development and stagnation

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By LUIZ CARLOS BRESSER-PEREIRA*

Presentation of the recently released book by André Nassif

The book you are about to read is a remarkable analysis and discussion of the theory of economic development and the causes of economic stagnation. It is a theoretical book that helps us to understand why countries tend to develop and why countries like Brazil, which grew in an extraordinary way after the Second World War and were reaching the standard of living of rich countries, in the 1980s entered an interminable period of economic stagnation. Then they began to grow slowly and fell behind the rich countries.

This is not a book about the Brazilian economy, nor a book with a single theory of development, but a book in which we see how heterodox, Keynesian-developmentalist theories have evolved, and how these theories compare with neoclassical neoliberal theory – the dominant theory taught in universities in central countries, which since the 1980s have adopted them and practically imposed them on countries on the periphery of capitalism.

Rather than complicating economic theory, this book simplifies it. It shows that, in essence, there are two strategies, or two forms of economic organization of capitalism – the developmentalist form, which assumes moderate intervention by the State in the economy and economic nationalism, and a liberal form, which limits State action to guaranteeing property and contracts and responsibility for fiscal balance, while rejecting economic nationalism when it is practiced by peripheral countries.

For both developmental and liberal economists, economic development depends on investment and investment depends on the expected rate of profit. The difference lies in the fact that liberals believe that, with market freedom, the profit rate will be satisfactory, the investment rate will be high and the allocation of factors will be efficient, so that “we will live in the best of all possible worlds”. Developmentalists think differently. They defend the freedom of the market, but they don't expect more from it than it can give.

Economic theory is the science that studies the coordination of economies by the market and the state. Therefore, it studies capitalism from an economic point of view. In this form of social organization, it is important to distinguish the center from the periphery of capitalism. Under capitalism, it is not just corporations but also nation-states that compete with each other. Therefore, it is necessary for each country, without denying the importance of international cooperation, to defend its interests, to be an economic nationalist.

Secondly, it is necessary to understand that, contrary to what liberals think, economic sectors are not equivalent. Economic development is associated with increased productivity, which, in turn, increases not only as the productive capacity of each worker increases, but also with the transformation of labor from sectors with low added value per person, which are unsophisticated and pay low wages, to sectors with high added value per person, which are more sophisticated and pay higher wages. Therefore, developmentalists say that economic development is industrialization, or, more broadly, it is productive sophistication.

For the central countries, it does not matter that the countries on the periphery of capitalism industrialize. They don't want to have more competition than they already have. For this reason, they seek to prevent its industrialization, and use economic liberalism as an instrument of domination – more specifically, the law of comparative advantages in international trade. This is an absurd law, which ignores that countries can learn and, thus, the advantages change.

In the XNUMXth century, the British told the Germans that their country was “essentially agricultural”, but Germany became an industrial power. This law also assumes full employment – ​​which allows liberal economists to state that, in order to industrialize, countries on the periphery need to reduce their agricultural or mineral production – however, full employment is the exception, not the rule.

To discuss developmental theories, André Nassif divided his book into two parts. In the first, he discusses structuralist developmental theories; in the second, he deals with neoclassical liberal theory. And he has devoted seven chapters to developmental theories with which he identifies, including a chapter on conceptual roots and another on policy implications.

In Chapter I are the basic ideas about economic development – ​​the ideas of Adam Smith, Karl Marx, Joseph Schumpeter and, in some passages, John Maynard Keynes. Smith explained the wealth of nations by investment and the division of labor; Marx emphasized the expected rate of profit, the interest rate, and capital accumulation. Schumpeter showed that, in the perfect competition assumed by liberals, the rate of profit is very low; only innovation can create a competitive advantage that creates demand for the company, increases its expected rate of profit, and drives it to invest; Keynes, finally, criticized liberal neoclassical theory by showing that supply does not automatically create demand, showed that in capitalist economies capitalists can hoard money instead of investing, and argued that only aggregate demand management can assure competent companies of low interest rates and satisfactory profit rates that lead them to invest.

In Chapter II, André Nassif discusses the structuralist-developmentalist current, or classical developmental theory, which emerged together with the first developmental economists. It is a critical theory of neoclassical liberalism, an abstract and ahistorical theory. With the classic developmentalists, economic development comes to be seen as a historical phenomenon that is identified with industrialization.

And the first critical models of neoclassical liberal theory emerge: the model of big push by Rosenstein-Rodan, the center-periphery model and the external constraint model by Raúl Prebisch, the labor displacement model by Arthur Lewis and the increasing returns model by Nicholas Kaldor. All were Keynesian economists, who stressed the role of demand. André points out that, in the 1960s, Kaldor formulated the “laws of growth”, among which the most important, or original, was the defense of industrialization, due to the fact that in the economy there are increasing returns to scale.

In Chapter III, we have ECLAC's ideas, the Latin American, structuralist version of classic developmentalism. Raúl Prebisch was the main economist of this current, which he built within ECLAC – the Economic Commission for Latin America of the United Nations – with the help of many economists, particularly Celso Furtado. As he ran an international agency, Raúl Prebisch did not speak of imperialism, but of center and periphery. He showed that economic development was structural change or industrialization and criticized the center for advocating an unequal exchange – an exchange of sophisticated goods for simple goods.

It showed, on the other hand, how developing countries are subject to an external constraint – the permanent “lack” of dollars: while in rich countries the income elasticity of imports is less than one, in peripheral countries the income elasticity of imports of manufactured goods is greater than one. A problem for which there is only one solution: industrialization.

In Chapter IV, the focus is on the contribution of Celso Furtado, who thought of development and underdevelopment as expressions of the center and the periphery. Underdevelopment is not a stage prior to industrialization and development, but it is a historical configuration created by the center by imposing itself on the periphery, it is a form that assumes the international division of labor, in which the center industrializes while it is up to the periphery to produce agricultural and mineral goods. Furtado always used the historical-structural or historical-deductive method to build his theory of development and always located it within the framework of interdependence between nations. In the chapter on Celso Furtado, André Nassif recalls that, still in the 1950s, the great Brazilian economist practically identified the Dutch disease when analyzing the economy of Venezuela. He regrets that later he did not carry out this idea.

André Nassif defines Chapter V as “a prologue to new developmentalism: notes on the inflation targeting regime and fiscal austerity”. In this chapter, he comments that classical developmentalism gave relatively little importance to macroeconomic theory and states that Bresser-Pereira, with his new developmentalist theory, sought to fill this gap. He also notes that I realized that industrial and technological policies, necessary for development, became ineffective if they were not accompanied by macroeconomic policies, mainly exchange rate policy and monetary policy that create the environment for those microeconomic policies to have an effect.

André Nassif then discusses the policy of targeting inflation, which central banks adopted when, still in the 1980s, they saw that the monetarist policies proposed by Milton Friedman, which were dominant for a brief moment, did not help them to control inflation. And in this chapter he emphasizes the importance of the theory of inertial inflation, which, in São Paulo, Yoshiaki Nakano and I, and in Rio de Janeiro, economists from PUC (Pontifical Catholic University) developed.

I find it interesting that André Nassif saw the theory of inflation as a prologue to new developmentalism, because, for me, this theory, and particularly the “paper” “Factors accelerating, maintaining and sanctioning inflation”, played such a role.

After this prologue, André Nassif dedicates Chapter VI to new developmental theory – which a group of Brazilian economists and I have been building since the 2000s. Naturally, I felt very flattered and happy to be placed alongside the pioneers of development. Until the late 1990s, I was a post-Keynesian macroeconomist and a classical developmentalist. However, at the end of that decade, after 20 years of near-stagnation in Latin American countries, I realized that additional theoretical models were needed to understand the problem of development and stagnation.

We begin by criticizing high interest rates and an appreciated exchange rate in the long term. Although liberal economists in government claimed that prices were determined by the market, we saw that the interest rate was much higher than the international interest rate plus the Brazil risk, and that the exchange rate tended to appreciate in the long run. As a result, capable companies ceased to be competitive and did not invest, while the purchasing power and consumption of workers and rentiers were artificially high. We have also seen that, contrary to conventional theory, the exchange rate is a determining variable for investment.

We could say this because we also said that the exchange rate is not merely volatile around current equilibrium, but tends to remain appreciated in the long run. For two reasons: because the policy of growth with external debt appreciates the national currency in the long term and because an unneutralized Dutch disease keeps the exchange rate appreciated for the industry, not for the “commodities".

Finally, we affirm that the macroeconomics that matters is a macroeconomics and a macroeconomic policy of development in which the State must be responsible for about 20 percent of the total investment and the government must guarantee the general conditions of capital accumulation, that is, invest in education, science and technology, invest in infrastructure, maintain institutions that guarantee the good functioning of the market, guarantee the existence of a local financial system capable of financing investments and keep the five macroeconomic prices in the right place: the real interest rate must be relatively low; the real, competitive exchange rate; the rate of profit, satisfactory for industrial enterprises to invest; the wage rate rising with the increase in productivity, and the inflation rate at a low level.

André Nassif discusses new developmentalism with great competence, because he is one of the most notable Brazilian developmental economists. When, however, I met him, in 2008, he had just published in the magazine I edit, Brazilian Journal of Political Economy, an article in which he denied the thesis that I was then beginning to defend, based on the theory I was developing, that Brazil was undergoing a serious process of deindustrialization.

André Nassif, however, is an economist who thinks with autonomy and clarity. Over time, he changed his views on deindustrialization and became one of the economists who have made the most contributions to new developmentalism.

Chapter VII is a conclusion of the analysis carried out. In it, André Nassif emphasizes that economic development is only successful when it results from a national project. And he takes the opportunity to talk about recent contributions to development theory. He cites, then, authors such as Ha-Joon Chang, Erik Reinert and Mariana Mazzucato, who showed that all successful countries in the process of catch up were guided by developmentalist principles, and not by neoclassical precepts (inherited from David Ricardo) of unconditional adherence to development practices. leave-doing and free trade; Alice Amsden and Robert Wade, developmentalists focused on East Asian countries; Neo-Schumpeterian authors, such as Mario Cimoli, Giovanni Dosi and Gabriel Porcile; and neoclassical but developmental authors such as Dani Rodrik.

The second part of the book is devoted to neoclassical liberal theory of development. In Chapter VIII, André discusses liberal theories of international trade; in Chapter IX, the neoclassical theory of growth; and in Chapter X, the Washington Consensus and neoliberal ideology. These are very interesting chapters, but I confess I have no patience with what neoclassical liberals call development theory. As Celso Furtado used to say, it is nothing more than ideology. Ideology that appears undisguised as a theory in Chapter X. Chapter XI is André Nassif's critique of these theories.

So we have a beautiful book. A brilliant analysis of the theories of development by a developmentalist economist engaged in the fight for development – ​​a difficult fight, which will only be won when developmentalism returns to being the form of economic organization of dominant capitalism in Brazil and Latin America and we know how to reject the policy of growth with external debt, we decide to neutralize the Dutch disease and we return to the State the role of investing in strategic sectors of the economy.

* Luiz Carlos Bresser-Pereira Professor Emeritus at Fundação Getúlio Vargas (FGV-SP). Author, among other books, of In search of lost development: a new-developmentalist project for Brazil (Ed. FGV).

Reference


André Nassif. Development and stagnation: The debate between developmentalists and neoclassical liberals. São Paulo, Countercurrent, 2023, 560 pages.


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