Interesting books

If you want to better understand how economic development work and how to explain that in the last decades some countries succeed to develop and other remain in the poverty trap, I give you as advice to read the following two books:

• Chang Ha-Joon, Bad Samaritans. The Myth of Free Trade and the Secret History of Capitalism, New York, Bloomsbury Press, 2008

• Reinert Erik S., How Rich Countries Got Rich... and Why Poor Countries Stay Poor, New York, Carrol And Graf, 2007
  

These two books look at history to show some lesson that we can learn on development and its relationship with trade. The two authors go beyond models and provide a clear analysis rooted on reality. What is more, both have a direct experience on how economies and economic development work. In fact, Reinert worked in the private sector as entrepreneur and Chang grew up in the middle of the “Korean Miracle”. Their experience and thinking outside the box is very valuable because they support their arguments with precise examples and historical analysis.

Both authors give me some hope that economics will stop to be highly dependent on ideological assumptions and supporter by mathematical models that oversimplify the reality and have as a main function to show this king of economics as scientific.

economics books trade and development

Why Education Development Programs tends to be useless?

Development aid community has been investing large amount of resources (even if they decreased the last decades according to Heyneman, 2006) to improve the education sector in developing countries. Education development programs often fail to improve growth and economic development. This post aim is to give some thought, based notably on Erik. S. Reinert ideas, to understand the reasons of this failure.

The Millennium Development Goal number two states:

Ensure that all boys and girls complete a full course of primary schooling

Of course, this is a very important goal from an ethical point of view. Nevertheless, when we invest resources in a goal we need to assess if it will create a sustainable development path and if it is the most effective investment, from a developing country that lack of resources, to achieve development goals.

In this case, our assessment is that primary education is not the most effective way to start a sustainable development path. In fact, as Heyneman (2006) underlines:

The source of the problem lies within the development education community itself. The development education community chose to adopt a simple ideology with respect to Basic Education-for-All at the expense of many other important education sector objectives.

According to this author, the reason is that many donors lost interest because they need to focus only on primary education. In fact, often this paradigm is translated in investing all the education resources in primary education without investing in universities.

Also in this case, a general MDGs criticism is pertinent. As Chris Blattman pointed out in a post:

These goals, while laudable, are humanitarian rather than development goals. To reach middle income status and a sustainable social safety net, the least developed countries will require manufacturing jobs, a growing services and technology sector, rising real wages, and a broadening tax base. Such transformation has been historically urban, and historically narrow and unequal, at least at first.

If we look at the reality, a country with all people with only primary education will never succeed. In fact, this is a country with only low skills workers that will continue to work in decreasing return industries (as agricultural commodities and sweatshop). Such a country will totally depends on transnational companies to create jobs. The problem is that this kind of strategy without a link with national industry development: it is a recipe for failure. A country to achieve development should have very diversified workers. What is more, a country to develop should have high-educated people with new ideas, entrepreneurship, and skills. Only these kinds of workers can start new profitable business, create jobs and increase a country wealth.

We see, for example, that India succeeds to develop in high profitable sectors because they invested in valuable high education. They had a chance to have smart decision-makers that in the 80s refused to follow the World Bank advice to renounce of their universities and focus their resources in primary education. If they followed this advice, we have never seen the "Bangalore Miracle".

This does not mean that it is enough to invest in high education (and in particle primary education) to achieve development. A country should also provide work opportunities for its graduates. If it is not the case high education will only increase migrations that will profit developed countries.

Education should be part of a broader development strategy. The problem is that, as Heyneman shows, education development community evaluate its success or failure on their sectoral objectives criteria (increase of educated people). What is needed, however, is to assess the impact of these programs on their sustainable development contribution. It is useless to have more educated people that are still poor because they have any job opportunity.

References

Heyneman S. P. (2006), The Effectiveness of Development Assistance in Education: An Organizational Analysis, Journal of International Cooperation in Education, Vol.9, No.1, pp.7 -25

Reinert Erik S. (2007), How Rich Countries Got Rich... and Why Poor Countries Stay Poor, New York, Carrol And Graf

development aid foreign international education ODA political economy heterodox

What role plays agriculture in economic development?

In 2007-2008 agriculture became once again a major issue in the global agenda. Even, the World Bank recognizes the importance of this sector for economic development in its 2008 World Development Report. Another reason is linked to rising prices of agricultural commodities caused by drought in some major exporting countries (e.g. Australia), rising global consumption and growing use of agricultural commodities for biofuels. Some actors underlined that the 21th century will be the agricultural century.

Agriculture plays for sure an important role in development. In fact, according to IFAD, 2/3 of poor in developing countries live in rural areas.

Agriculture debates at the international level are always linked with the trade dimension. In fact, even if only around 10% of the global production is traded, trade plays a crucial role in agriculture because it influences greatly prices. Trade in crucial for farmers incomes as well as for the added-value produced by the agricultural sector. For this reason, agricultural negotiations at the WTO are very difficult.

Economic history, as Reinert and other authors show us, can give us some insight on the role of agriculture in development:

• Never in the history a country succeed to achieve development through its agricultural sector. In fact, often agricultural products are subject to decreasing returns that, as we showed in a post on trade and development linkages, does not enable a country to develop successfully. Nevertheless, some products can be subject to increasing returns notably rare products (Japanese beef meat from cow daily massed with sake), transformed and typical products (e.g. Swiss cheese, wine, etc.) and likely biofuels.

• Never in the history was rural development possible without the presence in the same region/country of an industrial sector providing inputs and tehcnological innovations. Historically only industrialization allowed to raise durably productivity in agriculture.

Nevertheless, agriculture can play an important role in development event if we take into account what the history tell us:

• Agricultural exports enable countries to increase their incomes that can be used to implement a strategy of industrialization and of development of an advanced service sector. An interesting option to start industrialization is to create an industry that transforms agricultural commodities. Often, this industry is easier to set up than high-tech industry. This will increase the country income, by climbing the value chain. These additional resources will be invested again in order to improve industrialization and create new industries, jobs and incomes. In this way, a developing country can start a virtuous economic development cycle.

• Agriculture can raising incomes and help poor farmers to increase their consumption and improve their education. These two outcomes will both increase the national/regional market size essential to allow the development of a national (temporary protected against international competition with tariffs) industrial sector and increase the opportunities of farmers (when productivity rise) to have the skills required to work in the industrial sector. This process is what we observed in developed countries history.
  

You will think: “If it is so easy, why only a bunch of developing countries succeed to achieve high growth rate?” The reason is quite simple. Developing countries faced huge difficulties to export their agricultural commodities at a fair price. Historically there were at least three reasons:

• Developed countries subsidies depressed international as well as developing countries local prices. This both decreased farmers and developing countries incomes and pushes out of business many farmers. For this reason, nowadays number of developing countries, even net importers of agricultural products, cannot fully profit of their production potential. Developed countries subsidies are a partial explanation of the growth success of many developing countries between the end of WW II and the 70s (when subsidies were relatively low in developed countries) and the growth low rates in the 80s and 90s (when developed countries invest large amount of money in subsidies).

• Developed countries, for long time basically the only market for developing countries, in order to protect their farmers, adopted high tariffs and implemented non-tariff measures that restrict greatly the acess to their markets. Subsidies also played a role. In fact, they caused overproduction and reduced the need of import. What is more, developed countries tariffs policies imposed higher tariffs on transformed products (tariff escalation) in order to protect their agro-industry. This constraint developing countries to continue to export commodities without having a chance to develop their transformation industry.

• World Bank and IMF structural adjustment policies constrained many developing countries to specialize in the production of agricultural commodities. These policies create overproduction that led to low prices.

• Agro-industry is an oligopoly of developed countries industries that take advantage of their dominant position by negotiating low prices with producers. This issue can be solved if the WTO rules will include an international antitrust policy. This was never very high on the agenda because developed countries want to continue to take advantage of their dominant position in many sectors.

Today, the situation is different. In fact, agricultural prices were very high the last couple of years. The consequences are that developing countries can use agriculture more profitably to start a sustainable development path. What is needed is a WTO agreement that:

1. Pushes developed countries to decrease their subsidies and opens their market (and eliminate tariff escalation);

1. Allows developing countries to implement policies (tariff and subsidies) to modernize their agriculture (and temporarily protect poor farmers until an industrial sector is developed) and to increase their competitiveness and export capabilities.

In conclusion, agriculture can be a powerful tool to start a sustainable growth and economic development. Nevertheless, barriers that prevent to realize this potential are still large. Doha Round negotiations do not seem to be likely to remove these barriers effectively.


References

IFAD (2001), Rural Poverty Report. The Challenge of Ending Rural Poverty

Reinert Erik S. (2007), How Rich Countries Got Rich... and Why Poor Countries Stay Poor, New York, Carrol And Graf

World Bank (2008), World Development Report. Agriculture for development

agriculture Economics Trade and Development WTO

Is Official Development Assistance Effective to Boost Growth? Palliative vs. Development Economics

Practitioners often flaunt official Development Aid (ODA) as the panacea to fight against poverty and boost development. For these reason, many practitioners, NGOs and the United Nations pledge and claim for more aid (0,7% of the GDP of developed countries).

Even if these practitioners are driven by good intentions the results of ODA in the last fifty years are extremely disappointing. In fact, if we look at the ODA impacts on growth we see that, as Rajan and Subramanian demonstrate, “there is no robust positive relationship between aid and growth”.

I propose in this blog some reasons that can explain this failure that it is mainly caused by the last thirty years policies:

• ODA, notably multilateral, was used in the 80s and 90s to promote Washington Consensus policies. Liberalizing trade provoked in many countries the destruction of their industrial sector (1). The outcome was the slowdown of growth, unemployment and increase of poverty. These impacts were amplified by privatizations and “less-state” policies.
• There are also some external factors that reduced growth and create poverty. The more important ones were probably: debt service, oil prices, global economic crises and huge increase of developed countries agricultural subsidies. However, the last two elements are linked to policies adopted by developing countries.
• ODA, mainly provided by bilateral donors, often follow the political and economic interest of the donor. For example, ODA tends to maintain the colonial division of labour with developing countries producing only raw materials and handicraft. What is more, ODA now deals more with emergency situations than with development.
• ODA is more focused on what Erik Reinert (see the “interesting to read” section on this blog) call “palliative” economics than development economics. In fact, aid community prefers to try to solve the worst negative impacts of development failures in developing countries (as increase of disease, health care, poverty in very peripheral areas, etc). They chose to treat the symptoms of the disease instead of its causes.

Source

I could conclude that ODA is useless and we need to simply eliminate it. Nevertheless, I think that we can reform it. ODA can become a genuine instrument for development.

The following changes, some of them already discussed by the ODA community, can contribute to this objective:

• ODA should be linked by a real ownership of developing countries that should use it as a tool in broader development strategy. Donors discuss on this issue but they are very far to achieve it. For example, PRSP have been criticized because developing countries poorly choose how to spend resources.
• Donors should spend less money in “palliative” policies and more in development policies. We should invest more in industrialization and advanced services development. In fact, only by developing these sectors a country can have enough resources to invest durably in health care and education. Furthermore, as Reinert, demonstrate only the development of an industrial sector can help to durably improve farmers living conditions. Donors often continue to implement the same kind of project. What is needed is to think outside the box notably to use new technologies for development.
• Donors invest a huge amount of resources in the so-called “good governance”. This is a waste of money. In fact, if we look at the most successful former developing countries (as Korea, Singapore, etc.), they were not good examples of “good governance”: there were corruption, rent-seeking, authoritarian governments, etc. Nevertheless, they succeed and after reaching a level in their development, they choose to implement democracy, human rights, anti-corruption policies, etc. Implementing these policies in LDC is a waste of money and could be counterproductive in terms of development. In the early phases of development, there is only a good- or bad-for-business governance.
• National decision-makers are the most well placed to design a development strategy and to choose what and when policies should be implemented. International experts, with few exceptions, tends to propose (and often to impose) one-size-fit-all approaches based on econometric models. We should adopt a new approach on development. Rodrik call this approach experimental. We need to learn more form past experiences and from our (of a developing country decision-maker) mistakes. We should learn more on experiences of successful countries than form econometric unrealistic models. What is more, each country has its specificities and a one-size-fit-all strategy did not exist.
• We should use more tools that history demonstrate that they are effective. For example, it is better to improve South-South integration than North-South Free Trade Agreements. In general, we need to better understand how the successful Marshal Plan worked in Europe and replicate it in the developing worldthrough ODA. I will explain its main characteristics in another post.

In conclusion, ODA donors should assess the failure of development aid and think seriously on how to improve it. They should surpass old (and new) ideological thinking and adopt a more experimental approach that takes into consideration past experiences and assessments of development results. Development and not palliative measures should be the focus of ODA. We need better development economics scholars that can think outside the box and criticize past and current policies. We also need to think on aid and its inter-linkages with global governance and international engagements. In fact, it is useless to promote cotton industry in Benin if the US gave huge subsidies to their cotton farmers.


Foot Notes

(1)For more information on trade and development issues look at my previous post.

Economics North-South Relations ODA development aid foreign aid

Fair Trade: a real tool for sustainable development?

Fair Trade labels proliferate the last decade. Although Fair Trade grew very fast since 2000, its market share are still small in major developed countries (excluding Switzerland, the average could be between 5 and 15%). Fair Trade focuses on some traditional developing countries tropical exports (notably coffee and cocoa).

Many scholars and stakeholders try to understand if Fair Trade labels can have positive impacts on development, the fight against poverty and succeed to render the international trading system fairer.

My assessment on Fair Trade is not clear-cut. In fact, as often happen, global issues carry both opportunities and problems in terms of sustainable development.

On the positive side, we can underline that Fair Trade increase earnings of some farmers in developing world. It seems to be a solution for low prices that usually these farmers should accept and that trap them into the poverty. Furthermore, these additional resources should be invested in basic services for the community (health, education, etc.). This element is often included in Fair Trade label Term of Reference.

All these Fair Trade effects seem to support sustainable development goals. However, Fair Trade labels bring also a number of issues that reduce their impact on sustainable development. We can summarize them in the following points:

• Fair Trade concern a minority of developing countries farmers. These labels contribute only to improve the living conditions of a minority of farmers. They create some “islands of wealth in an ocean of misery”. This is true even if Fair Trade start to be adopted also by some Trans-National-Companies. Its impact on “conventional” trade has not yet assessed. My guess is that it is very small. Big companies use Fair Trade only for marketing reasons and to profit of the growth of this market. What is more, in the last couple of years Fair Trade seems to have reached a limit in its market share in many developed countries. These labels will not succeed to change the international trading system.


• Fair Trade products are the traditional developing countries tropical products. This does not solve the overproduction of these kinds of products that is the main cause of low prices. Fair Trade labels choose not to merchandize products that are concurrent with developed countries productions for example, in Fair Trade chocolate only cocoa and sugar are form developing countries, milk is produced in developed countries). This is very damageable for both Fair Trade farmers (that continue to produce the same products with low prices and they are totally dependent of Fair Trade labels) and other developing countries farmers (that are in competition with this labels).


• Fair Trade products are usually transformed in developed countries. Only raw materials are bought in developing countries. These labels did not improve the transformation capabilities of these communities. They do not profit of this opportunity to increase the value added produced by these communities and transfer the needed know-how and technology that after can eventually transferred to the whole country. On this issue too, labels preferred not to enter in competition against developed countries productions and industries.


• Labels constrain Fair Trade farmers to invest additional earning in basic services. This poses an ethical problem. In fact, if Fair Trade is neither a development project nor charity these farmers should take alone their decision on how to spend this money. Furthermore, even if spend money in basic services can have an important living conditions impact in the short term, productive investment can bring a more sustainable communities’ welfare. These kinds of productive investments can also help to improve living conditions beyond the Fair Trade islands to the whole region/country. These investments can also decrease their dependence on Fair Trade labels.

In conclusion, Fair Trade labels are only a second best, or a partial, solution. In fact, even if they can bring come benefits their economic impact on a developing country economy is very tiny. In fact, Fair Trade does not respect the lesson learnt form history that in a previous post we underlined as crucial to increase the positive impacts of trade on sustainable development: diversification, climbing the value chain, technology and products innovations and developing the industrial and advanced services sector.

However, buying Fair Trade products could be better that buying conventional ones. For this reason, in absence of a real alternative I buy Fair Trade products.

I will be very interested to read your comments and discuss more deeply with you on this issue.

economics fair trade trade development agriculture

How to Reform the World Trade Organization? A way to go beyond Members disagreements

For few years, some policy-makers, scholars and other stakeholders have voiced their disappointment with the World Trade Organization (WTO) and have proposed some ideas for reform this institution. The WTO has been accused to be to ineffective (slow to produce agreements) as well as to fail to produce results favorable in terms of sustainable development and of solving asymmetries in the international trading system between developed and developing countries.

Some authors pointed out that ineffectiveness derive from the institutional setting. However, as far as I know, scholars failed to propose feasible new ways of organizing the WTO institutional setting. In fact, there is some historical “path dependence” on its evolution as Wilkinson brilliantly shows (1).

Independently of potential improving on how the WTO institutionally works, it is more important to sort out how to go beyond the first issue with the WTO that I showed in the last post: conflicts among Members. There is number of divides among WTO Members: not only between developed and developing countries but also between "defensive" developing countries (that want to defend their agricultural and industrial sector) and "offensive" developing countries (that are competitive exporters and want that every country open up its market) or between “old” and “new world” (on geographical indications that want to protect food specialties). In order to succeed to find an agreement and bridge these divides, Members should change their approach and the founding principles of WTO.

The WTO is based on number of principles that normatively try to push the international trading system in the direction of always more free trade (as the Most Favorite Nation, the National Treatment, etc.). This is at least the dominant discourse. In fact, the reality is quite different because developed countries used the GATT/WTO since the 80s to eliminate developing countries trade barriers while maintaining and reinforcing the protection of their sensitive sectors (as agriculture) and introducing some additional protectionist measures to defend their interests (agricultural subsidies and the protection of intellectual property). However, the normative foundations of the WTO have a huge impact on the negotiation process, on what is feasible and on how Members can defend their interest and propose acceptable solutions.

These norms constrain Members to negotiate in a reciprocal mercantilist way. In fact, even if the goal of the Doha Round was to solve asymmetries between developed and developing countries, the path choosed is not that developed countries will eliminate measures that create these asymmetries by changing their policies and reduce the constraints for developing countries. The principle applied was the “less than full reciprocity”. This means that developing countries should negotiate and offer something in exchange of the (partial) elimination of the international trading system asymmetries. For these reasons, negotiations became (once again) very mercantilist. Developed countries ask for more concessions by developing countries. Developing countries try to maintain their policy space (crucial for their development process) and to obtain more concessions by developed countries. This means that if the developing countries want to obtain some gains in terms, for example, of market access, they will need to accept disciplines that will harmonize even more their policies and restrict their policy space.

This situation is a recipe for failure. In order to get out of this dead-end we need to rethink the principles on which the WTO is based. The starting point should be that trade is not a goal per se but a means to achieve sustainable development for all Members. In fact, this is the only norm that can reach a consensus among WTO Members. What is more, this norm is included in the introduction of the agreement that choose to create the WTO.

Few days ago, I show some elements that can improve the positive impact of the international trading system on development. I underlined that for developing countries is crucial to:

• Use the international trading system to increase incomes as well as to specialize in transformed and high value added products.
• Have the opportunity to use protectionist measures to protect and develop their industry and advanced service sector.
• Have the opportunity to use regional integration in order to increase the competitiveness of their production.
• Have enough policy space to innovate in policy and industry is crucial. Only this freedom will allow a country to find its development path by balancing: 1) temporary protection and incentives for some sectors and 2) market opening to increase their competiveness.

On the opposite, for developed countries, trade already contributes to their economic development. However, it can bring some risks in terms of environmental and social damages.

To find a middle ground to achieve a consensus between these two positions seem quite difficult. However, we need to precise the two developed countries issues and their importance. Regarding social issues caused by imports, we should remember that developed countries have enough resources to adjust and solve these problems (notably through a better education of workers). What is more, outsourcing is creating jobs in the North. The problem is to adapt workers’ skills. However, developing countries should respect some basic standards. Regarding environmental issues, the question is more complex. In fact, developing countries should make some efforts, at least to avoid most damageable practices. However, we should not forget the developed countries historical responsibility of pollution. This mean that rich countries should be more commited in solving environemental problems, carry most part of the costs, invest more in clean technologies R&D and contribute to transfer this technology on the South.

In conclusion, in order to improve the problem solving effectiveness of the WTO we need to think trade issues in terms of co-development. The international trading system should contribute to improve sustainable development in both developed and developing countries. To reach these objectives negotiators should remember this hierarchy of objectives in developing countries: economic, social and, finally environmental goals. For this reason, they should introduce the following hierarchical principles at the WTO:

1. Give back policy space to developing countries. Renounce to constrain all countries to harmonize their policies beacause they are in very different situations that need very different policy tools.
2. Developed countries policies should not arm developing countries or preclude them to follow a sustainable way of development. For this reason, for example, developed countries should eliminate all their agricultural subsidies.
3. Developed countries should give more market access (particularly for transformed products) to developing countries. This is the best opportunity for developing countries to improve their economic and social development and lift people out of poverty.
4. Improve social standards (that take in consideration the differences between developed and developing countries situations).
5. Launch environmental standards and other measures to solve environmental issues. All countries are constrained to contribute. These measures can harm development priorities of poor countries. Costs are attributed considering a country development level and its historical responsibility in terms of pollution.

This package of measure should be implemented in its integrality and following this hierarchical order. Otherwise, it will harm developing countries fight against poverty or it will simply be impossible to reach a consensus.

All comments are welcomed.


Footnotes
(1) Wilkinson Rorden (2006), Crisis and the Governance of the Global Trade, New York, Routledge.

codevelopment economics free trade trade development reform global governance

Trade and Development link in developing countries beyond the free trade vs protectionism debate

The link between trade and development has been discussed by centuries even before Adam Smith most famous book. What is disappointing with this debate is that it was framed as you can be only either an enlightened free trader of a short-term-looking protectionist. This debate, particularly the last two or three decades, has been very ideological. With this post, we will try to resume another way to think on trade and development linkages beyond this dichotomy.

What is needed in this highly polarized debate is to look at the historical reality with pragmatism to show, beyond oversimplifying economic theories, what we can affirm on this link. In fact, policies should be context specific. Checking theories on reality is very important. This means that neither free trade nor protectionism are always the best decision. In some case, free trade could be positive in terms of welfare and, in other cases, it can have an overall negative impact. We can say the same for protectionist policies.

Classical economic theory based on comparative advantage assumption cannot explain why many African and Latin American countries which choose free trade in the 80s have a worse development track record that, for example, South Korea that choose to be protectionist for many decades. The answer is that only experience and learning by doing strategies can tell us what the best option in a particular setting is.

Before dealing with the trade and development issue, we need to better understand what causes explain growth and development success stories of the past. There are two authors, Rodrik and Reinert, that I cite in the “interesting to read” section of this blog, that give us some interesting insight that were tested on the historical reality. The following points are very important:

1. Not all the economic sectors provide the same input to a development process. In fact, the assumption of mainstream economics that all products are the same is not proved by a reality check. As Reinert underlines, there is two different ideal types of economic activities: Schumpeterian activities, that “create welfare and development” and Malthus activities, “that keep wage-levels close to the subsistence level” (Reinert, 2007, p. 150). Reinert characterized both ideal types (Reinert, 2007, p. 151). Schumpeterian activities, which include most of manufacturing and advanced services, are characterized by the following elements: increasing returns, dynamic imperfect completion, stable prices, generally skilled labour, creates a middle class, irreversible wages, technical change leads to higher wages for the producer and create large synergies. Malthusian activities, as most of agriculture and raw material extraction, are characterized by the following elements: diminishing returns, perfect competition, extreme price fluctuations, generally unskilled labour, creates “feudalist” structure, reversible wages, technical change tends to lower price to consumer and create few synergies [i]. Three elements are important to achieve development: increasing returns, technological change and synergies. The secret to achieve development and growth is simply to succeed to shift an economy from Malthusian to Schumpeterian activities. Industrialization and development of advanced services is the key for development.
2. The role of states, notably through the building of institutions, is capital to give the right incentives to the private sector in order to start a real and sustainable development process. As Rodrik pointed out, “it is increasingly recognized that developing societies need to embed private initiative in a framework of public action that encourages restructuring, diversification, and technological dynamism beyond what market forces on their own would generate” (Rodrik, 2007, p. 100). Furthermore, Public and private sector can interact in different way and achieving the same results in terms of development. Institutional setting can vary among countries (Rodrik, 2007, p. 29). What is more, their effectiveness in terms of development depends on their fitness with the specific historic, cultural, economic and political situation.
3. The driving forces of capitalism are entrepreneurship, state policies, technological change and innovation: capital, markets and labour are just auxiliary factors (Reinert, 2007, pp. 121-3). This assumption has a big impact on how we understand development.
4. A country should use strategically the opportunities offered by the international context. What UNCTAD called policy space [ii] is crucial to adopt a successful development strategy. There is no one-size-fit-all recipe to start and sustain a development process (Rodrik, 2007).

These crucial lessons learnt from history can be translated in the following elements that help us to explain the trade and development links:

• If a country is pushed by its trade policy to specialize in the production of Malthusian products it will neither reduce its poverty nor start a successful growth and development path. A country should find trade (and other) policies that give incentives to the entrepreneurs to start and improve business linked to products that allow technological change. There is not a list of such products because they vary across periods (Reinert, 2007, p. 111). What is more a developing country should think strategically in terms of synergies and clusters between the industries that it chooses to incite.
• There is a timing on changes in trade policy. Friedrich List [iii] proposes the following useful sequence, summarized by Reinert: “1) all nations first needed a period or free trade to change the patterns of consumption and thus to create a demand for industrial goods. Then followed a period 2) when small states protected and built their own industries (i.e. activities subject to increasing returns, including advanced services). Once this was done, List suggested 3) a period where even larger geographical areas would be integrated economically. […] Subsequently, when all countries had established their own competitive industrial sector, it was 4) in everyone’s mutual interest to open for global free trade” (Reinert, 2007, p. 161). This is probably the main lesson that all the countries that achieved historically important development progresses (for example, the US, Germany, South Korea, China, etc.) teach us. This with the first point simply means that a country can take advantage from trade if it conceives its international markets integration strategically.
• Regarding exports: the main goal should be to maximize exports of diversified products with increasing returns. Diversification is a precondition for development because, notably, of increasing synergies and for selecting the best technologies, products and organizational solutions (Reinert, 2007, p. 256). Export of decreasing returns products can be useful only if is utilized for a short period in order to earn more resources to invest in the development of increasing returns sectors.
• Regarding imports: a developing country should find a balance between the protection of the immature industry and the utilization of imports in order to improve gradually competitiveness. In fact, as Reinert rightly underlines, “production systems need time to learn to adjust” , consequently sudden open of markets can have a very negative impact (Reinert, 2007, p. 58) that tends to die out the most dynamic sector of the least advanced country (because these sectors are founded on increasing returns and are not competitive against a country that produce much more quantities) (Reinert, 2007, p. 181). The infant industry protection is crucial for development but “[…] once a country had been solidly industrialized, the very same factor that required initial protection – achieving increasing returns and acquiring new technologies – now required bigger and more international markets in order to develop and prosper. Successful industrial protection thus carries the seeds of its own destruction: when successful, the protection that was initially required becomes counterproductive” (Reinert, 2007, p. 81) [iv]. What is more, as Reinert shows empirically through the case of Peru, “[…] a country with an inefficient industrial sector is far better off than one with no industrial sector at all” (Reinert, 2007, p. 163) .
• To have enough policy space to innovate in policy and industry is crucial. The problem is that often the international trading system is used to limit this freedom.
• The world production in organized around the creation of value chains across countries. It is very important how the regional/global value chains are broken up among different countries. In fact, there is a link between the place that a country have in the value chains and its competitiveness or, in other words, its welfare. In fact, “the risk with globalization is that the value chains of production are broken up in such a way that the rich countries take all the high-skill jobs […] while activities [which rich countries can no longer mechanize or innovate further] are farmed out to poor countries” (Reinert, 2007, p. 39).
  

In conclusion, the comparative advantage assumption is not supported by a serious historical analysis. Free trade could be theoretically the best option in every case but in the reality is better for a developing country to be pragmatic and integrate strategically in the world markets by following the lesson learnt that we presented in this post. Thinking on this way at the economic issues (test theories against reality and historical experiences) will more probably allow us to have a better understanding than to use models that should oversimplify the reality. What is more, a mathematical model tends to become an ideology (as free trade shows us). On the opposite looking at the reality move us away from ideology and bring us to pragmatism and a more scientific approach.

Footnotes

[i] Reinert give even more detail on the difference between products through its “quality index of economic activities” (Reinert, 2007, p. 317).
[ii] Policy space can be defined as the opportunity that a country has to use heterodox and context specific policies that can be very different from what international expert think to be the best option.
[iii] List is often showed as a protectionist. Nevertheless, “list was both a protectionist and a free trader, depending on the stage of development of a nation” (Reinert, 2007, p. 161).
[iv] Reinert shows the key elements of “good” and “bad” protectionism (Reinert, 2007, pp. 311-2). Rodrik too acknowledged this assumption. In fact, he underlines that “import substitution, planning, and state ownership did produce some successes, but where they where entrenched and ossified over time, they led to colossal failures and crises” (Rodrik, 2007, p. 100).

economics free trade trade development

Sustainable Development beyond developed countries neo-colonialism: sequencing and co-development

Sustainable development comprehends two important elements:

1. The importance of meeting today's needs without compromising future generations’ needs.
2. Three dimensions are crucial: economic development, social equity and the preservation of the environment.

This concept also means that not only developing countries try to follow a path that led to development. In fact, also developed countries try to achieve economic, social and environmental goals, even in a different situation and with different constraints. This is also the idea defended by Anthony Payne (1). The importance for both developing and developed countries of the concept means that, in order to achieve sustainable development, the international system should allow and enable both categories of countries to achieve their development goals. This is the idea of co-development.

Currently sustainable development is the only principle that, in its two dimensions ,can be shared by all the people across the world. For this reason, sustainable development should be considered the principle which should drive actions and decisions at the national, regional as well as global levels. This is far to be achieved because international economy and politics continue to be the realm of power relationships. Furthermore, there is not a real consensus on how to define and how to operationalize it.

What is more, the concept is often used by developed countries to “kick away the ladder” needed to an effective development strategy. For example, by imposing to developing countries free trade ideologically (2) or by constraining to respect some environmental norms. These constraints imposed by developed countries take often the form of a kind of neocolonialism.
Developed countries underline too much the importance of environmental protection in developing countries. However, even if achieving the three dimensions of sustainable development is a crucial goal, a developing country, that by definition is characterized by a lack of resources, both human and financial, should prioritize the goals. In fact, decision-makers and society should achieve hierarchically three fundamental goals.

The first and more important goal is to ensure that a society is creating the wealth needed to reach acceptable living conditions. To reach this goal, in the current historical situation, there is a need to find a path to economic growth (3). Only with this precondition a society can obtain the resources needed to improve or, for developed countries, maintain the level of wellbeing.

Nevertheless, achieving this first goal is not enough to ensure the welfare of a society. In fact, a society should reach a level of social equity too. It matters not only for a normative reason but also to ensure the stability of the society: a precondition to maintain growth and to increase the welfare.

This second goal is not enough to ensure that the well-being of the population will continue to increase. In fact, usually (4) growth creates an important number of environmental issues. These damages are borne by citizens when the main objective is to lift out people of poverty. However, when the level of welfare is enough high, the environmental cost become less bearable by citizens. Is at this moment that a society should invest resources to find solutions to environmental issues.

Of course, it will be better to achieve all these goals together, but due to lack of human and financial resources, this is simply impossible for developing countries. A sequencing is needed. In fact, if we look at the history, developed countries get closer to sustainable development through three stages:

1. Second half of the 19th century – beginning of the 20th century: industrial revolution with “wild” growth;
2. Beginning 20th century – 1970: Set up of the welfare state;
3. 1970 – today: increasing attention to environmental problems.
   

What I want to say is not that developing countries should not care about environment. In fact, for example, if there is win-win situations between environmental and economic goals, developing countries should adopt such public policies. A developing country should simply avoid environmental policies that limit growth.

This, of course, poses a number of problems for developed countries, particularly the European Union, that really want to achieve number of environmental goals. In order to achieve the co-development objective, developing countries should be allowed and enabled by the international system to follow their path to increase their economic growth and, beyond a level of development, improve social equity. Considering also their historical responsibility, developed countries should do more to preserve environment both in their countries and in developing countries through development cooperation programs and technology transfer that will not limit developing countries’ economic growth. There is some steps in this direction (notably the GEF) but these efforts are far to be enough.

Footnotes

(1) Payne Anthony (2005), The Global Politics of Unequal Development, New York, Palgrave Macmillan.
(2) I will handle the trade and development issue in another post.
(3) For an interesting analysis of the elements that explain how a country can start and maintain growth see Rodrik Dani (2007), One economics Many Recipes. Globalization, Institutions and Economic Growth, Princeton, Princeton University Press.
(4) Because usually growth start with some industrialization. However, a growth path based on advanced services will have a smaller environmental impact.

codevelopment economics environement sustainable development