expenditure for development purposes. • Went further than Keynesianism in regarding the state as the crucial agent for economic social and political change (the Developmental State) • Through economic planning and protectionism state seen as spearheading industrialization process in developing countries 7

Structuralism VI • Structuralism provide the rationale for land reform and state owned enterprises • Its ideology was • Anti-feudal • Anti oligarchical • Democratic • Reformist and technocratic • It questioned the perverse effect of capitalism in the periphery and the resulting inequities in the institutional arrangements • While it promoted economic change, it did not advocate revolution 8

Center Periphery Model I Features of the Center and Periphery • Linkages between the center and periphery • Increased the productivity of the factors of production dramatically • However diffusion of technological progress was very uneven throughout the world • Center countries internalized the new technology by developing an industrial capital goods sector and employing more advanced technology across economic sectors • Resulted in the development of a homogeneous and integrated economy 9

Center Periphery Model II • In the periphery things different • New technologies were largely imported and manly confined to the primary commodity producing export sector • The industrial sector was insignificant and the capital. goods sector rudimentary or non existent • As a result the peripheral economy became disarticulated and dualist • Disarticulated because it had to import advanced technology from the center and • Dualist because of the large productivity gap which existed between the export and subsistence 10

Center Periphery Model III • Periphery is characterized as having a sizeable lowproductivity pre capitalist sector which continuously produces a large surplus of labor • This surplus labor keeps wages low and prevents the periphery from retaining the fruits of its own technological progress • Productivity increases in the export sector largely being transferred to the center through a deterioration in the terms of trade • Thus in the Structuralist view, international trade both • perpetuates and • deepens the asymmetry between center and periphery 11

Inward Oriented Development Model I Inward oriented development model • To overcome constraining effects of this outward oriented process ECLA and Structuralists proposed an inwardoriented development model • Centerpiece was import substitution industrialization ISI • Structuralists expected an ISI strategy to transform industry into the most dynamic sector of the periphery’s economy and lead to a higher rate of growth than comparative advantage and a primary product export model • Basically ISI an investment – lost income in the short-run more than made up by higher income streams in the futures 12

Inward Orientated Development Model II • ISI policy was to be implemented by variety of policies • Easy credit, • Infrastructure support, • Favorable foreign exchange rates, and • (Mainly) protectionist measures – tariffs and quotas • For Structuralists industrialization justified in the periphery even where the cost of local industry is higher than international price • Otherwise some factors of production would remain unemployed, or • Would be used to produce export commodities with adverse consequences for the terms of trade 13

Structural Inflation I 14

Structural Inflation II 15

Assessment • Structuralists felt ISI would overcome limitations of outward development process and • Bring social and political benefits – strengthening middle and working classes and of democracy • By early 1960 s talk of “exhaustion” of ISI process • Wide-spread recognition that inward directed development had not progress as planned • Despite substitution, external bottleneck become even more problematic as volume of imports continued to rise • Set up need for capital equipment, spare parts • Countries ran large balance of payments deficits – few exports doe to overvalued exchange rate • Led to massive devaluations and inflationary spirals 16 • Eventually economies stagnated – No TFP

Assessment II • Structuralism versus monetarism • Structuralists see the problem of inflation within the context of the structural transformation of developing countries • For Structuralists inflation also arises from the sociopolitical tensions, sectorial imbalances and expectations generated by the process of development. By contrast monetarists regard the inflationary process as a major obstacle to growth • Monetarists see inflation as arising from excessive demand • Structuralists see it coming from maladjustments and rigidities in the economic system • Monetarists claim many of the supply rigidities stem from distorted prices 17

Neo-Liberal Counter Revolution I • Neoliberal counter revolution • Came out of the work of Deepak Lal (preface to the Handbook of Emerging Economies) • Main beliefs: • Imperfect Information – makes detailed planning impossible, • Individual freedom, and • The markets • Neo liberals influential in designing World Bank and IMF structural adjustment programs and their providing advice to developing countries. • While these structural adjustment programs don’t incorporate the Structuralist ideas – actually the opposite direction 18

Neo-Liberal Counter Revolution II • Neo-liberal structural changes entail rolling back the welfare state by • Radically reducing government expenditure (especially welfare expenditure. • Eliminating subsidies and protectionism, • Liberalizing markets and • Switching from inward oriented to outward oriented development strategies so as to integrate developing countries even further into the world market • With the success stories of the market driven east Asian economies in the 1970 s into the 1980 s and 1990 s neoliberalism was the clear winner in the debate • Overt time Latin America has fallen further and further behind East Asia 19

Neo-liberal Critics I • Nevertheless neo-liberalism has come under attack from many sources • To their critics neoliberal reforms have simply resulted in: • The rationalization of economic production and distribution on a global scale along the lines of comparative advantage and • The maximization of the rate of return (i. e. , profit) on invested capital for transnational banks and corporations and their stockholders. 20

Neo-liberal Critics II • The costs of these programs is reflected in one or (usually) more of the following • Increased concentration of wealth in the hands of the very rich • Increased unemployment and underemployment • Wages that remain low for those wo still have jobs, even as workforce productivity increased • Decreased power of trade unions under the pressure of economic globalization • Increased crime as more people become economically marginalized • Increased numbers of police and prisons to combat the increase in crime • An erosion of civil liberties 21

Neo-Liberal Critics • Neoliberal costs (contd) • Rural depopulation as small farmers are put of business by corporate agribusinesses which with free trade can take full advantage of its economies of scale • Armed resistance by traditional cultures put under economic siege • Increased immigration to more economically developed countries by those who no lnger have land to work and/or cannot find work in cities • An increasingly irrelevant political system that is unable and/or unwilling to start a genuine democratic debate because it is controlled by corporate interests that have most to gain from status quo • An alarming decrease in social solidarity 22

Assessment • More balanced view suggests that the neo-liberal reforms make sense in the long term but: • There have been serious technical errors in their application in the short run • Most neoliberal reforms have been untaken through IMF/World bank coercion – bitter medicine • Best to try buy-in of government and population with IMF/World Bank so that everyone is looking for ways to minimize their shortrun pain. 23