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
0
2000
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16000
Korea (Rep.) Somalia
1950
1952
1954
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1962
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2001
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