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.
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..
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.
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.