Market vs. Plan in economic development

Reading article by Saad-Filho[1] on effects of neolib on development economics. He makes the classic claim of the left that Asian tigers disprove neolib doctrine. The right-wingers claim the opposite. Actually I think neither are right. The East Asia tigers (Japan, Korea, Taiwan, Hong Kong, Singapore, more recently Malaysia, Thailand) display a broad array of econ policies, from centrally organized Korea, reminiscent of Soviet U in 1930s, to laissez-faire HK, with Taiwan close behind.

Korea: huge firms, heavy-handed state planning & financing;

Taiwan: small firms, very little planning.

But both were successful. So it appears that the actual policy pursued is not so important. Deng Hsiao-Ping said: “It’s not so important if the cat is black or white, the main thing is that it catches mice.”

There is another possibility, namely that the correct econ growth policy depends on very specific country factors.

One common element in the E Asia tigers is the export orientation. However they did not shy from import substitution as a tactical measure to save foreign exchange (other exceptions?).

The important elements may be instead the factors for growth outlined in R Barro's books.[2]

These are:

Positive correlation:	Regression coeff. X 1000
Terms of trade change	137
Democracy index	90
Life expectancy	42
Rule of law index	29
Male secondary & higher education	11
Negative correlation:
Gov’t spending ratio	-136
Democracy index squared	-88
Inflation rate	-43
Fertility rate	-16
Log GDP x Male education	-6

In a single series:

Variable	Index
Terms of trade change	137
Gov’t spending ratio	-136
Democracy index	90
Democracy index squared	-88
Inflation rate	-43
Life expectancy	42
Rule of law index	29
Fertility rate	-16
Male secondary & higher education	11
Log GDP x Male education	-6

There is little that can be done about the most important factor, terms of trade, except reduce production of exports whose TOT are falling and increase those whose TOT are rising. This is usually difficult to do except over very long term. So we’ll discard this factor as a possible policy measure.

Consequently the most significant policy measures to promote growth are, in order of importance:

Reduce gov’t spending

Democratise (but not too much)

Reduce inflation rate

Invest in public health & improve nutrition

Make courts & administration more efficient and law-abiding

Reduce birth rate

Increase male secondary & higher education

There is an obvious contradiction between 1 on the one hand, and 4, 5 & 6 on the other. Other factors that are not taken into account are reduction in military spending and in education of females. (For some reason “defense” & educ are not included in “gov’t spending” figure.)

So the revised list is:

1. Reduce overall gov’t spending and reallocate it

FROM:

• military
• female educ
• gov’t production (to the extent it creates deficits)
• etc. (which others?)
• corruption

TO:

• health & family planning
• nutrition
• adm & judicial reform (incl raising salaries)
• male secondary & higher educ. (only at low GDP/cap levels)

2. Democratise (but not too much)

3. Reduce inflation

Factors 2 & 3 are relatively cheap but require strong political base.

Historical examples

It is interesting to compare Barro’s list with English society & government in the early 19^th cent, when England became the first industrialised country: It fails every single test. 90% of gov’t spending was on the military, none on health, educ, nutrition, adm reform. Corruption was high. The rule of law was so-so. Democratisation was minimal. Fertility?[3]

Perhaps England was able to grow because it had no competition, above all no countries that were more advanced and that could force England into disadvantageous divisions of labour.

The decisive elements in England’s rise were its sheltered strategic position, its traditional autonomy from Roman Catholicism’s stifling dogmas, the prodigious inventiveness of its artisans, the convergence of science and technology, the traditionally self-confident yeomanry [?], its relatively free political & social atmosphere, its possession of a colonial empire [?].

On the other hand it shared with N Italy & Holland the commercial culture that facilitated division of labour.[4]

It is evident that the factors that impelled England’s rise were much more fundamental than the Barro factors. They were connected to the creation of new technologies and new forms of social organisation. Modern LDCs however, mostly adapt existing technologies, instead of creating their own. A developing country only starts creating technologies when it has reached an advanced stage of development (see Korea). Hence the factors that impelled England are much less important to today’s LDCs. So the Barro factors step in to fill the gap.

Postscript May 2006

Since writing that I have read “Governing the Market” about the single-minded control of Taiwan development by Kuomintang. They were shamelessly import-substituting in the 1950s & 60s. However they did not make the mistake of the LAmericans, let the manufacturers make shoddy merchandise unscathed. If domestic quality was bad, the imports would roll in.

Secondly, “Growing Public” makes a couple of claims about the Barro parameters, namely that if Zimbabwe and other kleptocracies were excluded, the negative effect of large state sectors would disappear from the statistics. What was the other one?

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[1] Saad-Filho (ed.) “Neoliberalism – A Critical Reader”, Pluto Press 2005.

[2] “Determinants of Ec Growth", MIT Press, 1997 & “Getting It Right -– Mkts & Choices in a Free Soc", MIT Press, 1996.

[3] Theodore S Hamerow: The Birth of a New Europe. State and Society in the Ninetheenth Century, Univ of N Carolina Press, 1983, part 3. [Since Jan I have read “Kicking away the ladder” by that Korean guy.]

[4] Douglass North & Robert P Thomas: The Rise of the Western World. A New Ec History, Cambridge U Press 1973