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Leontief Prize

"Ruling Out National Development? States, Markets and Globalization"

Remarks by Alice Amsden
on occasion of her receipt of the Leontief Prize
at Tufts University, on November 21, 2002

Thank you so much -- usually when I speak, it’s sort of in the tradition of Fidel Castro, five or six hours at a minimum, now I’ll try to sort of keep it down. Thank you so much for this award; it’s really an honor and pleasure to be here again at Tufts. I actually knew Leontief, not well I would say, but I actually did an interview with him. I wanted to understand him a little better. And the formal interview started with a letter that ran as follows “My dear Keynes, I don’t know how you can work so much, it really amazes me. As for Leontief, I agree he is very, very intelligent, bright, but unfortunately he has disagreed with my advice. He’s gotten married and his thesis will be late.” And it’s signed Joseph Schumpeter, 1933; it’s in the Harvard archives.

But I really agree with Dani that Leontief was very interested in the tangible, something that you could observe, measure, think about, and he, for that reason, was very critical of supply and demand curves and tried to introduce his own economic system in terms of his input/output analysis. And most of all he was very, very, very interested in policy. And by way of a tribute for him I would like to consider the following proposition: has the new wave of globalism created a genuine set of policies for economic development that can actually promote growth in poor countries? Are there the mechanisms there that allow business enterprises to be developed? Are there the types of policies that allow manufacturing and services and employment to thrive? So that’s really the question that I have in mind as I speak to you today.

I think it’s really ironic that almost immediately after WWII, for the first time in world history you had a tremendous upsurge in economic development among countries that had no original technology of their own. It wasn’t like the U.S. after the revolutionary war, where you had Eli Whitney with the cotton gin. It wasn’t France after Napoleon when they were fighting in commercial markets against the British and they had their own artisan skills, they had their own fine designs, they had their own silks and their own tapestries that allowed them to capture niches in world markets. When you’re talking about developing counties after WWII, apart from raw materials, they had nothing. They were really pure learners; they were pure borrowers of technology. And yet they had this tremendous upsurge in economic development.

Ironically, before the Washington Consensus, you get growth rates throughout the world that are far higher than after the Washington Consensus, particularly among developing countries. And even more ironic still, developing countries after the war, eschewed the standard kind of market theories that would have prescribed certain types of laissez faire policies in order for them to grow. I think all of them, not just Korea and Taiwan, and it was I think a very conscious and deliberate move on the part of a large number of latecomers. What they did was they used subsidies, they used tax breaks, they used protectionism, they used incentives to export, in order to create profitable industries, in order to create profitable investments. And through this profitability, you would get investors coming into industries and making money and reinvesting this money and trying to improve the product and trying to make the process more efficient, such that you got learning and you got a kind of snowballing type of economic development.

This was really extraordinary. At that time, someone like British Prime Minister Harold McMillan talked about the winds of change. Everyone had five-year plans; everyone was really into the development process. So many different academics joined the field of economic development in order to help make this kind of thing happen.

Now I think two questions are interesting in this regard, again thinking about Leontief and his tangible policies. Why did these countries reject market theory? Why was there almost uniformly a movement away from this kind of theory, even as people from the developing world themselves were learning this kind of theory. And second, while there was this huge upsurge in economic development, why did some countries succeed and other countries fail? It was not as though this was some elixir of economic growth. It was a very difficult set of policies that only some countries succeeded in using and other countries failed.

I think the reason countries consciously or unconsciously moved away from free market theory had to do with the nature of technology. In market theory technology is codified, it’s documented; you can use it very easily. You can make pulp and paper the way you can wash your clothes in a washing machine. You just put the pulp in, push it down and you get some paper. It’s very specified in such detail in market theory. It’s also free, like manna from heaven.

Now if everyone has the same technology, if everyone has the same know-how, if everyone has the same sort of documented principles, then of course everyone competing in the same industry would have the same productivity. And if you can’t compete given the same productivity in an industry, and if the industry is labor-intensive and you’re a labor-abundant country, the reason is according to market theory, that your wages are too high. And the solution is that you lower real wages. That kind of lesson from market theory was resisted by the developing countries as the panacea or as the way to start economic development. In fact, over time it became very obvious that technology is not codified, it’s not documented, it’s very tacit, it’s very difficult to get, it’s very difficult to use, it’s very difficult to understand. Even in mature industries, if you are making cement and you have different limestone from another country, it’s very difficult to control the process in that kiln. So technology becomes something really hard to get, particularly as you move up the ladder of technological complexity, where technology is the knowledge-based asset of a firm. It’s intellectual property; people don’t want to share it. It’s not like where in Adam Smith’s pin factory where it’s easy to observe what’s going on in another production domain. It’s very difficult, and so countries recognized that if technology is uncodified, if it’s tacit, then productivity will be and was unequal, and sometimes vastly unequal, even among firms within the same industry.

So you had the situation, using Korea and Taiwan as an example, but there are lots of other examples, where after World War II Korea and Taiwan were in a privileged position. They had U.S. foreign aid, they had a lot of education, they had good infrastructure, they had fairly modern textile facilities. And with all these advantages, they still, at market prices, could not compete against the mighty Japanese textile industry that was just miles away. So these developing countries realized they had a choice; they could lower real wages, or they could try through various means to increase productivity. And what most of them I think did, was both.

If you look at most developing countries after WWII, the policies towards labor are extremely hostile. In Korea and Taiwan they have martial law, there’s big penalties for joining trade unions, many of the regimes that are responsible for economic development are not democracies. So in many cases they tried to keep wages down as much as possible. But in all cases they tried to build a system in order to increase productivity; in order to be world competitive in textiles, and then in cement, and then in steel, and then in petrochemicals, and up the ladder of complexity. And out of that growth, I would argue, came democracy. So it is not as though you had democracy as the initial condition and then you had the growth. Unfortunately, you start with relatively authoritarian, autocratic regimes, and out of economic development comes the productivity that leads to democracy.

As far as the question: why some countries more than others? I think the answer again is related to technology. I would put it in this strong way: the countries that succeeded, however you want to measure it, by growth rates, per-capita growth rates, by exports et cetera, the developing countries that succeeded in entering the orbit of modern world industry after WWII all without an exception had pre-war manufacturing experience. You could be a country with pre-war manufacturing experience and you could fail, like Argentina. But it is very, very hard to think of a country that develops after WWII that just springs out from nowhere. All the successful countries -- Argentina, Brazil, Mexico, Chile, Korea, Taiwan, and I would say Turkey, Malaysia, Indonesia, Thailand, China, India -- they all have manufacturing experience. Some got it through émigrés, some got it through pre-modern experience, some got it through colonialism, but they all had manufacturing experience. And that manufacturing experience, in a sense, gave investors confidence that someone knew what they were doing. It attracted capital. It made enterprises that were subsidized more prone to use their capital for productive investments, rather than to take their capital and run to Switzerland or to use it for corrupt purposes, because they thought they had a chance of actually industrializing and actually making profits.

Pre-war manufacturing experience also gave you skilled people; it gave you salaried managers, people who understood management. Those people went into two directions: in one direction they went into the new business enterprises, the new large-scale enterprises that really were the hallmark of post-war economic development. And on the other hand, they went into the elitist ministries that led the industrialization drive. Those ministries are extremely interesting, because you could have a government that is, in a sense, generally corrupt, and the ministry of education may be corrupt, and the ministry of construction is almost certainly corrupt, and the military has its hands in almost everyone’s pockets, and so on and so forth. But what most of these countries did is they created zones that were relatively free of corruption. And within those zones they conducted an industrial policy. And I think the unique and the interesting aspect of that industrial policy, that sets the success cases apart from the failures, is that in the success cases subsidies to create profitability and to attract investors were always tied to some type of performance standard. In Korea and Taiwan they protected the domestic market, but they forced firms to export. In Brazil they had a big development bank and they gave subsidized credit, but they had particular conditions on the firms which with whom they had a contract: we will give you the subsidized credit but you must hire a chief financial officer who is not a member of the family; we will give you this subsidy for pulp and paper but you must re-create the raw materials after you are finished, et cetera, et cetera. So this kind of government was not just a government, it was a relatively disciplined government. And it was a relatively honest government in these particular zones.

Today we have three sets of developing countries. First, we have the poorest countries. And the poorest countries are interesting in so far as there are something like 40 of them, and if you exclude Nigeria and Bangladesh, those very, very, low-income countries account for about two or three percent of the population of the developing world. So most of those countries are very small, they have very small domestic markets, and I think appropriately the main policy focused on them now is poverty alleviation. Then you have the richest countries, maybe not rich in per capita income, but rich in the sense of rapid growth, with people coming into relatively high paying employment, people getting better housing, better sanitation, better infrastructure. Its not just Korea and Taiwan -- I think parts of China, certainly parts of coastal China, and parts of India also qualify. Malaysia is entering that group, parts of Indonesia are entering that group, and certainly Thailand is now entering that group.

If you look inside those countries now, they are trying to move beyond what could be called mid-tech industry, heavy basic industry, into mature high-tech industry, mature in so far as the product’s been out for two or three years, pioneered by a company in the advanced world, and now they are starting to produce it and improve it, et cetera. What you see inside them is not the Washington Consensus at all, in the sense that they still have a policy to promote industry and services. We could call it the neo-developmental state. And the main way in which they try to promote industry and services is through promoting science and technology. So if we look at a country like Taiwan, the cell phone is now the new hot item there. They had some real problems getting into cell phones, and the government labs, and the spin-offs from government labs, and government working hand in hand with the companies, overcame those problems. Those types of policies, where you’re working with science and technology and promoting science and technology, are kosher under the WTO because the U.S. promotes the aerospace industry through the Department of Defense, and the U.S promotes pharmaceuticals and biotech through the National Institute of Health. So there is nothing in the rules of the WTO that prevents countries from promoting development, promoting their industries by promoting science and technology. And that is precisely what the higher income latecomers are doing.

Finally, you have these middle income countries, and if you look at which are the middle income countries, they are to a large extent located in the Middle East and they include countries like Egypt, Algeria, Tunisia, Iran, and outside the Middle East, Peru, Ecuador, et cetera. What’s interesting about these countries is they all have post war manufacturing experience. In the 50s and the 60s and even the 70s, they all developed relatively diversified industrialized basis. But their economies now are all stagnating. Countries in the Middle East have some of the highest unemployment rates, they have some of the highest inward migration rates, and they have some of the slowest growth rates. So if you think about it, and you say to yourself “what is the relationship between the sort of terrorism that we’ve been observing in the last year or two and economic growth in the developing world?” -- we can’t say that these are the poorest countries, although the foot soldiers come from countries like Afghanistan and Pakistan, but higher up, higher in the hierarchy they come from Egypt, they come from Saudi Arabia, and they come from Algeria, and those countries are really performing badly.

So the question is, how do global policies influence what they’re doing? What does the Washington Consensus give them? And if I can just take Dani’s point and collapse his excellent categories into only three small categories, I think if you look at the World Bank and you ask what is it doing? How is it promoting development? Or if you read some of the documents from the U.S., there are three parts. The levers of growth are now: poverty alleviation, free markets -- that is to say liberalization, deregulation, and privatization -- and foreign direct investment.

Let me just say the following. Poverty alleviation, we need more for the poor countries, including some of those middle income countries, we need more. There are really tremendous health problems and there are tremendous social problems that cry out for more poverty alleviation. But having said that, I think in some respects that poverty alleviation has become a cult, because it is no substitute for developmental policies. Let me give you an example of the difference. We want every person in the world, poor countries too, to have the kind of medications, to have the drugs that they need to have. That’s poverty alleviation, giving the poor drugs they need. Developmentalism is giving the poor the drugs they need by producing the drugs locally in a factory that has employment, that has quality control, that has lots of small firms participating in the process, et cetera, et cetera. And I don’t get that second part, I don’t hear anything developmental, it’s all left out.

The second part is free markets, and as Dani I think very wisely pointed out, every developing country has a mixture between heterodoxy and a regular sort of market policy. But in these Middle Eastern countries that have this manufacturing experience and have the factories, as it now stands they cannot compete against the more successful latecomers. It is very difficult for the Egyptian textile industry to compete against the Korean, Chinese and Taiwanese textile industry. It is even very difficult for the Saudi Arabian petrochemical industry to complete against the Brazilian or the Mexican petrochemical industry. So just saying “free markets and free trade” is not going to help countries that are in desperate need of capital to modernize their facilities. We’re not talking about creating new industries; we’re just talking about modernizing and bringing up to date. I don’t hear that, I don’t see that, I don’t see that available. I see the World Bank lending but it’s usually for infrastructure, it’s not to Egypt to modernize its textile industry, which it’s scared of doing because it’s afraid that if it modernizes there’ll be lots of unemployment. Somewhere there might be a policy to help create a social safety net, but it’s not coordinated, it’s not a big movement the way it was after the war.

And finally, the supposed panacea of foreign direct investment. Two points: first of all it’s very, very, very hard to get. Foreign investment in the case of the developing countries goes to a very small number of developing countries, and now that China is gobbling up everything, there’s not that much left over. And frequently the foreign direct investment will go to services, or will go to industries that are long developed and will buy local companies, so they’re not adding anything, no greenfield industries. And finally, the multinationals usually come after the growth momentum has started, and then they accelerate it. But it’s not often the case that they act as catalysts.

Therefore, I would say in answer to the first question in honor of Wassily Leontief: has globalism created a genuine set of policies for economic development? I would say no, it has not done that. It has particularly left in the lurch these middle income developing countries with post war manufacturing experience, who really could make a go of it, at least on that criterion. So it seems to me what is required at the minimum is to re-visit the successful latecomers, to see how their institutions, how their firms, and how their governments can be adapted to suit the conditions of the Middle Eastern countries today. Otherwise -- unless this open air policy, unless this “lets open the windows and get rid of the dust on our feet” policy, unless that happens, I fear that the dark cloud that has descended over the earth in the last year or so will get darker and will get more impenetrable, because I think there are a lot of people out there that are disappointed and that desperately want improved living conditions and social standards.

Thank you.

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