Over the last half millennia, our species has made enormous progress in medicine, industry, economics and virtually every other field of human pursuit. Global average life expectancy has increased from around 25 in the early 1800 to 70 today. However, when attempting to explain this development – that is, broad, sustainable and practically irreversible change in the political and economical structures of society – our knowledge has not progressed at all as impressively.
The 1930s and 40s did see some breakthrough developments: John Maynard Keynes (1936) creating the field of macroeconomics, Ronald Coase (1937) explaining the reason for the existence of firms, Karl Polanyi (1944) showing the deep connections between market and society, and F.A. Hayek (1945) explaining prices as a mechanism that transfers information on the scarcity or abundance of goods.
Since then however, the debate has been going back and forth, mostly recycling and re-formatting old ideas – humorously and rather accurately portrayed by an Econstories rap. Few revolutionary discoveries have been made.
- Through both violent and non-violent independence struggles, Marxism had often been an inspiration for many independence movements with its imagery of fighting for the oppressed.
- The Washington Consensus was typically implemented through Structural Adjustment Programs (SAPs), which cut or abolished tariffs, and cut government spending on infrastructure and social services alike.
The lack of consensus – is it really a problem?
As to the larger historical debate of what first caused or laid the groundwork for the industrial revolution and/or the revolution in the sciences – and which was caused by which – we may be content with not coming to agreement. After all, the implications would seem to be more philosophical than practical.
However, when it comes to the problem of why some countries still lag behind others – why economic and social developments worldwide are less equal than they have ever been – the lack of consensus does provide policy-makers with real dilemmas regarding how to proceed with their development strategies.
Over the last five decades, civil servants in low- and middle- income countries have watched in frustration as ideological leaders and donor countries have put upon them new conditions and requirements for policy, largely depending on what would be the current trend in the many think tanks of international development.
A Marxist-Statist post-independence period
Through both violent and non-violent independence struggles, Marxism had often been an inspiration for many independence movements with its imagery of fighting for the oppressed. As their economies had been subservient for the western centre for more than 70 years, many post-independence leaders made their economic autonomy a national priority.
Inspired by the initial successes of interwar state-driven industrialization in the Soviet Union, many post-independence governments prioritized their own through a strategy called import substitution industrialization (ISI) – too often to the detriment of their agricultural sectors. As a consequence, food prices changed little, and poverty rates remained stagnant.
Furthermore, without increased agricultural production and the revenue that would have come with it, they had difficulties in paying for industrial and infrastructural investments. So they moved away from taxation towards external creditors in order to secure the necessary financing.
Worse, as populations grew, food prices instead raised, sometimes lowering living standards. As a consequence, Marxist-Statist ideals fell out of favour, their governments lost popularity, and their states racked up unhealthy amounts of debt.
The Liberal-Monetarist reaction
Coming to their aid were primarily international financial institutions like the World Bank and the IMF. They had money badly needed by many developing countries, and therefore the ability to make demands. In reaction to the statist failures, they advocated a new development paradigm, widely known as “the Washington Consensus” – a sign of the undisputed dominance of the USA. Embodying Milton Friedman’s monetarist ideas, it sought to dismantle state power, balance public budgets, lower inflation and set the market free to distribute available resources as efficiently as possible.
Through Margaret Thatcher’s talk of there being ‘no alternative’ to Thomas Friedman’s idea of ‘the golden strait-jacket’, this narrative and agenda has gone hand in hand with western individualism and the neoliberal wave through much of Europe since the end of the Cold War.
The Washington Consensus was typically implemented through Structural Adjustment Programs (SAPs), which cut or abolished tariffs, and cut government spending on infrastructure and social services alike. However, most of the economies ‘set free’ by the SAPs were not dynamic enough to provide development without a purpose and vision coming from central government.
Instead, marginalized farmers became even more marginalized, often loosing access to markets and income generating opportunities due to failing infrastructure and weakened marketing boards. Many left for the cities, where they had to compete with a similar underprivileged urban underclass. As public funding contracted, little could be done to accommodate countryside migrants, who came to live in ever sprawling shantytowns.
Similar reforms had similar effects in developed countries alike. The shock-therapy programme of aggressive reforms in Russia almost destroyed the state, leading to increased crime, alcoholism as well as an unheard-of 5-year drop in male life expectancy (Notzon et al, 1998) – arguably history’s greatest non-famine, non-war loss of life due to a policy failure.
An institutionalist atonement
In searching for answers to why the SAPs hadn’t worked as hoped, attention was brought back to society and the state, but to its quality rather than quantity. The new institutionalist paradigm, sometimes called the “post-Washington Consensus”, did not seek to significantly strengthen the state or give it a significant economic role. Nevertheless, it recognized the central role of the state in establishing and enforcing the rule of law – in short to offer a venue for the peaceful, just and relatively predictable resolution of disputes and conflicts. In practice, this meant that more specific requirements on governmental performance, accountability and transparency were added on top of the anti-statist SAPs.
However, the inner contradiction between discouraging states developmental roles and promoting ‘good governance’ meant unfortunately that state institutions often were not strong enough to effectively fill this function. Furthermore, the opportunities in government for bright, honest professionals paled in comparison to the private sector: those who could left governmental agencies for better prospects in the private sector – a domestic brain-drain.
Return of Keynesianism from the global south?
This paradigm is now shifting towards a new Keynesianism, driven by the successes of India, China and to a lesser extent Brazil, where private companies drive growth together with governments.
Their models can partly be seen as a challenge to US and liberal economic hegemony – pungently symbolized in the attempt to found a BRICS development bank as an alternative to the IMF and the World Bank. While many obstacles exist, this institution could potentially drive this new paradigm in other developing countries across the globe.
While it is too early to tell how this new paradigm will be undermined, discredited and replaced, it is highly likely that this will happen sooner or later.
The importance of context – the example of marketing boards
While we have been unable to find a universal truth of what works in development through these shifting paradigms, we have nevertheless been able to observe many success stories that occurred under any and each of these differing systems of economic thought. It thus appears that the determining factors of a successful project are highly contextual.
Take agricultural marketing boards for instance, an institution decried by laissez-faire economists as price-distorting and inefficient. In reality it had quite mixed results depending on the politico-economical context.
Agricultural marketing boards were first introduced in Europe in the 1930s to create greater economic security for farmers: they would be guaranteed a set price per volume delivered, and the board would keep any surplus in times of high prices in order to absorb the hit when market prices fell. In some cases, they would also use surpluses to make collective investments and or channel support like subsidized fertilizer or farm equipment to the farmers.
The largest such scheme is the EU Common Agricultural Policy, whose subsidies make up about half of the entire EU budget. In the EU, it successfully maintains an overproduction of food, while keeping the number of farmers roughly stagnant. While small, EU agriculturalists have a powerful lobby in Brussels that make loud protests as soon as the CAP is threatened. Whether the current form of the CAP is good for the EU as a whole is another question – but it is a resilient and functional institution that secures access to food for +500 million inhabitants.
In Tanzania during the 1980s however, marketing boards were not supporting the interests of farmers. The ruling party, the Chama Cha Mapinduzi (CCM) saw rural elites as competing centres of power, and thus the board became a potent tool with which to undermine their power. Consequently, they gave farmers a too low price for their goods and offered too few subsidies and development projects in return (Bates, 1995: 42-3).
In Kenya during the same time period, rural elites were integral to the national elite bargain. State marketing boards became a channel through which to award their constituents, the result being increased food production and a modernized agricultural sector (Bates, 1995: 43-4). This in turn paved the way for later successes in more lucrative horticultural production.
The social, political, and economical context is made up of so many different variables that it is virtually impossible to account for all of them satisfactorily – it is extremely difficult to predict the outcome of any given project beforehand. Thus, the task for civil servants and development professionals cannot be to find a magic bullet solution – because no such solutions exist. The question is rather one of how to establish continuous mechanisms with which problems can be detected, analysed, and solved.
Bates, Robert H. 1995. ”Social Dilemmas and Rational Individuals”. In The New Institutional Economics and Third World Development, ed. John Harris, Janet Hunter, and Colin M. Lewis. London: Routledge.
Coase, Ronald H. ”The Nature of the Firm” Economica, Vol. 4, No. 16, 1937.
Hayek, Friedrich A. 1945. ”The Use of Knowledge in Society”. The American Economic Review 35 (4): 519–530.
Keynes, John Maynard (1936) The General Theory of Employment, Interest and Money, London: Palgrave Macmillan.
Polanyi, K. (1944). The great transformation. New York: Rinehart.
(This article first appeared in Global South Development Magazine’s December 2013 edition with the same title the difficulties of establishing consensus in development.)