The Right To Development

Celebrating 70 years of UWI and the life and work of Sir Arthur Lewis, January 23, 2018

On the Mona Campus of the University of the West Indies (UWI), the Vice Chancellor will host a Forum themed “Economic Transformation with Social Growth: Arthur Lewis’s Contribution.” At the St-Augustine Campus, the Sir Arthur Lewis Institute for Social and Economic Studies (SALISES) will host a one-day symposium on the life and work Sir Arthur Lewis. It is appropriate that the 70th anniversary year of the UWI should begin with a celebration of Sir Arthur Lewis who served as its first West Indian Principal and Vice Chancellor. Professor Levitt will be a visiting professor in residence on the St-Augustine Campus at the Faculty of Social Sciences, from January 22nd to April 8th 2018.

 

Fifth Sir Arthur  Lewis Memorial Lecture, Eastern Caribbean Central Bank,   St Lucia, November 8 2000.                         

Kari Polanyi Levitt

 

 

 

 

 

 

 

 

Previous speakers in  this series addressed the celebrated contribution of  Sir Arthur Lewis to intellectual and public life in the  Caribbean -  as scholar,  teacher,  administrator and  role model to a remarkably creative  generation of  West Indian  economists.  In his inaugural address,  Rex Nettleford,  reminded us  that  this eminent economist and Nobel Laureate was, in the final analysis, a great educator and guru to his people both in the Caribbean and the Third World  who perceived their future and any hope of redemption to rest firmly on the exercise  of their intellect and their imagination. I thank the Eastern Caribbean Central Bank for the opportunity to join  Norman Girvan, Alister McIntyre and Lloyd Best in paying my respects to the memory of Sir Arthur Lewis -   illustrious son of the Caribbean, public intellectual and development economist  supreme.

 

I have chosen AThe Right To Development as the theme of this lecture  because it  was   central to the  life and work of Arthur Lewis, and because globalization has in may respects  put development  in suspense – if not  regression.   Developing countries are  without effective voice  in the making and the implementation of  the  rules governing the global economy.  The  right to development has been subordinated to the  rights of   investors;   fortified by the trade-enforceable  regime  of the WTO, and an ever growing  list of economic and political conditionalities attached to official development finance.  The  new rules governing trade, investment and property rights are increasingly invasive, requiring  institutional reforms which transgress  the sovereignty of developing countries, and seriously constrain  policy autonomy to determine domestic  social and economic priorities.

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Although  Caribbean countries are small players in the world economy, Caribbean statesmen have played an important role in third world initiatives   to achieve  a more equitable international economic order within  the framework of the United Nations System. In 1986 the United Nations adopted a  Declaration on the A Right To Development as an inalienable human right.   The  process of development is the realization of all civil,  economic, social,  cultural and other human rights  enumerated in the Universal Declaration of Human Rights. Responsibility for the formulation of  policy to advance  human development is  vested in the nation state:  States  have  the right and the duty to formulate appropriate national development policies  as  economic and social projects for  the constant improvement in the well being of the entire population and of all individuals (Article 2); to assure  equality of  opportunity for all in their access to basic resources, education, health services, food, housing, employment and the fair distribution of income (Article 8). Internationally, States  have the duty to cooperate with each other in …eliminating obstacles to development and fulfil their duties in such a manner as to promote a new international economic order based on sovereign equality, interdependence, mutual interest (Article 3).

 

 

Since this  Declaration  was adopted,  globalization has devalued sovereign equality and   stripped states of economic and administrative policy instruments essential  to medium, and long terms development planning. The authority of the United Nations has declined.  Private  global capital flows have displaced  official development assistance as the major source of external finance. Market criteria of profitability have trumped social criteria  in the provision of public  goods directly affecting the well being of people.   International inequalities have escalated. Commodity prices continue to fall. Finance has been privileged at the expense of productive activity and countries open to capital inflows have born the full economic, social and human costs of adjustment to ever more frequent and serious  financial and economic  crises.  Since the mid 1990s,  major countries of Latin America  – Mexico, Brazil, Equador, Bolivia, Peru   and now Argentina.- have suffered financial and economic collapse.  In all these cases,  as in the Asian Crisis of 1997/8  governments were provided with unprecedented billions of bail out packages  by the US Treasury, the IMF, World Bank, IDB etc,  to protect investors from the discipline of  the market.  ( The bail out in Argentina is close to 40 billion to rescue an  economy which has abrogated monetary autonomy by dollarization)   These loans will have to be repaid  with interest for years to come. We do not know  where the  next  crisis will hit – but we can say with certainty that there will be more such crises – and  escalating billions will be found to protect an unstable  global financial structure by draining the life blood out of  economies struck  by these man-made disasters. .

 

The  Caribbean is relatively fortunate in having escaped the  calamities suffered in other regions of the developing world,   although endemic poverty in  Haiti and Jamaica, organized  drug related crime throughout  the region,  the high incidence of hiv/aids, and  the threat of elevated sea levels due to global warming must urgently be addressed.  As mentioned, the Caribbean played an important role in past efforts  to fashion a more equitable international economic order. The developing world is now more fractured, and twenty years of Astructural adjustment  has  reduced the policy autonomy of states. There is  a crying need for creative thinking and new initiatives  by the ASouth@ to protect the gains of development from devastation by  financial hurricanes fed by institutional  investors who freely  move funds in and out of countries at the tap a keyboard. with no responsibility for the  impact of their  operations .on >host countries.  The IMF, BIS, G7, G 20 etc. are  captive to the overriding interest  of protecting the value of global financial investment; regardless of collateral damage to shattered lives and hopes of millions. A minimal  consensus of developing countries in international  negotiations  with the Bretton Woods  institutions and the  WTO, and a critical examination of the   ideological claims of neoliberal policies to  universality,  call for intellectual and political leadership from the South.

 

 

The aspirations to  equity and social justice which motivated the call for a new international economic order twenty five years ago,  remain a fundamental motivation of all human rights claims, including the  right to development. A rising  tide of outrage at global inequities orchestrated by  church leaders and a broad spectrum of international  social  activists in Seattle, Washington, Prague and other cities has attracted the attention of the world. There is a growing sense  that  globalization is a non territorial form of  imperialism, imposed by legally binding obligations of compliance with rules favouring capital,   enforced by trade sanctions and  denial of  access to  finance . For the past twenty years,  developing countries have been encouraged – sometimes bullied – into  excessive   dependence on export earnings and foreign credits by programmes designed by the staffs of the Washington based IFIs.  The International Monetary Fund has become  a foreign policy instrument of the United States. Crises have been used as opportunities to radically restructure economies  – most scandalously  in the case of Korea.  Since the end of the cold war, the only remaining super power has acted as self appointed  global policeman.  Military  interventions targeted at  physical and social  infrastructure  have  punished  civilian populations  for the misdeeds of their leaders.

 

Sir  Arthur Lewis was conservative and pragmatic in temperament, practical in delivering policy advice, but  radically anti-imperialist  in his conviction that the peoples and societies of the  South have the capacity to chart their own path to development. In an autobiographical note written late in life he stated:  what matters most to growth is to make the best use of ones own resources and   exterior  events are secondary.  Trade plays a useful role  in development, but countries that hitch their fate to trade are bound to be frustrated.  In the  context of globalization, the teachings of Arthur Lewis present  a radical challenge to the developing world to reclaim the right to development -  the right to make the best use of ones own resources..

 

First Encounter

 

I  first encountered Arthur Lewis in 1942, long before I knew anything about the West Indies. I was a first year undergraduate at the London School of Economics, and  Lewis was lecturing the  introductory course on economic analysis. I was 19 years old. and a convinced socialist.   Having failed to win the necessary scholarships to study history in Oxford or physics in Cambridge, I concluded that I was scholastic failure and was now at liberty to learn how to put the world right by studying economics. In the third week of the course, Lewis presented a diagram showing the marginal product of labour and the wage rate and explained that employment could be increased by lowering  wages.  I gathered up my  courage and approached the lecturer after the class.  Sir I said, I dont believe it. Before the war there were three million unemployed in Britain and they could not find work at any wage. What is your name? he asked.  I supplied the information. Miss Polanyi he said,  I assume you have come here to study the science of economics. When you have mastered it, you may return and we will discuss this subject.  I was impressed,  and  decided  that I will study this subject until I can prove him wrong. Of course it was Keynes who explained that  mass unemployment in Britain in the 1930s was not due to excessively high wages, but to an excess of savings. To argue his case for fiscal and monetary policies to combat depressions and recessions, Keynes invented macroeconomics by discarding critical  assumptions of neoclassical economics.  (Younger  generations of economists may not know that macroeconomics did not exist before Keynes and   national income accounting.)

 

Classical Model in a Tropical Setting

Lewis was similarly  unorthodox.  His seminal article on AEconomic Development with Unlimited Supplies of Labour (1954) was the result of a brilliant departure from the assumptions  of neoclassical economics. Lewis asked himself two questions: Why do wages  in developing countries not  rise with rising productivity?  And why  is  labour is paid so much less in  peripheral (Atropical) countries than in  industrial (Atemperate) countries?  Why is coffee so cheap and steel so expensive?  He tells us that  one day in August 1952, walking down the road in Bangkok, Ait suddenly came to me that both problems have the same solution. Throw away the neoclassical assumption that the quantity of labour is fixed. An unlimited supply of labour will keep wages down, producing  cheap coffee  in the first case and high profits in the second case. The result is a dual (national or world) economy where one part is a reservoir of cheap labour for the other.   In  conditions of Asurplus labour,  wages are not determined by the productivity of labour,  but by the reserve price of labour which stays close to subsistence level as  long as labour can be drawn out of a non market reservoir of subsistence activities.  This also  explains why workers  producing in coffee or sugar stay poor, while  workers producing steel in the metropole gain rising wages. Lewis  invented  an analytical construct (model), based on familiar economic concepts,  to explain the unequal distribution of the gains from  capital accumulation in colonial (tropical) conditions of  surplus labour.  The conclusion he  drew from this analysis was that  open (tropical)  exporting economies  cannot   escape from underdevelopment until they have raised  the productivity of the domestic sector producing food (and other  necessities of domestic consumption). The developing  world should  rely on its own resources to generate the necessary savings for  investment, and utilize its natural and human resources to provide the necessities of life for its populations.

 

Terms of trade of Primary Commodity Producers

My initial  encounter with Arthur  Lewis in 1942 was followed by a second one – which perhaps contributed to my destiny to become a  development economist.  When I returned to the LSE in 1944,  after two years of national war service, I  attended a  course in which  Lewis lectured the contents of a  book he  was in process of writing.  Economic Survey 1919 -1939  (1950) is  a brilliant account of the inter-war years in the setting of  world economic history -  written in the accessible lucid style noted by McIntyre. Many times re-printed, the book  is on a short reading list for courses at McGill to this day. There are prophetic passages, such as the speculation based on  long wave theory  that A.the decline of the inter-war  period was a mere phase; to be followed in due course by another burst if vigour and prosperity,. say from the middle 1940s to the 1970s , when a new period of decline would set in.  Years  later I learned that  1944 marked the  beginning of a  life time of  research on  the history of the world economy after 1870,  published in 1978 as  Growth and Fluctuations 1870 -1913.

 

But back to my story. From previous reading, I was  reasonably familiar with what had happened in Europe in the 1920s and 1930s. What made an indelible impression on me was Lewis treatment of the slide of world commodity prices in the 1920s, which preceded  the Great Depression of the 1930s.   As a child in Vienna, I had read  that  mountains of coffee were burned in Brazil. I could not understand why anybody would do something  so destructive. Now I could make the connections. The coffee was burned to keep up the price. It was  Lewis who awakened my interest in the terms of trade of colonial primary exporting countries. By this time I had made personal friends at LSE from India, Malaysia, and other (then) colonial countries. Among West Indians, Lloyd Braithwaite.  They took me to meetings where I heard  Krishna Menon, George Padmore and short fiery Indian trade unionist whose name, if I remember right, was Dange. But never in my wildest dreams  could I have imagined that more than 50  years later I would be delivering the Fifth Arthur Lewis Memorial Lecture, here in  St Lucia .where Arthur Lewis grew up;  where he tells  us,  his father took him to meetings of the local Marcus Garvey association when he seven years old;   where he left school at 14 because he had completed the curriculum and  worked as a clerk in the civil service until he was old enough to sit the exams which won him a scholarship to an English university of his choice.

 

Industrialization in the Caribbean 

From the time of his arrival in  England, at age 18, Arthus Lewis  turned his attention to the condition of the West Indies,  advocating the destruction of the economic  foundations of slavery by the equitable redistribution of  land to the peasantry .In Labour in the West Indies, (Fabian Society, 1939) Lewis described  the causes of the insurrections, strikes and riots  which swept thought the region from 1935 to 1938  and gave birth  of the  labour movement. His  anti-imperialism grounded in early personal  experience of the colonial condition in the West Indies, was shared by a  generations of Caribbean, African and Asian intellectuals and political leaders.   As  teacher, scholar,  policy advisor and  administrator, Lewis combined advocacy of  practical  measures  for economic development and  economic independence in  countries emerging from colonialism, with research   in industrial economics, which he dropped after 1948; and the history of the world economy Awhich I started in 1944 and still pursue and in development economics which I did not begin systematically until about 1950″  .

 

 

In his reports to the Caribbean Commission (1948) Lewis  argued the case for the industrialization of the British West Indies, based on the success of  industrial development in Puerto Rico. He used  his knowledge  of  industrial economics  to identify a set of manufacturing industries which could be established in  the region.  A  careful reading of this report reveals the seeds of his subsequent  work in development economics. We draw attention to his insistence on the need to increase  the productivity of the food producing peasant sector, which would have the effects of raising  the supply price of labour to the capitalist (plantation) sector.    The case  for industrialization was argued on the grounds that  plots of 2 or 3 acres are too small to  yield an acceptable  standard of living from agriculture.. Because land resources are limited, and population density in the islands is very high, the  number of peasant holdings  must   be drastically reduced – perhaps in half – to provide  land holdings sufficiently large to enable the  peasant farmer to gain  a decent  income. .   Income generating employment in manufacturing  would  have  to be created for the  labour displaced from the land, and  overseas  markets would  have to be found  because  local – even regional – markets were  too small  to absorb output on the scale required for full employment.  We  note that the  reason why the islands  have to export manufactures is because they are grossly overpopulated in relation to the  land resource – a legacy of plantation slavery which introduced millions of unfree  African workers  to the Caribbean islands at a time when  sugar  was highly  profitable. When commodity prices weakened and the sugar economy collapsed.,   unemployment became endemic. Lewis  did not argue  the case for  export manufacturing on general grounds of comparative advantage,  but as a policy appropriate  for small countries burdened by chronic  excess population.

Industrialization of the West Indies  was a radical  idea at the time,  given the resistance of colonial authorities, and  prejudices relating to the capacity  of  West Indian labour to become skilled and productive industrial workers. Lewis proposed a set of  industrial policy measures to encourage, protect and subsidize the establishment of manufacturing  industry, including concessions  to attract foreign capital and capitalists, as was done  in Puerto Rico. Until such time as  national income would rise to levels adequate to generate domestic savings for domestic investment, it would  be necessary to fawn on foreign capitalists to learn the tricks of the trade and gain access to their overseas distribution outlets.   We note that Lewis considered  the   free movement of goods and persons  (single economy) within the region, together with a  political federation of the island territories and a single  regional Industrial Development Corporation as  essential to  the success of this industrialization strategy.

 

Misplaced Criticism; Erroneous Revisionism


The  implementation of industrial  policies  proposed by Lewis in  Jamaica and elsewhere in the region,   proved disappointing.  Economic growth in the 1960s was accompanied by rising unemployment and growing inequalities. In the radical  climate of  the times,  Lewis was held accountable for  the failures of Aindustrialization by invitation  by   a younger generation of UWI economists. The failures were real, but the  criticism was  misplaced.. Regrettably, subsequent    generations of  UWI students were left with the impression  that ,Industrializaton of the British West Indies was the  most important – perhaps the only -  work of  Arthur  Lewis.  The seminal article of 1954  was largely ignored.   Later there were mea culpas and a revisionism which claimed  Lewis as a far sighted champion  of  export orientated development. Economic problems were ascribed to the  failure of  governments to heed  his advice to  concentrate on export manufacturing.  But the  revisionists  have been too quick to dismiss import substitution as a useful  industrial strategy, and too quick to buy into the  currently  fashionable doctrines of externally oriented development.  Industrialization  policies  which established  import substitution industries, with all their shortcomings, were important in upgrading  technical and managerial  skills. They have served  Trinidad well in the development of a diversified manufacturing  sector,  now strong enough to  expand into regional and overseas markets. The collapse of many of these  industries  in Jamaica in the 1990s  is a serious loss of social capital, as well as a devastating loss of income to the  workers who have lost their jobs.  Jamaica is regressing to a colonial style import  export economy- virtually the only country in the hemisphere which has not experienced economic growth in the 1990s.  It is one thing to understand that exports are essential where national and regional markets are too small to sustain a high level of employment in manufacturing or services. It is quite  another to claim Lewis as an advocate of  outward looking development.

 

The Lewis Legacy

 

In the Schumpeter memorial lectures,  delivered at   Princeton in 1977 as  The Evolution  of the International Economic Order    Lewis brilliantly summarized the results of  decades of research on growth and fluctuations in the world economy. I quote the concluding sentences:  The development of the LDCs does not, in the long run, depend on the developed countries; their potential for growth would be unaffected if all the developed countries were to sink under the sea. The LDCs have within them themselves all that is required for growth . They should not have to be producing primarily for developed country markets. International  trade cannot substitute for technical change , so those who depend on it as their major hope are doomed to frustration. The most  important  item on the agenda of developing countries  is to transform the food sector , create agricultural surpluses to feed the urban population, and thereby create the domestic basis for industry and modern services If we can make this domestic change we shall automatically have a new international order. Arthur Lewis gained the Nobel prize in 1979  in recognition of his contribution to development economics. His  seminal article on AEconomic Development with Unlimited Supplies of Labour (1954) grounded  Adevelopment economics in a model which assisted in establishing the subject as a distinct  area of  economics.  The open version of the Lewis model  provided   the theoretical foundation for the radical conclusions he drew from a life time of research and intimate  familiarity with the economics of peripheral (tropical) developing countries.   .

 

When Arthur Lewis stated in the autobiographical note quoted earlier:  A what  matters most to growth is to make the best use of ones own resources and   external   events are secondary  what was he telling us?  Certainly not that trade is unimportant, or that small countries do not have to find export markets for their goods  and services, where possible  on the most favourable terms of trade, and in  high value specialized products.  What I believe he  meant was that  developing countries have to engage the world  economy on their own terms, not on terms set by global markets or international institutions.    His  emphasis on the internal and domestic well springs of  development, and the primacy of  domestic food production directly challenges   currently prevailing economic doctrine which holds  that   countries which do not adjust domestic policies to global markets  will be marginalised.  But is it really  true that trade and foreign investment are  the sources of economic growth? Has it ever been true?  What  transformation  has  globalization brought about to justify  favouring exports over domestic production,  and courting  foreign investment with incentives and subsidies? Has  globalization now  made it impossible for developing countries to chart  their own path to development, according to  their endowment of human and natural resources,  cultural and  institutional heritage, and social imagination?   If so, peoples and societies  comprising   eighty percent of the worlds population will  have to  reclaim spaces of policy autonomy  to exercise  the Aright to development Anything less  would fail to  do justice to Athis most distinguished West Indian of the Century (McIntyre). These are the issues we now address.

 

Was  Import Substitution (ISI) Really So Bad?  

 

 Because ideas are powerful  means  to inform – or dis-inform – policy, we have to assess  the  validity of current orthodoxies . Relentless and  interminable repetition of the doctrinal mantra that >inward-looking development is bad, and out-ward-looking development  is good has demonized  policies of  import substitution (ISI) -  which served the developing world rather  well in the 1960s and 1970s. .The  World Development Reports used to contain useful summaries tracking  growth rates of major regions since the 1960s. They have disappeared, perhaps  from embarrassment of evidence confirming what one observer called the Banks optimism beyond  the bounds of empirical responsibility (Emmerij).  The data  show a secular decline in annual growth rates  in  the industrial  countries from 5.3 per cent  (1961-70) to 3.1 per cent (1971 -80)  to 2.8 per cent (1981-90) and 1.8 per cent (1991- 95). For Latin  America,   corresponding growth rates were  5.5 per cent; 6.0 per cent; 1.3 per cent; and 2.8 per cent.  High growth  from 1960 to 1980 , largely based on a combination of primary commodity exports with  import substitution was  impressive. Nothing like it has been seen  since in the region.   But Latin America was not the only region of the world which did well in the 1960s and 1970s.

 

From 1960 to the first oil shock of 1973,  no fewer than 42 developing countries, including Jamaica, Trinidad and Barbados and  12 countries  in South America; 6 in the Middle East and 15 in sub Sahara Africa grow at rates of GDP per capita exceeding 2.5 per cent per annum, and six Sub-Sahara African countries were among the 20 fastest growing economies in the developing world!.  To varying degrees, all these countries  practised import substitution (ISI)   based on profitable domestic markets for investors. Contrary to received wisdom, ISI-driven growth did not produce tremendous inefficiencies on an economy-wide scale. Indeed, most of the  countries of Latin America and the Middle East had total factor productivity in excess of  East Asia in 1960-73 (Rodrik 1999) .

 

From the mid 1970s, most these countries started to fall apart. Of these 42 countries only 12 countries  -  Trinidad, Belize,  7  Asian and not a single Latin American country -  managed to sustain 2.5  per pent per capita growth  in 1973- 84.  Median per capita GDP growth for  all developing countries fell from  2.6 per cent  in 1960-73;  to 0.9per cent  in 1973-1984; and 0.8 per cent  from 1984 -1994  In the Middle East and Latin America  which had led the developing world in TFP growth prior to 1973, TFP  turned negative from 1973 -1994.- while China and the rest of East Asia ( except the Philippines), and virtually all of  South Asia produced positive TFP growth. By 1994,  one hundred developing countries had a lower per capita income than five years earlier; 69 lower than in the 1970s; 35 lower than in the 1960s; and 19 lower than in 1960. Per capita consumption  in Africa is today  25 per cent lower than in 1962, and Latin America has not regained  1980s per capita levels.

 

 

The Collapse of Growth in Latin America and Africa

The common timing of the collapse of growth  in so  many countries in the late 1970s and early 1980s,  suggests that it was not the exhaustion of  import substitution policies, but the turbulence  which beset  the world economy following the demise of the Bretton Woods system that grounded growth.   Floating  exchange rates;  wildly fluctuating commodity prices, including  two oil shocks,  balooning  international liquidity unconstrained by  national banking regulations,   and  illusions of the sustainability of debt led growth by  creditors and  borrowers alike, went into the making of the  Debt Crisis of 1982.  In countries too poor to attract private capital inflows,  politically motivated official development assistance contributed to unpayable external debt. As is now well known, the proximate cause of the debt crisis of 1982 was the stringent monetary policy adopted by the Federal Reserve to combat inflationary expectations which  precipitated the recession of the early 1980s. .The  Debt Crisis was collateral damage.

 

 

In the 1930s, virtually all Latin American countries declared  moratoria on debt service – and bond holders were forced to share the costs of the crisis.  In 1982, the IMF saved the international banks from technical bankruptcy  by the organization of a creditor cartel which  shifted  the entire  burden of  adjustment to debtor governments.   The costs of the Alost decade of the 1980s, when wages in Latin America fell by 40 to 50 per cent and rose only slightly in the 1990s, linger on.The incomes of most Latin Americans are today 20 per cent lower than in 1980.  From the mid 1980s  governments  and technocrats  embraced the new doctrines of liberalization, de-regulation and privatization. Social  capital  eroded  and income inequality and poverty  increased. Interestingly, South Asia  escaped the  Debt Crisis  of the 1980s, and continued an ISI led growth path, with average annual per capita  growth of 3.0 per cent (India);   2.7 per cent (Pakistan) and 2.4 percent ( Bangladesh) from 1975 -1995?.    China – hardly a  model of a  liberalized economy.-  took off into three decades of spectacular growth, sustained to this day. The  East Asian Atiger economies achieved   Amiracle growth@  with domestic savings rates  of 30 per cent, low fiscal deficits and booming exports -  until financial and exchange liberalization precipitated  the  Asian crisis of 1997.  Incidentally,  Chinas defence of  its  currency during the Asian crisis by effective exchange controls,   saved the  region from a second destabilizing round of devaluations. India also escaped contagion by the Asian crisis, thanks to modest  short term capital inflows and  effective financial and capital controls. Malaysia demonstrated that even smaller countries can defend their economies from destabilizing capital flight by the imposition of capital controls. .

 

What Are We Forever  Adjusting To? 

Ten years ago William Demas posed a  very good  question – in one  of those rambling  telephone conversations   which were his way of keeping in constant touch with his many friends in the region.  What are we (the developing countries)  forever adjusting to ?  In the  Eric Williams Memorial lecture delivered at the Central Bank of Trinidad and Tobago in 1990,  I suggested that  developing countries  are adjusting to the consequences of the demise of the Bretton Woods system in the 1970s and to the Aregime change introduced by  the United States and Britain in the 1980s to open new national and global opportunities for capital by  deregulation, liberalization, and privatization of public utilities and other state assets.  . In the 1990s, it  became evident that these neoliberal  policies  have three characteristics: they are crisis prone; they encourage a spirit of speculation, rather than entrepreneurship, and they are deflationary.(Emmerij) Increasingly serious recessions and the slowing down of growth in the capitalist heartlands have intensified competition and the drive to  penetrate new markets and establish new outlets for excess savings and excess production.  This is the ultimate  reason why the United States and  Britain ( less so continental Europe)  have facilitated business and financial interests in  the elimination of every conceivable barrier to entry of goods, services and  investments  in the developing world  – and how  the doctrine of  externally oriented development serves this agenda.  Primary commodity exporters have always been price takers.  They have always been under pressure to adjust to business cycles  in the industrial countries  by pro-cyclical deflationary measures. The industrial countries are the business cycle makers; the peripheral countries are the business cycle takers (Ocampo, November 2000). Since  the advent of the  debt crisis of the 1980s, thanks to 15 years of  Astructural adjustment to a liberalized economy, these countries  have also become policy-takers. This is why Aadjustment is now a  continuing  process. This is the answer to the question posed .by Demas ten years ago.

 

 

The exigencies of debt service  have  been  the hook to catch developing country governments with  very limited options. The situation is most severe in sub Sahara Africa, where debt service can consume up to 60 per cent of government revenue, and average consumption is now below 1970s levels. These countries  must forever   export themselves out of debt,  no matter that they are competing with a dozen other countries exporting the same  coffee or cocoa – or shoes and shirts.   No matter that domestic food production is  declining,  as export agriculture is favoured over food crops., and natural resources are pillaged  for instant returns, with long term damage to the environment.  The  export of commodities,  both primary and manufactured -  because labour intensive manufactures are the new commodities  -  is a way of exporting cheap labour,  as Lewis explained.  The real resource transfer from South to North is greater than the recorded  debt service and net capital flows. It is  not transparent. It is occult. It operates through the market by  declining factoral terms of trade As in times when raw material were worked up in the industrial world, the  export of cheap manufactures  contributes  substantially to domestic  income generation in the importing country in the form of services associated with their  purchase and  distribution .  The difference between the (low)  unit cost of production  and the final wholesale  price accrues to the transnational enterprises who design, sub contract and organize bulk purchase and re-sale.  The increasing volume of these developing country exports have   assisted the United States to maintain a long boom of non inflationary growth. in the 1990s. This is the sense in which .globalization  has  increased wealth – in a unidirectional way  as in sens unique indicating a one way street in my home town in Montreal.

 

Globalization as Agenda and Process

 

Globalization is a process with an agenda, which promises to deliver  prosperity and human development to countries which  Areform their  policies.  The agenda is driven by corporate and financial capital and the  reforms are increasingly  invasive. Investors demand >national treatment and trade policy now reaches  beyond conventional  issues of trade between nations, and raises questions  of the  permissible limits to the penetration of market relations (of purchase and sale)  into the fabric of economic,  social, and  cultural  norms and institutions of developing countries. Policy options are reduced.  Indeed, this is the explicit purpose. The intention is to  lock states into irreversible commitments to the sanctity of  contract.  There is ever less  autonomy  for states  to design and implement development  strategies.  Eventually everything – and everybody – is for sale. Societal  norms and standards are eroded.   Social cohesion dissipates  under the stress of glaring injustice and inequality. Crime, corruption and repression increases.

 

National  boundaries which separate external from domestic markets have become porous and blurred. Trade and Development,  Market and State  and Growth and Equity have been  the  leading issues of development economics since its beginning. Liberalization of global trade and finance conflates these  issues into one asymetric relationship  which reduces  the capacity of  developing country states  to govern markets at the national level – but enhances the capacity of  the  major capitalist  powers to set the rules which  govern markets  at the global level. At the national level, governments are  under  pressure from productive enterprise,  labour and civil society to respond to the  real needs of the population – however reluctantly or incompletely. At the global level,  capital is insulated from popular protest and the constraints of democratic accountability.  Recent attempts by the World Bank  to  return to its original developmental remit were  over ruled  by the US Treasury, resulting in the  departures of Joseph Stiglitz and Ravi Kanbur. The responsibility of national states in realizing  ADevelopment with Equity has been  subordinated to  Trade and Growth as  policy objectives  Doctrine now prevailing at the World Bank is that Agrowth is good for the poor (David Dollar 2000) and  global freedom of  capital is good for growth.

 

Debt dependence  has provided the international financial institutions with the  leverage to tell developing countries -  in  micro-economic detail-  how to restructure their economies.  Whereas the number of IMF standby arrangements have declined from a high of  132 in 1981-85, to 49 in 1996-98, the number of enhanced structural adjustment facilities  (ESAFs) – now renamed poverty reduction and growth facilities  (PRGFs)  have grown from 18 in 1986-1990 to a record high of 96 in 1996-98. – most of them in Sub Sahara Africa. The author of the study from which these data are taken concluded  that  as a result these  countries  have pretty much ceded their sovereignty to the IMF and the World Bank (Cheru 1999).

 

 

A second generation of the AWashington Consensus has  moved beyond restructuring economic institutions, to require a proliferation of Agovernance-related conditionalities. An analysis of a sample of IMF programmes in 25 countries between 1997 and 1999, showed an average of 26 conditionalities per programme. In Latin America, the average  was 33, of which 13 were governance related; in Africa 23, of which 9 governance related.(Kapur and Webb)  Unlike macro economic  targets, governance related reforms are open ended, inviting discretionary judgement regarding compliance. In the view of a World Bank economist, the penalties inflicted by the conditionality regime Alack moral legitimacy.  But donor pressure to conditionalize development assistance is on the increase as an ever growing number of Acivil society stakeholders press their diverse agendas on developing countries by leverage of promises of development assistance and debt forgiveness.

 

For middle income developing countries, judgment .of  economic  performance  has passed to private capital markets. In his  introduction to  a  study which challenges current orthodoxy regarding  the role of  trade and foreign investment  in successful economic development, Harvard economist Dani Rodrik  notes that the globalization model  raises a fundamental question of accountability.  To whom, will national policy makers be accountable? The implicit answer  is that they will be accountable  – not to their populations – but to foreign investors, country fund managers in London and New York and a relatively small number of domestic exporters. These are the  groups that determine whether an economy is judged a Asuccess  or not, and whether it will prosper. It takes too much blind faith in markets to believe that the global allocation of resources is enhanced by the twenty-something-year-olds in London who move hundreds of millions of dollars around the globe in a matter of an instant, or by the executives of multinational enterprises  who make plant location decisions on the basis of the concessions they can extract from governments Consequently, governments and policy advisors alike will have to stop thinking of international economic integration as an end in itself. Developing nations have to engage the world economy on their own terms, not on terms set by global markets or multilateral institutions ( Rodrik 1999).

 

 

Rodrik dismissed the claims made by boosters  of international economic integration as inflated or downright false:  ACountries  that have done well in the post war period are those that have been able to formulate a domestic investment strategy to kick start growth and those that have had the appropriate institutions to handle adverse external shocks , not those that have relied on reduced barriers to trade and capital  flows. Policy makers therefore  have to  focus on the fundamentals of economic growth – investment, macro-economic stability, human resources and good governance – and not let international economic integration dominate their thinking   His research confirms the advice of  Arthur Lewis.  The next few paragraphs summarize his findings.

 

Inflated Claims For Openness   

There is no special advantage in  Aopenness A Trade is a means to an end, a way to  access  imports essential to growth. A dollar of  exports does not contribute anything more (or less) than a dollar of any other productive activity. Countries that grow fast tend to experience increased  openness (export to GDP ratios) but  the reverse is not true  It   is a fallacy to believe  that increased openness to trade  stimulates  growth.  Generally,  causality  goes from dynamic high productivity firms to export activity, not visa versa .There  is no efficiency argument for special export incentives.  Much the  same is true for foreign direct investment( FDI): One dollar of FDI is worth no more  (and no less) than any other kind of investment. The correlation between the presence of FDI and superior performance is generally due to reverse causality: multinational enterprises  tend to locate in the more productive and profitable economies, or niches in these economies. Policy makers should resist granting  subsidies or tax credits that favour foreign over domestic investment.

 

A cross country regression of per capita GDP growth from 1975 to 1994 showed only a weak (statistically insignificant) correlation between economic growth and indicators of openness- whether based on trade volumes or on tariff or non tariff restrictions. Openness to capital flows  (captured by an indicator of capital account liberalization)  did  not exert any influence, nor was    the size of government a significant  factor. What mattered  most were  investment rates and macroeconomic stability. AThe evidence in favour of small government/free trade  orthodoxy is less than overwhelming.  It  is domestic investment  that ultimately makes an  economy grow, not the global economy.

 

 

The Successful Export Economies

This is  also true for the successful export economies of East Asia.  According to the standard story,  South Korea and Taiwan adopted a  set of export oriented measures in the 1960s which caused these  economies to specialize according to comparative advantage, resulting in rising  levels of income, investment, savings and productivity.  But  how could export manufacturing  possibly  have contributed to high national growth rates at a time when exports  were  less than five per cent of GDP in Korea,  barely 10 per cent in Taiwan, and manufactured exports were a quarter or less of total exports?. A more plausible explanation is that the  significant increase in private returns to investment engineered by the government of South Korea  kick started growth. The principal measures used were  the extension of credit to  large  business groups at negative interest;   the nationalization of banks which gave the government exclusive control over the allocation of investible funds;  and the socialization of investment  risk in selected sectors.  In both countries governments played a direct hands on role in involving private entrepreneurs  in investment, and established public enterprises with linkage and scale economies – which accounted  for  a large share of manufacturing  in the 1960s. The economies that have done well in the post war period have all succeeded in their own brand of heterodox policies. High investment rates and macroeconomic stability have been common – beyond that details differ.

 

Inequality, Social Conflict and Macroeconomic Adjustment   

 

Why did some economies  survived  the debt crisis of  1982, while others collapsed ?  The evidence  is unambiguous. : Trade and industrial policies had little to do with bringing on the crisis. Neither  the severity of external shocks, nor microeconomic price distortions were significant explanatory factors. In the countries that experienced  debt crises, the crisis  was the result of monetary and fiscal policies that were incompatible with manageable external balances : But why  were some countries able to make  macroeconomic adjustments more  effectively than others?   Countries with deep social cleavages – whether along class or ethnic lines – and poor institutions of conflict management  find it difficult to implement timely and effective measures of stabilization.  The economic cost of external financial or trade shocks is magnified by distributional conflict. The quality of government institutions, civil liberties and political rights, social insurance and access of non elites to political  institutions are factors which enhance and improve responses to shocks .Emphasis on social conflicts and institutions – at the expense of trade strategy and industrial policy – suggest that the main  difference between  Latin America and East Asia was not that the former remained closed and isolated while the latter was  integrated into the world economy., but  that the  gross inequalities and deep social cleavages in Latin America  are  the ultimate reasons for endemic  macroeconomic instability and  stop and go  growth in the region.

 

This conclusion is supported by the authors of a recent  ECLAC study of 15 years of  transformation toward  more market oriented and open economies in Latin America and the Caribbean. They found that  these far reaching reforms had  a Asurprisingly small impact. At best they  restored rates of investment and labour productivity to  levels prevailing  20 years ago  at the end of the import substitution period. AGrowth has been modest, employment has grown slowly with problems of job quality, and inequality has not improved and may even have gotten worse. The increased growth of exports ( in volume as well as value) has not led to comparable growth of output . Imports have grown even faster , leading to widening trade deficits, .financed by recourse  to foreign capital. A key feature of capital flows to Latin America  has been their volatility and the cycles of surges and steep declines became even more frequent in the 1990s. Crises were also more frequent ( Stallings and Peres).  Poverty has increased. and a majority of Latin  Americans surveyed in  a World  Bank   study believe their children will not have as good a life as theirs.

 

 

The identification of  unresolved social conflicts as underlying factors in  macroeconomic instability and economic stagnation  accords with a view I have expressed on several occasions that  the basic reasons for the  economic impasse in Jamaica  are to be found in  gross inequalities,  deep cleavages of class and race -  and a  malfunctioning  political system which has  enabled  the  government and the commercial  elites to postpone policy  measures required to  reduce interest rates and rescue the productive economy from further collapse. Jamaica is living on borrowed money and borrowed time – The contrast  with the ability  of Trinidad society to  negotiate  adjustment to the severe shock of the collapse of oil prices in the mid 1980s is striking. Barbados, with few natural resources other than an excellent   tourist environment  has achieved the highest GDP per capita in the Caricom region, and the other countries of the Eastern Caribbean have maintained macroeconomic stability and sustained economic  growth  – assisted by the  excellent performance of the Eastern Carribean Central Bank. In none of these countries do we find income disparities of the level of Jamaica .The Human Development Report 2000 singled out  Jamaica, together with Brazil and Guatemala as countries of extreme inequality  where the   top fifths  share in national income is more than 25 times the bottom fifths ( p. 34).

 

Equity  and social justice are not only  self evident objectives of development,  but an essential condition for macro economic stability and  economic growth.. Policies which increase inequality, poverty and injustice,. even when  successful in generating growth  – which more  often they are not -  result in a cycle  of repression and  societal disintegration as crime,  drugs, violence and general lawlessness drains the energies and extinguishes the hopes of individuals and societies.

 

Reclaiming the Right To Development

.For the  past twenty years, the developing world has been adjusting  to the  agendas of the  IMF and the World Bank. It is time to reclaim the  right of nations to policy autonomy,  the right to make the best use of ones own resources, and the right to engage in the international economy on ones own terms  The  Right to Development is a citizen right and its realization is a priority obligation of  national governments..  States  – not the IMF or the World Bank – have  the right and the duty to formulate appropriate national development policies.  This requires  an  international rule based order which permits space for developing countries to follow different and divergent paths to development,  according to  their own philosophies,  institutions, cultures and societal priorities.

 

 

Finance must be subordinate to the productive economy, globally and nationally. The productive economy must  provide  the basic needs  of the entire population, in an integrated society  where there is not one economy for the privileged – and  another for the poor. Poverty alleviation is no substitute for development as a social  project of all citizens. Economic growth must be  subordinate  to long term sustainable development. Private profitability  criteria are inappropriate for the provision of universally available educational,  health and other essential public  services. All modern economies are mixed economies, combining the private sector,   state enterprise, self employment and .diverse forms of cooperative and associational community economic organization. Democracy and pluralism implies diversity of  social and economic organization of societies.

 

For peoples and  nations as for individuals, the right to development is ultimately the  right to be autonomous, the right to be free, the right to the fruits  of individual and collective work and the right to live in harmony in a society of peace and mutual  support and respect . The revolution in communication and information has diminished distance and speeded time. We know more about what is happening to other people in other countries, although the Caribbean has always been connected with the four corners of the world – by the diasporas of the past  which created these unique societies and the diasporas of our  times  which have enriched many countries and societies by the presence of Caribbean people and their descendants. In that sense Aglobalization is neither new, nor menacing.

 

What is menacing is the tide of global finance which is sloshing  in and out of currency and securities  markets,  in search of  short term gains, with no responsibility for the fate of the majority of people who gain no benefits but  pay the costs of this Acasino capitalism. There is no limit to the damage that international finance can inflict on an economy. Even  the most successful countries have been  brought to their knees by changes in market sentiment. The first requirement  to restoring the right to development is the establishment, within the  United Nations System, of a multilateral  World Financial Authority to track, oversee and regulate  global financial markets on principles which restore Amarket risk to creditors and limit the   Asocialization of  private (unguaranteed) debt. …

 

The International Monetary Fund should return to its original mandate to provide medium term  finance for countries with temporary balance of payments problems to enable them to undertake  adjustment without deepening a crisis by restrictive monetary and fiscal measures which have long term effects in eroding social infrastructure,  as intended by the  architects of the Bretton Woods institutions. The right to impose capital controls should be re-affirmed and  initiatives to bind countries to capital account liberalization suspended.

 

All  official debt to poor countries should be cancelled,   and financial restitution made to Sub Sahara Africa for slavery, colonialism and the imposition of inappropriate programs and policies by the IMF and World  Bank  in the past two decades. Development assistance should not be conditional on trade and investment liberalization, and should be  extended to borrowing countries as grants or soft loans to  finance  free universal elementary education and primary health care.  The World Bank should be brought under the direction of the Social and Economic Council of the United Nations which must be strengthened and  reformed to accord with the  demographic realities of the 21st century, with no permanent  seats on an elected  Security Council   Nothing less can assure peace, which is the ultimate pre-requisite of development.

 

Developing countries must have an effective voice in the making and the implementation of the rules of the WTO, which should be restricted to trade in its conventional sense, with no extension into  Atrade-related matters. Trade enforceable regulations concerning intellectual property right to pharmaceuticals  must be amended to permit -  and encourage -  the production of generic drugs in  and for developing countries. The right to health is a  sacred right to life.

 

Because it is obvious that small countries can only implement self reliance policies in the context of larger regional entities, all barriers to  regional economic integration of developing countries should be eliminated from the rules of the WTO., and provision for special differential treatment substantially lengthened .to enable developing countries to transform their economies to be less reliant on  exports which impoverish people and the environment, or on destabilizing private financial in flows as a substitute for a high rate of domestic  savings and progressive and equitable taxation. Regional  monetary arrangements for  mutual assistance should be encouraged.

 

You  may dismiss this wish list as idealistic. Perhaps so, but  it is certainly more realistic than the assumption  that  the world can continue on its present path without courting disasters more terrible than any we have yet visited upon ourselves. Without dreams, nothing is possible. Without hope, there is no future.

 

 

 

Bibliography

 

Louis Emmerij:  “World Economic Changes at the Threshold of the 21st Century” in J.N.Pieterse (ed) Global Futures: Shaping Globalization,   Zed Books, London, 2000.

 

Fantu Cheru: Effects of Structural Adjustment Policies on the Full Enjoyment of Human Rights. Economic and Social Council. United Nations, Commission on Human Rights , Feb 24 1999. E/CN.4/1999/50

 

Devesh Kapur and Richard Webb: Governance Related Conditionalities of the International Financial Institutions, G-24 Discussion Paper Series, No 6, August 2000.

 

WA Lewis: “Autobiographical Note” in Special Issue in Honour of Sir Arthur Lewis, Social and Economic Studies, Vol 29, No 4, December 1980. See also “W.Arthur Lewis” in W.Breit and R.W.Spender: Lives of the Laureates: Thirteen Nobel Economists, Third Edition, MIT Press, Cambridge,Mass, 1995.

 

José Antonio Ocampo: Developing Countries= Anti-cyclical Policies in a Globalized World, United Nations, CEPAL/ECLAC, Santiago, Chile, November 2000.

 

Dani Rodrik: The New Global Economy and Developing Countries: Making Openness Work,

Overseas Development Council and John Hopkins University Press; Washington, DC, 1999.

 

Barbara Stallings and_ Wilson Peres: Growth, Employment, and Equity:_ The Impact of the Economic Reforms in Latin America and the Caribbean , Brookings Institution, Washington, 2000.

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