Adjustment, Global Trade and the New Political Economy of Development

Citation

Naseem, S.M. (1999), "Adjustment, Global Trade and the New Political Economy of Development", Journal of Economic Studies, Vol. 26 No. 6, pp. 510-520. https://doi.org/10.1108/jes.1999.26.6.510.2

Development economics has had a chequered history during the last 50 years. It started out as an attempt to remove the structural imbalances in poor, largely formerly colonised countries, mainly in Asia, Africa, Latin America and Southern Europe. Models of dualistic structure and vicious circles of poverty highlighted both the paucity of resources and their misallocation among different sectors and their distribution among different groups of people. The focus was on the domestic factors affecting growth and the economy was treated as being essentially closed. The main objective was to raise per capita GDP to a level that would assure self‐sustaining growth. The role of foreign trade was mainly to augment the availability of domestic resources through infusion of foreign aid flows – mainly concessional and non‐interest bearing.

The state had a significant role in economic development. The mushrooming of the planning commissions in the 1950s and 1960s, if nothing else, was a clear acknowledgment of this role. Yet, strangely enough, the state had a rather “apolitical” role in promoting economic development. Its objective was to increase the size of the cake, rather than to determine how to slice it and distribute it. Development economists, except those following Marxist or other ideological traditions, generally shunned political questions and confined the discussions mainly to technical and behavioural issues, such as the efficiency of capital and the propensity to save in an economy.

Much water has since flown down the Amazon, Nile, Ganges and the Yangtze rivers and the political economy of development is now an established part of the development discourse. The epithet “new” attached to it by Biplab Dasgupta, a renowned academic and a committed Marxist, is apparently to distinguish the current discourse from the political economy in the Marxist tradition which centred around the class struggle. The “new” political economy that Dasgupta’s book discusses is the theoretical underpinning of the structural adjustment programmes of the Bretton Woods institutions initiated in the 1980s to rescue many developing countries from the global economic turbulence in the wake of the oil shock and the worldwide economic recession that followed it.

Dasgupta’s book – with its tortuously long title – is structured to tell a credible story of the problems facing the developing countries in the last two decades which have been overshadowed by structural adjustment and the globalisation of trade and investment measures undertaken largely under the aegis of the Bretton Woods institutions and the GATT (and its successor, the WTO).

Any book which tries to be so comprehensive in its conception, must suffer from some degree of arbitrariness in the detailed treatment of issues or areas selected or omitted by the author. On the inclusion side, the chapter on environment stands out as a bit out of place, as it does not contribute to the main thrust of the book, notwithstanding its increasing importance in the development debate. One aspect of the political economy of environment, which would indeed have been quite pertinent to discuss, but hasn’t received even a cursory mention in the book, is the role of Non Governmental Organizations (NGOs) which have played a significant role in this sector, although their usefulness in other areas as a surrogate for the state is much more debatable.

Dasgupta’s book has also suffered, quite inadvertently, from the rather unfavourable timing of its publication. Both East Asia and BWIs have undergone a deep crisis since he completed the main body of his work. Although he does try to take stock of the East Asian crisis in its initial phase in his Epilogue, it was clearly impossible for him to foresee the full implications and magnitude of the crisis and its global ramifications, which now require a radical reassessment of the East Asian experience. Similarly, the BWIs which were meant to contain the domestic crises in developing countries and play a largely “fire‐fighting” role are unable to do so in a regime of free capital movements which spread the “contagion” of devaluation and capital market turbulence around the globe. Increasingly, the need for a “new global architecture” is well‐recognised, although its precise contours are yet to be worked out and agreed upon.

Dasgupta characterizes the “new political economy” of development (NPE) – the acronym is evocative of NEP which Lenin introduced in the early years of the Bolshevik revolution – as being “internally inconsistent, ahistorical, … oriented towards justifying market‐centred economic policies under authoritarian regimes, … dependent on the rich world institutions for its success and ignoring the importance of institutional process in development”. The author then elaborates his critique in terms of the basic ingredients of the theory behind it, which consists of such diverse elements as a theory of state, which is neither neutral nor benevolent, but is malevolently used by those in power for the purpose of rent‐seeking, the theory of distributional coalitions based on a recognition of narrow self interest, and the theory of directly unproductive (DUP) activities. The NPE also includes an implicit faith in the technocratic bureaucracy and a distrust in the working of democracy in poor countries and the desirability of “a strong party or ruler which can rise above the various interest groups and make decisions and impose them on the rest of the society and sustain unpopular, but desirable policies over what is likely to be a number of difficult years” (p. 34). The author brings out the internal contradictions in this rather loosely‐knit amalgam of hypotheses which are used to justify the superiority of a market‐oriented economic system over an interventionist state. He also attempts to show, not too unconvincingly, that the NPE – to the extent it can be characterized as a cohesive theory – is both less consistent and less relevant than the Marxian tradition of political economy which was formulated in terms of clear class distinctions based in economic reality and the “old” development economics which aimed at removing the structural barriers in the way of late industrialising developing countries.

Dasgupta views the Bretton Woods institutions, in close concert with the developed countries, especially the USA, as essential to carrying out the objectives of the new political economy through their programmes of structural adjustment and trade liberalization. The modus operandi of these institutions is both direct and indirect. Directly it consists of giving and mobilising external resources for the developing country in need of them, albeit under an increasingly strict regime of conditionalities regarding domestic policies which are based on the tenets of the NEP. Indirectly, they attempt to influence the elite, especially the bureaucrats and the technocrats, who are the main instruments of implementing the structural adjustment programmes, through their programmes of training and technical assistance and policy dialogues.

Advancing critiques of structural adjustment programmes and the IMF and World Bank has become a growth industry in development economics in recent years and have come forth from different quarters, ranging from street emotion to ivory tower erudition and from the extreme left to the extreme right of the political spectrum. Biplab Dasgupta’s particular critique lies somewhere in the middle in both respects, being much closer to an academic, though at times rather polemical, treatment and veering considerably to the left of the centre. Dasgupta does not deny the need for adjustment by developing countries in the face of the changes occurring in the world economy. Indeed, he endorses the main ingredients of a Fund‐Bank programme by recommending that “the least an LDC can do is to follow a policy of prudent macro‐management: low level of inflation, low level of debt and high levels of domestic savings and investment” (p. 391). As he rightly points out, this is an admirable recipe for avoiding the Fund‐Bank adjustment programmes in the first place and shows that most of the East and Southeast Asian countries did precisely that. His main objections to the structural adjustment programmes sponsored by the IMF and the World Bank are their extreme rigidity, lack of ownership of the programme by the adjusting country, the long and unending dependence on these programmes, their iniquitous nature both in domestic and international terms and their extremely low success rates in most of the developing world.

Neither does he deny the need for existence of global financial institutions to give countries a helping hand in times of need and emergency. The author’s main criticism against the functioning of the IMF and the World Bank is that they have deviated significantly from their original charter, which had envisaged the bearing of the burden of adjustment by surplus (broadly, the developed), rather than by the deficit (broadly, the developing) countries, during the process of global integration in the post‐War period. Instead, the institutions adopted an evolving agenda which increasingly embroiled them in the domestic development policies of the developing countries. Such involvement by the developed countries, who command the majority voting rights in these institutions, was, according to the author, “motivated by rational self‐interested [sic] behaviour, [to] further the economic [and may be also] political interests of the rich countries” (p. 77). The author finds this hypothesis in accord with the “new political economy”, whose basic precept has been the motive of self‐interest, at both individual and group level.

Dasgupta singles out the three large East Asian economies, Japan, South Korea and Taiwan as being the paragon of independent capitalist development, primarily because they avoided or (in the case of South Korea) made a success of the structural adjustment programmes, without being unduly encumbered by the shibboleths of Fund‐Bank economic philosophy. Despite the heavy polemics it employs, the chapter describing the East Asian experience (Chapter 6), is remarkably well documented and substantiates the author’s arguments about the flawed analyses and the reluctant admission on the part of the World Bank and IMF on the strategic role that the state played in their development. State intervention not only in the choice of industries they promoted through liberal, yet well‐monitored, incentives, but also in the financial support and encouragement they provided to technology and human development, which have played a major role in their success.

Dasgupta’s book is a refreshing change from earlier leftist dogmatic critiques of the East Asian economies, many of which concentrated on such alibis as the close political and military alliance with the United States and the large infusion of foreign aid into them and many castigated them as “comparadors” and as subservient to world capitalism. His is a pragmatic assessment of the strengths of the East Asian economies which carved out an independent path of capitalist development, despite their strong political and military linkages with the West. He sees the East Asian experience to be a repudiation of the arguments of dependency school that “integration with global capitalism would hinder development in the peripheral countries”. Dr Dasgupta is equally dismissive of the critique of East Asian countries by Paul Krugman and others using total factor productivity (TFP) results which are intended to show that the growth in these countries is the result merely of increases in factor inputs and not technological change. The East Asian financial crisis has, however, rekindled the debate and its conclusive end is not yet in sight.

The review of the experience of developing countries in the various parts of the globe in the penultimate chapter of the book is designed to show that the structural adjustment strategy has largely failed. Where it has succeeded to some extent, such as in Southeast Asia, that has been due to the countries in question following policies close to those of the main East Asian countries. The Indian experience is perhaps, the most revealing, partly because the author is most familiar with it. The Indian growth strategy shared with the East Asian countries an activist role of the state. Yet the Indian state failed to achieve the economic and social success for which East Asia is acclaimed. Dasgupta lists four major reasons for the Indian state’s failure, compared to the success in East Asia. These are:

1. 1.

   (1) inadequate land reforms;

2. 2.

   (2) inadequate human development;

3. 3.

   (3) inadequate access to health and education; and

4. 4.

   (4) inability to graduate from import substitution to export promotion.

These would seem to be the major lessons that need to be learnt by India and other developing countries if they are to avoid the fate of becoming terminal patients in the IMF‐World Bank ward of structural adjustment.

Unfortunately, this appreciation of the quintessential East Asian experience has come a bit too late in the day for most developing countries. Globalisation not only of trade but investment and unpredictable capital movements have gone too far to be reversed to a situation where the East Asian countries were able to tread a path of “independent capitalist development”. It is largely a mirage to chase that option. Dasgupta points to one light at the end of the tunnel in terms of undoing the damage done by the Marrakesh agreement on several issues, such as labour and environment standards, anti‐dumping, investment and competition policies, through a “process of collective pressure and action by developing countries”. This too, seems a rather unrealistic hope, as the South has always been strong in rhetoric and weak in action. An option that the author does not consider even worth mentioning is an attempt through mobilising world public opinion to change the basic lever of the “new political economy” of global development from “self‐interest” to global or common interest. That leverage would perhaps be most effective in dealing with questions of environment and migration.

In sum, this is a readable and enlightening book on contemporary issues in development economics in the phase of globalisation and structural adjustment.