NS4053 Winter Term 2015

Monetarist/Structuralist Debates

Overview• Structuralism – Cristobal Kay Handbook of International

Political Economy• Neo-Liberalism – Robert Looney Handbook of International

Political Economy• Deepak Lal, Preface, Handbook of Emerging Economies

• Debate between the two schools in the Latin American context has carried on since the 1950s

• The debate represents two somewhat opposed views of how economies grow and expand

• Each school has had its ups-and-downs as events have unfolded

• Neo-liberal view mainly that of the international financial organizations and free market economists

• Structuralism mainly indigenous to Latin America and has not been a factor in other parts of the world. Embodies many of the historical and social factors unique to Latin America 2

Structuralism I

Structuralism

•Often compared with Marxist, and institutional perspectives

•Latin American Structuralist school emanated from ECLA under Raul Prebisch

•Structuralists perceive the economies in Latin America as being inflexible and confronting manor constraints or structural barriers

•They distrust the price mechanism and justify government intervention in the economy as accelerating the process of economic development and structural transformation

•They regard distinct asymmetries in international political economic structures and relations as having a detrimental impact on Latin America

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Structuralism II

• By contrast the neo-liberal position emphasizes flexibility in which prices dominant and government intervention is discouraged

• Neo-liberal position in Latin America often associated with the Chicago School of economic thought – many graduates became finance ministers

• Characteristics and originality of structuralism

• Key propositions of structuralism concern the world market economy and unequal exchange

• The center-periphery model

• Idea is that the disparities between the center and the periphery are reproduced through international trade

• Thus the periphery’s development problems are located within the context of the international political economic system.

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Structuralism III

• This analysis of the world economic system directly challenged prevailing orthodox theories and continues to generate controversy

• The argument that the center and periphery countries are linked in a series of asymmetric relationships a sharp break from theories such as Rostow stage theory

• Rostow maintained all developed countries (DCs) were once underdeveloped and that present day underdeveloped countries can evolve into DCs following similar polices and states

• Structuralists consider such theories deficient as they do not take into account

• the different origins, structures and dynamism of the peripheral economy or

• The changing nature of the world-system

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Structuralism IV• Structuralism grew out of dissatisfaction of neo classical

economics which did not seem to contribute to an understanding of the development problems of he periphery.

• Structuralists wanted to develop an alternative based on major obstacles to development in Latin America and one that could be used to propose remedial policies

• Structuralism is historical –examines the origins of developing counties into the dominant capitalist system as producers of agricultural and mineral primary commodities.

• Structuralists term this pattern of development in the periphery and the “primary-export model” or “outward oriented development model

• Wanted to distinguish it form the industrial-export model and autonomous development model of the center countries

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Structuralism V

• Structuralist approach goes beyond economics

• Emphasizes the part played by institutional and social factors in the functioning of an economy.

• Key element is the role of the state in the development process.

• Structuralism was influenced by Keynesian economics in its advocacy of manor increases in government expenditure for development purposes.

• Went further than Keynesianism in regarding the state as the crucial agent for economic social and political change (the Developmental State)

• Through economic planning and protectionism state seen as spearheading industrialization process in developing countries

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Structuralism VI

• Structuralism provide the rationale for land reform and state owned enterprises

• Its ideology was

• Anti-feudal

• Anti oligarchical

• Democratic

• Reformist and technocratic

• It questioned the perverse effect of capitalism in the periphery and the resulting inequities in the institutional arrangements

• While it promoted economic change, it did not advocate revolution

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Center Periphery Model I

Features of the Center and Periphery

•Linkages between the center and periphery

• Increased the productivity of the factors of production dramatically

• However diffusion of technological progress was very uneven throughout the world

•Center countries internalized the new technology by developing an industrial capital goods sector and employing more advanced technology across economic sectors

•Resulted in the development of a homogeneous and integrated economy

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Center Periphery Model II

• In the periphery things different

• New technologies were largely imported and manly confined to the primary commodity producing export sector

• The industrial sector was insignificant and the capital. goods sector rudimentary or non existent

• As a result the peripheral economy became disarticulated and dualist

• Disarticulated because it had to import advanced technology from the center and

• Dualist because of the large productivity gap which existed between the export and subsistence

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Center Periphery Model III

• Periphery is characterized as having a sizeable low-productivity pre capitalist sector which continuously produces a large surplus of labor

• This surplus labor keeps wages low and prevents the periphery from retaining the fruits of its own technological progress

• Productivity increases in the export sector largely being transferred to the center through a deterioration in the terms of trade

• Thus in the Structuralist view, international trade both

• perpetuates and

• deepens the asymmetry between center and periphery

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Inward Oriented Development Model I

Inward oriented development model

•To overcome constraining effects of this outward oriented process ECLA and Structuralists proposed an inward-oriented development model

•Centerpiece was import substitution industrialization ISI

•Structuralists expected an ISI strategy to transform industry into the most dynamic sector of the periphery’s economy and lead to a higher rate of growth than comparative advantage and a primary product export model

•Basically ISI an investment – lost income in the short-run more than made up by higher income streams in the futures

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Inward Orientated Development Model II

• ISI policy was to be implemented by variety of policies

• Easy credit,

• Infrastructure support,

• Favorable foreign exchange rates, and

• (Mainly) protectionist measures – tariffs and quotas

• For Structuralists industrialization justified in the periphery even where the cost of local industry is higher than international price

• Otherwise some factors of production would remain unemployed, or

• Would be used to produce export commodities with adverse consequences for the terms of trade

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Structural Inflation I

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Structural Inflation II

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Assessment

• Structuralists felt ISI would overcome limitations of outward development process and

• Bring social and political benefits – strengthening middle and working classes and of democracy

• By early 1960s talk of “exhaustion” of ISI process• Wide-spread recognition that inward directed development had

not progress as planned• Despite substitution, external bottleneck become even more

problematic as volume of imports continued to rise• Set up need for capital equipment, spare parts• Countries ran large balance of payments deficits – few exports

doe to overvalued exchange rate• Led to massive devaluations and inflationary spirals• Eventually economies stagnated – No TFP

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Assessment II

• Structuralism versus monetarism

• Structuralists see the problem of inflation within the context of the structural transformation of developing countries

• For Structuralists inflation also arises from the socio-political tensions, sectorial imbalances and expectations generated by the process of development. By contrast monetarists regard the inflationary process as a major obstacle to growth

• Monetarists see inflation as arising from excessive demand

• Structuralists see it coming from maladjustments and rigidities in the economic system

• Monetarists claim many of the supply rigidities stem from distorted prices 17

Neo-Liberal Counter Revolution I

• Neoliberal counter revolution• Came out of the work of Deepak Lal (preface to the Handbook

of Emerging Economies)• Main beliefs:

• Imperfect Information – makes detailed planning impossible,

• Individual freedom, and

• The markets

• Neo liberals influential in designing World Bank and IMF structural adjustment programs and their providing advice to developing countries.

• While these structural adjustment programs don’t incorporate the Structuralist ideas – actually the opposite direction

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Neo-Liberal Counter Revolution II

• Neo-liberal structural changes entail rolling back the welfare state by

• Radically reducing government expenditure (especially welfare expenditure.

• Eliminating subsidies and protectionism,

• Liberalizing markets and

• Switching from inward oriented to outward oriented development strategies so as to integrate developing countries even further into the world market

• With the success stories of the market driven east Asian economies in the 1970s into the 1980s and 1990s neo-liberalism was the clear winner in the debate

• Overt time Latin America has fallen further and further behind East Asia 19

Neo-liberal Critics I

• Nevertheless neo-liberalism has come under attack from many sources

• To their critics neoliberal reforms have simply resulted in:

• The rationalization of economic production and distribution on a global scale along the lines of comparative advantage and

• The maximization of the rate of return (i.e., profit) on invested capital for transnational banks and corporations and their stockholders.

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Neo-liberal Critics II

• The costs of these programs is reflected in one or (usually) more of the following

• Increased concentration of wealth in the hands of the very rich

• Increased unemployment and underemployment

• Wages that remain low for those wo still have jobs, even as workforce productivity increased

• Decreased power of trade unions under the pressure of economic globalization

• Increased crime as more people become economically marginalized

• Increased numbers of police and prisons to combat the increase in crime

• An erosion of civil liberties

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Neo-Liberal Critics

• Neoliberal costs (contd)

• Rural depopulation as small farmers are put out of business by corporate agribusinesses which with free trade can take full advantage of its economies of scale

• Armed resistance by traditional cultures put under economic siege

• Increased immigration to more economically developed countries by those who no lnger have land to work and/or cannot find work in cities

• An increasingly irrelevant political system that is unable and/or unwilling to start a genuine democratic debate because it is controlled by corporate interests that have most to gain from status quo

• An alarming decrease in social solidarity22

Assessment

• More balanced view suggests that the neo-liberal reforms make sense in the long term but:

• There have been serious technical errors in their application in the short run

• Most neoliberal reforms have been untaken through IMF/World bank coercion – bitter medicine

• Best to try buy-in of government and population with IMF/World Bank so that everyone is looking for ways to minimize their short-run pain.

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