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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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