Ten Theses on New Developmentalism

On May 24 and 25 of 2010, a group of economists sharing a Keynesian and structuralist development macroeconomics approach convened in São Paulo to discuss ten theses on New Developmentalism — the name that some of them have been using for some years to describe the national development strategy that middle income countries are today using or should use to promote development and economic catching up.

The meeting was part of the Financial Governance and the New Developmentalism project, financed by the Ford Foundation.  The project has as its background the failure of the Washington Consensus to promote growth in Latin America and the 2008 Global Financial Crisis that showed the limits and dangers involved in financial globalization and financial deregulation.

The workshop was held in the aftermath of the biggest financial crisis in history in which was evident the impact of open capital markets on exchange rates and the prices of tradable goods.  G20 and individual countries are now building the required regulation of financial markets.  Given that and the repeated financial crises in middle income developing countries, the general objective of the workshop was to evaluate how effective a new developmentalism strategy might be in promoting growth with stability.  The specific objective was to discuss ten theses on new developmentalism that participants had been asked to think about in advance of the meeting.

After two days of lively discussion, the local organizers of the workshop were charged with editing the theses to reflect the debate.  The final version has now been endorsed by the original participants of the workshop.  Other economists and social scientists committed to the idea of economic growth with stability and social equity are now also invited to subscribe.

1. Economic development is a structural process of utilizing all available domestic resources to provide the maximum environmentally sustainable rate of capital accumulation building on incorporation of technical progress.  The primary objective is to provide full employment of available labor resources.  Not only should this involve increasing productivity in each industry, it also involves finance and the continuous transfer of labor to industries producing goods and services with higher value added per capita and paying higher wages and salaries.

2. Markets are the major locus of this process, but the state has a strategic role in providing the appropriate institutional framework to support this structural process.  This includes promoting a financial structure and financial institutions that channel domestic resources to the development of innovation in sectors that produce high rates of increase in domestic value added.  This framework should also include measures aimed at overcoming structural imbalances and promoting international competitiveness.

3. In the context of globalization, economic development requires a national development strategy which seizes global opportunities i.e. global economies of scale and multiple sources of technological learning, mitigates barriers to innovation created by excessively strong intellectual property regimes, assures financial stability, and creates investment opportunities to private entrepreneurs.

4. Although the Schumpeterian side of the development process and strategic industrial policy are relevant, the demand side is where the major growth bottlenecks unfold.  Since Keynes it has been widely recognized that supply does not automatically create demand.  However, in developing countries there are two additional structural tendencies that limit demand and investment: the tendency of wages to increase at rates below the growth of the productivity, and a structural tendency to overvaluation of the real and/or nominal exchange rate.

5. The tendency of wages to increase more slowly than productivity growth is due to the existence of an abundant supply of labor and of the political economy of labor markets.  Besides limiting domestic demand and reinforcing income concentration in the higher classes, this tendency can also affect long term productivity growth negatively.  A legal minimum wage, cash transfers to the poor, and principally a government guarantee to provide employment at a living wage could be used to neutralize this tendency to underpay labor.  The alternative — chronic overvaluation of the national currency that increases purchasing power– is not a sustainable strategy.

6. The tendency to cyclical overvaluation of the exchange rate in developing countries has been due to both the excessive reliance on external savings in the form of foreign capital flows and the Dutch disease in the context of excessively open capital markets and lack of appropriate regulation.  This tendency implies that the exchange rate in developing countries is not just volatile, but it also contributes to recurrent currency crises and recurrent bubbles in the financial markets.  It also implies that export oriented investment opportunities are chronically insufficient because exchange rate overvaluation renders even the most efficient business enterprises uncompetitive internationally.

7. Dutch disease may be characterized as a permanent overvaluation of the national currency due to Ricardian rents originated from the export of commodities based on natural resources or exports based on ultra cheap labor.  Dutch disease impedes other tradable industries from prospering.  It does so by creating a wedge between the “current account equilibrium exchange rate” (the exchange rate that balances the current account) and the “industrial equilibrium exchange rate” — the exchange rate that allows tradable industries to be competitive utilizing state-of-the-art technology.

8. Economic development should be financed essentially with domestic savings.  In order to achieve this goal, the creation of public financial institutions to ensure full utilization of domestic resources, in particular labor, finance innovation and support investment is required.  The attempt to use foreign savings via current account deficits usually does not increase the investment rate (as claimed by orthodox economics), but instead increases domestic indebtedness and reinforces financial instability.  Growth strategies that rely on foreign savings cause financial fragility; get governments caught up in regressive “confidence building” games; and, all too often end with a balance of payments or currency crisis.

9. In order to provide the appropriate framework for development the government must ensure a stable long term relation between the public debt and GDP and a real exchange rate that takes account of the need to counter the adverse effects on the manufacturing industry of Dutch disease.

10. To achieve long term development economic policies should pursue full employment as its primary goal, while assuring price and financial stability.

These ten propositions are not intended to be a comprehensive recipe for development.  Rather they are intended to be a set of propositions that a wide array of economists can subscribe to.  These propositions should be adjusted according to a proper mix, specific to each domestic productive, social and political context.  Nothing has been said about the global financial and trade architecture which are clearly matters that need attention in the new environment of globalization that binds economies so closely together, often in forms of adverse competition.

The economists that subscribe this document are not saying that they agree fully with all its ten theses.  They are just saying that they support its theoretical approach and main policy recommendations.

São Paulo, September 29, 2010

Original subscribers

Agosin, Manoel
Amsden, Alice
Arestis, Phillip
Baer, Werner
Belluzzo, Luiz Gonzaga
Bhaduri, Amit
Bielschowsky, Ricardo
Blecker, Robert
Block, Fred
Boyer, Robert
Bresser-Pereira, Luiz Carlos
Bruno, Miguel
Bruszt, Laszlo
Burlamaqui, Leonardo
Carneiro, Ricardo
Carvalho, Fernando Cardim de
Chandrasekhar, C. P. (Chandru)
Chang, Ha-Joon
Chavagneux, Christian
Chick, Victoria
Chilcote, Ronald
Coutinho, Luciano
Damill, Mario
Davidson, Paul
Del Pont, Mercedes
Dymski, Gary
Dulien, Sebastian
Dutt, Amitava
Epstein, Gerald
Faucher, Philippe
Ferrari, Fernando
Ferrer, Aldo
Frenkel, Roberto
Gala, Paulo
Galbraith, James
Gallagher, Kevin
Garcia, Norberto E.
Ghosh, Jayati
Girón, Alicia
Guillén, Arturo
Guttmann, Robert
Huber, Evelyne
Jomo K.S.
Kregel, Jan
Kupfer, David
Lazonick, William
Le Heron, Edwin
Lopez, Julio
Marconi, Nelson
Mazier, Jacques
Nakano, Yoshiaki
Nayyar, Deepak
O’Connell, Arturo
Ocampo, José Antonio
Oreiro, José Luis
Palley, Thomas I.
Palma, Gabriel
Papadimitriou, Dimitri
Paula, Luiz Fernando de
Petit, Pascal
Popov, Vladimir
Prates, Daniela
Przeworski, Adam
Punzo, Lionello
Rapetti, Martin
Reinert, Erik S.
Ros, Jaime
Rueschemeyer, Dietrich
Salama, Pierre
Sawyer, Malcolm
Schneider, Ben Ross
Serrano, Franklin
Stephens, John
Sunkel, Osvaldo
Taylor, Lance
Vernengo, Matias
Wade, Robert
Weisbrot, Mark
Weiss, Linda
Wray, Randall

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Cf. See, below, an excerpt from James Petras, “Latin America: Roads to 21st Century Capitalist Development” (18 October 2010):

Notwithstanding the expansion of the state’s role and its timely intervention to maximize benefits from world demand, it remains a subordinate partner to private capital.  Even in Venezuela, where several important industries were nationalized, state enterprises accounts for less than 10% of the GNP.  Equally important, the state and economy, public and private, is subordinate to a global “colonial division of labor” in which Latin America exports agro-mineral products and imports finished goods.  The emphasis on extractive industries encourages large-scale foreign investments, while stable, orderly fiscal balance sheets, large-scale foreign reserves, and relatively high interest rates attracts financial capital.

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The current stability of the Latin American states rests in part on potentially volatile commodity prices and demand, military institutions with many carryovers from the past and too many links to Washington coup-masters, and a private sector willing to abide by the rules of democratic capitalism, as long as they continue to exercise hegemony over the society and economy.

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The heterodox road to 21C [twenty-first century capitalism] has the good fortune to coincide with the world commodity boom and the good sense to put in place financial controls which softened and shorted the duration of the US-EU induced financial crash (2008-2010) and economic recession.

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The most striking differences between heterodox and orthodox economic performances is found in the striking growth, poverty reduction, and political democratization in Brazil, Bolivia and Argentina and until 2009 Venezuela and the social regression, economic stagnation, gross violation of human and democratic freedoms found in ‘orthodox’ Mexico and Colombia.  Extreme violence characterizes rule by the political elites in the countries pursuing orthodox neo-liberal policies.  In contrast there is a process of state consolidation based on relative open politics among the countries pursuing heterodox policies.

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Heterodox models imply and practice the politics of social incorporation via capitalist welfarism, (non exempt from corruption and patronage) and tripartite consultation.  Orthodox regimes operate through unregulated capital markets and its ruinous effects on small producers, public sector employees, and wage workers.

The heterodox models, though drawing heavily on foreign capital, retain, cultivate, and promote national capitalists linked to the domestic market and dependant on mass consumption.  These sectors are not always opposed to periodic increases in wages.

The regimes pursuing orthodox strategy, heavily dependant on declining US markets and on large-scale military and police expenditures, have lost out on the lucrative markets of Asia, the Middle East, and other regions.  Moreover, in the case of Mexico, its structural dependence on an unstable tourist economy, declining immigrant remittances from an increasingly anti-immigrant US, and petrol exports in decline due to negligent management is a result of its early embrace of “free trade’ (NAFTA).  The latter destroyed its diversified productive base and encouraged the turn to narco trafficking.

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The sustained growth of the heterodox model put an end to the radical debate on globalization, by adopting it with a vengeance.  The new argument between the heterodox and orthodox focused on how “globalization” could be harnessed to national growth and made to work for all classes via appropriate distributive mechanisms.  In other words, the heterodox capitalists argued that greater global integration would deepen and increase the wealth available for social welfare.  With the advent of adverse global conditions during the crises of 2009, intensified competition and a temporary decline in prices, the heterodox policymakers argued that global conditions prohibited increased social spending and wage and salary increases.  With rapid economic recovery and the rapid rise in commodity prices by mid 2010, wage and salary tensions increased.

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While important differences still persist between heterodox and orthodox roads to capitalism, the tendency is for these to diminish.  The orthodox faced by the world recession resorted to greater state intervention to prop up the economy while the heterodox increased their pursuit of greater market shares by broadening their appeals to international investors.

As the Latin American countries move beyond the crises of 2008-2009, the improved economic performances does not appear to correlate along the orthodox-heterodox axis.  Slow recovery is most evident in Venezuela (heterodox) and Mexico (orthodox); while rapid recovery is evident in Brazil (heterodox) and Peru (orthodox).  While one might cite Venezuela and Mexico’s dependence on the US market and Brazil and Peru’s links to dynamic Asian markets, we need also to analyze the internal class composition of each set of countries.  The predominance of “rentier” elites in Venezuela and Mexico in contrast to dynamic domestic and foreign capitalists in Brazil and Peru may account for some of the differences in performances.  Clearly identifying the ‘dynamic’ road to 21st century capitalist development is problematic and the outcome uncertain.  The question of whether the commodity boom is part of a long or short cycle may be a determining factor in shaping the possibilities for the reappearance of authentic 21st century socialism.

“Ten Theses on New Developmentalism,” published by the Structuralist Development Macroeconomics Center at the São Paulo School of Economics of Getulio Vargas Foundation, is available at the Web site of International Development Economics Associates; it is reproduced here for non-profit educational purposes.  For the full text of James Petras’s “Latin America: Roads to 21st Century Capitalist Development,” visit his Web site: <www.lahaine.org/petras/b2-img/petras_roads.pdf>.