Inclusive Growth

Erik S. Reinert (Norway)Professor of Development Strategies

Tallinn University of Technology, Estonia

Maputo, October 14, 2015.

In the beginning there were traditional societies….

Traditional pre-capitalist societies everywhere were inclusive, but there was little or no growth.

The key economic principle is reciprocity, that the members of the clan/society helped each other mutually. Instead of trade there was barter.

Pre-Capitalist Societies.

These were characterised by the absence of Karl Polanyi’s three «fictitious commodities»: •Money•Labour as a commodity•Private ownership of land Karl Polanyi: «The Great Transformation» (1944)

Transition to Capitalism:

In (most of) Europe the transition from traditional societies to modern capitalism was characterised by enormous inequalities under feudalism. In feudal societies «1 per cent» of the people owned «99 per cent» of the land.Only 3 European countries – Switzerland, Iceland and Norway – had virtually no feudalism, but instead had independent farmers.

The Role of the Cities.

Economic equality grew out of the handicraft and industrial activities in the cities. The cities were a safe-haven from feudalism and it was here seriuos growth, and inclusive growth, started.

Antonio Serra (1613). Explained why city activities are needed to create wealth.

The Nordic Experience

Sweden: Industrialization started very early. The country had the world’s first company with limited liability – Stora Kopparberg – and the world’s first Central Bank (1660s). Sweden also had great economists who understood why they needed industries (1700s).Denmark followed in the 1700s, emphasizing the synergies between agriculture and manufacturing. The latecomers were the two former «colonies», Norway and Finland which only had serious industrialization after 1850.

Some nations just take off…

Source: original data extracted from Angus Maddison, The World Economy, Paris, 2003

Korea (Rep.)-Somalia, GDP per Capita 1950-2001

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Korea (Rep.) Somalia

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The Heritage of Colonialism:

‘That all Negroes shall be prohibited from weaving either Linnen or Woollen, or spinning or combing of Wooll, or working at any Manufacture of Iron, further than making it into Pig or Bar iron: That they be also prohibited from manufacturing of Hats, Stockings, or Leather of any Kind… Indeed, if they set up Manufactures, and the Government afterwards shall be under a Necessity of stopping their Progress, we must not expect that it will be done with the same Ease that now it may’. Joshua Gee, Trade and Navigation of Great Britain Considered, London, 1729.

The Heritage of Colonialism: Economic structure and population carrying capacity

Hunting and gathering soc. 1-2 persons / km2

Agricultural societies 40 persons / km2

Industrial soc (ex. Holland) 400 persons / km2

Only nations with a large manufacturing sector (rather: a large sector with activities subject to increasing returns) are able to feed a large population.

Famines are normally only found in nations specialising in agriculture.

An idea that united capitalism and communism: wealth cannot be created without manufacturing

The World Bank confirms Friedrich List:

“Except for a few oil-exporting countries, no countries have ever gotten rich without industrialization first’

Justin Yifu Lin. World Bank Chief Economist, New Structural Economics: A Framework for Rethinking Development and Policy, Washington DC: World Bank Publications, 2012, p. 350.

Warning from a Venezuelan Minister of Petroleum and a Founder of OPEC:

The Virtuous Circles of Economic Development: Marshall Plans

Source: Reinert (1980) , p. 39.

Productivity Increases(Activity-Specific)

Large Scale of Production

Highly Diversified Economy

Systemic Synergies

Higher InvestmentsHigher Profits

Under-development

Higher CapitalLabour Ratio

Exit from Syste

m

Economies of Scale and Scope

Children as inferior goods. Less

population, attracts migrants

Higher Real Wages

Lowering Export Prices at the same rate as Productivity Increases

Higher Demand

Higher Savings

Higher Possibility for Taxation (better Health, Education,

etc.)

Labour Saving Technology

Pays Off

No Increase in

Real Wages

The Vicious Circles of Poverty: Morgenthau Plans

Engaged in Production of Technologically MatureProducts and Products Subject to Diminishing returns

Little Productivity Increase

Perfect International CompetitionReversible Wages

Productivity Increases Taken Out As Lowered Prices

No Increase in Real Wages

Investment in Labor Saving Technology

Unprofitable

Demand Low

Savings Low

Low Possibility for Taxation - (Poor Health,

Education, etc.)

Balance of Payment ProblemsBreak-down of the Capacity to

Import

Low Capital, Labor RatioMany children as

an asset. Population grows

Small Scale of Production (Imports Cheaper Due to Scale

Economies)No Diversity of Production

Low Investments

Low Wages vs. Other NationsComparative Advantages in Labor-Intensive Activities