Author Archives: Stefano Tijerina

About Stefano Tijerina

Lecturer in Management, Maine Business School, University of Maine

The Neoliberal Model is not Sustainable but State Driven Models have not Proven to be Any Better: How About We Just Redistribute the Wealth?

State Versus Market in Developing Countries in the Twenty First Century

by Kalim Siddiqui (University of Huddersfield)(k.u.siddiqui@hud.ac.uk)

Abstract:
This paper analyses the issue of the state versus the market in developing countries. There was wide ranging debate in the 1950s and 1960s about the role of the state in their economy when these countries attained independence, with developing their economies and eradicating poverty and backwardness being seen as their key priority. In the post-World War II period, the all-pervasive ‘laissez-faire’ model of development was rejected, because during the pre-war period such policies had failed to resolve the economic crisis. Therefore, Keynesian interventionist economic policies were adopted in most of these countries.

The economic crisis in developing countries during the 1980s and 1990s provided an opportunity for international financial institutions to impose ‘Structural Adjustment Programmes’ in the name of aid, which has proved to be disastrous. More than two decades of pursuing neoliberal policies has reduced the progressive aspects of the state sector. The on-going crisis in terms of high unemployment, poverty and inequality provides an opportunity to critically reflect on past performance and on the desirability of reviving the role of the state sector in a way that will contribute to human development.

URL: http://econpapers.repec.org/paper/peswpaper/2015_3ano96.htm

Revised by: Stefano Tijerina (University of Maine)

This paper was distributed by NEP-HIS on 2015-04-19. In it Kalim Siddiqui indicates that the global economic crisis that began in 2007 “provides an opportunity” to reconsider Keynesian interventionist models, thus “reviving the role of the state sector” for purposes of protecting the interests of the majority. Siddiqui centers his argument on the modern economic development experiences of the developing world, juxtaposing it with the experiences of advanced industrialized nations. He particularly emphasizes the economic development experiences of the United States and the United Kingdom, in efforts to advance the argument that Keynesian interventionist policies and protectionist agendas are instrumental in securing a transition into advance industrialization. He argues that the developing world needs to experience a similar transition to that of the UK and the US in order to achieve similar levels industrial competitiveness. However the neoliberal discourse promoted by the industrial powers and the multilateral system after World War Two, and the implementation of neoclassical liberal policies after the 1980s, impeded the developing world from moving in the right direction.

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Siddiqui begins the construction of his argument by providing a brief history of the modern economic development patterns of both the UK and the US. This lays the foundation for his main argument that developing nations should return to the Keynesian patters of economic development in order to achieve advanced levels of industrialization that will eventually allow them to correct present market failures, reducing unemployment, poverty, and environmental degradation.

He points out that in the 1970s and 1980s the UK and US moved away from interventionist policies and adopted a neo-classical model of economic development in response to “corruption, favoritism, and other forms of self-seeking behavior,” that lead to the economic crisis of the times. This model would then be promoted across the international system by the economists of the World Bank and the IMF who found in the same neo-classical model an explanation for the failed Import Substitution Industrialization (ISI) policies implemented across the developing world to cope with the crisis of the 1970s and 1980s.

Kalim Siddiqui

Kalim Siddiqui

What Siddiqui does not address is that the failure of the implementation of the ISI policies across the developing world were the direct result of the same corruption and self-centered tendencies of leadership that forced a move away from interventionist policies in countries like the UK and the US. I agree with Siddiqui that the structural changes introduced by the multilateral financial agencies did more damage than good, however I disagree with his idea that the developing world should return once again to Keynesian solutions, since the implementation of these structural adjustment programs were in fact forms of interventionism that catapulted most of these economies into debt.

Siddiqui then lays down a series of reasons why the role of the state should be reconsidered across the developing world, highlighting that greater interventionism would be more beneficial than an increasing role of the market system. He uses the recent success stories of state driven capitalist experiments such as China’s, Brazil’s, India’s, and Malaysia’s, disregarding the fact that these state driven models continue to be tainted with problems of corruption and self-rewarding management styles that are inefficient and wasteful. For example, he points out the success of Petrobras in Brazil, not following up on the fact that the state-run oil company is now under investigation for high levels of corruption that has sent its stock price in a critical downward spiral.

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At the end Siddiqui’s argument is debunked by more contemporary realities; including decreasing global unemployment patters, economic recovery, and the downfall of state run economies such as those that moved to the Left in Latin America during recent times. Moreover, the bailout policies implemented by the United States and the European Union during the peak of the latest financial crisis contradicts Siddiqui’s argument that neoliberal economies “do not countenance any economic intervention by the state.” I argue that interventionism is an integral part of the advancement of neoliberal agendas; the question that Siddiqqui should be asking is what degree of interventionism is ideal for the developing world under a global neoliberal reality that is inevitable to avoid?

Siddiqui’s work represents yet another criticism to neoliberal capitalism, centering on the agendas set by the administrations of Margaret Thatcher and Ronald Reagan in the 1980s. It does not provide a convincing method or strategy for reviving state driven capitalism under an increasingly intertwined global economic system. It is rich in criticism but short of offering any real solutions through state interventionism. Current case studies that have returned to interventionist models, as in the case of Brazil or India, have failed once again to resolve issues of poverty and income inequality. I agree with the author’s conclusion that the implementation of neoliberal models across the developing world has distorted inequality and social justice even further but disagree with the simplistic solution of increasing state interventionism in the management of market driven economies for the sake of it. More so when the historic evidence indicates that the leadership across the developing world has consistently pursued self-interests and not the interests of the masses. From my point of view, the revival of interventionist models across the developing world will just complete the vicious cycle of history one more time, particularly now that the interests of private global actors has permeated the internal political economy decision making processes of the developing world. If in the early stages of the modern economic development of the developing world foreign political and business interests directly and indirectly penetrated local decision making, thanks in part to the intervention of the World Bank and the IMF as it was pointed out by Siddiqui, then it is inevitable to impede such filtrations under a global system, unless the nation state is willing to pay the high costs of isolationism.

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Siddiqui indicates that self-marginalization from the market system worked for the UK and the US, allowing them to strengthen their internal market and generate the technological and human capital capabilities necessary for advanced industrialization, but that was more than one hundred years ago when the globalization of the market had not reached the levels of sophistication of today. If these industrial powers were to try this same experiment today, the outcome would have been very different. In the past decade developing nations such as Venezuela, Argentina, Bolivia, and Ecuador have experimented with Siddiqui’s model and the results have been no different than the old experiments of Import Substitution Industrialization and other interventionist approaches of the post-Second World War Two era. Corruption, political self-interest, lack of internal will to risk investment capital, lack of infrastructure, lack of an internal sophisticated consumer market, the absence of technology and energy resources, and the inability to generate short-term wealth for redistribute purposes in order to guarantee the long-term projection of the interventionist model has resulted in failed revivals of the Keynesian model. It is the reason why Cuba is now willing to redefine its geopolitical strategy and reestablish relations with the United States; clearly the interventionist model is and was not able to sustain a national economy under a market driven international system.

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The solution lies inside the market system. It is futile to denigrate neoliberalism unless the developing world leadership is willing to construct a parallel market system, as once envisioned by Hugo Chavez, but we are far from that reality. Instead each nation state should reevaluate its wealth distributive and resource allocation policies, moving away from defense spending and refocusing on infrastructure, technology, human capital, health, and the construction of a solid and self-sustainable middle class. Van Parijs’s pivotal work, Real Freedom for All speaks to this idea, indicating that the solution to securing policies that center on what Siddiqui calls the majority, lies in capitalism and not in socialism. If, through a more equal distribution of capital across all sectors of society, capitalism is able to outperform any socialist or interventionist model, then there is no need to attack capitalism and its neoliberal ideas. A replication of this model across the developing world would boost economies into a more sophisticated level of economic development. More competition among states’ private sectors would lead to a more efficient international system, a dynamic that would be enhanced even further by less and not more government intervention. However, the current realities pointed out by Siddiqui indicate that political and corporate elites are not willing to redefine their views on capitalism and therefore we need greater government intervention for redistribute purposes. The redistribution of the pie is the only way to avoid Marx’s inevitable revolution, I agree with Siddiqui. But I do not trust the role of the state as a redistributive agent. I am more in favor of what Michael Howard calls “basic income capitalism” that secures sustainable expendable income in the hands of all consumers through the market system. The dilemma of interventionism continues to be at the forefront, yet it could easily be resolved by the market itself, as long as the actors, workers and owners of capital, are willing to redefine the outreach and potential of capitalism; as long as the social construction of freedom of capital is redefined?

References

Michael W. Howard, “Exploitation, Labor, and Basic Income.” University of Maine (work in progress).

Kalim Siddiqui, “State Versus Market in Developing Countries in the Twenty First Century,” Institute of Economic Research (working paper), submitted at VIII International Conference on Applied Economics, Poland, June 2015, p.1.

Van Parijs, P. Real Freedom for All: What (If Anything) Could Justify Capitalism. Oxford: Oxford University Press, 2005.

Putting Round Pegs in Square Holes

Economía Neoinstitucional: Prueba Falsable a las Hipótesis de Douglass North en Colombia
(Neoinstitutional Economics: The Falsification of Douglas North Hypothesis in Colombia)

by Fernando Estrada (Universidad Externado de Colombia)

Abstract: This article aims to propose a reading of political (dis) order in Colombia, using as a theoretical source Douglass North’s reflections on the economic formation of political institutions. The contributions of this letter are very preliminary in nature and can better be understood taking into account two objectives of the research project: (1) explain why, in Colombia there are very limited conditions for coordinating collective action, (2) what direct and indirect effects has the armed conflict and civil war had on the political (dis) order.

URL: http://econpapers.repec.org/paper/pramprapa/58515.htm

Revised by Stefano Tijerina

This paper was distributed by NEP-HIS on 2014-11-17. In it Fernando Estrada argues that a historically weak state, the prolonged civil war, political corruption, institutional failure, the lack of political accountability, a culture of dishonesty, and the numerous armed conflicts currently succumbing Colombia have led to citizen’s loss of credibility on its institutions, thus today’s “political (dis) order.” He uses the case of Colombia to test the falsifiability of the theory on political order developed by Douglass North, William Summerhill, and Barry R. Weingast in Order, Disorder, and Economic Change, concluding that there is an urgent need for political and institutional structural change, accountability, and an effective and firm implementation of the rule of law, in order to achieve the political and economic stability necessary for the effective implementation of a market economy. If these positive initiatives are achieved, says Estrada, then it will be possible for Colombians to construct a long-term political order that will “foment credible commitments” between citizens and their political institutions.

Throughout the paper Estrada focuses on current issues that illustrate why Colombia is suffering from a systemic political (dis) order. Through the use of commentaries from Colombian public and academic figures, he points out that private-public relations within the market system have failed due to political corruption and institutional failure, and that there is an urgent need for social, political, and institutional reform that sets the course for what North, Summerhill, and Weingast refer to as consensus based political order that provides the necessary conditions for the advancement of a market economy.

Fernando Estrada

Fernando Estrada

Implicitly, Estrada reveals that the theory of political order withstood the falsifiability test since his conclusions on citizenship rights, the absence of economic, political and judicial guarantees, the predominance of political corruption and dishonesty, and the lack of “productive and entrepreneurial” incentives, have resulted in a complete loss of credibility on the political system. Colombia, according to the theory on political order, is not democratic or able to effectively function within a market economy, it is a country with an “authoritarian” political order where “political officials cannot sustain a set of universal rights, and instead abuse the rights of a major portion, if not all of the citizenry.”

Estrada however does not question the reasons why the nation’s economic, social, and political development has followed the “authoritarian” path for the construction of political order. His disregard for historical evidence impedes him from better understanding and explaining the realities of the development of Colombia’s political order. An analysis on Path Dependency would have allowed Estrada to center on the historic constrains imposed on the definition of citizenship, why economic, political and judicial status quo has prevailed over time, why political corruption and dishonesty has been perpetuated over time, and why economic and political regional elites have opposed the expansion of the market economy. The historical analysis would have provided a local explanation to a local reality and would have allowed Estrada to move away from the generalizations of imported models and theories that only partially explain the outer layers of the nation’s realities.

Douglass North

Douglass North

A historical analysis would have provided clarity that seems to be missing in Estrada’s argument. This would have provided empirical evidence that showed that Colombian citizens distrust their institutions because they were never part of the process of creating them in the first place. It was the case of democracy, policy, and the majority of the key institutions that have shaped the national distributive, financial, and security policies, including the Departamento Nacional de Planeación (DNP), Banco de la República, and the Departamento Administrativo de Seguridad (now known as Agencia Nacional de Inteligencia Colombiana – ANIC); all the result of foreign mandates to fit the needs of both domestic “power individuals” and the international system.

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

It is important to look at theoretical models but it is more important to contextualize the theory and situate it within its local reality. There is a need to develop local theoretical models and explanations based on a self-evaluation of the nation’s particular historical trajectory and experiences. The solution lies in analyzing the uniqueness of Colombia’s institutional and programmatic development and the historical implementation of the idiosyncratic definition of democracy and capitalism.

Political (dis) order has been one of the pillars of nation building since independence. It has been the political and economic elite’s way of securing their own personal sources of livelihood, and it has been the formula used by foreign capitalist interests to secure resources and influence in Colombia. Their preservation over the control of the political order has relied on the state, its institutions, and policies that throughout the twentieth century achieved a high level of sophistication and arte now capable of disenfranchising sectors of society and limiting the rights of citizenship and personal security vis-à-vis one of the most progressive and pluralist constitutions in the international system.

Contrary to North, Summerhill, and Weingast fundamental requirements for the creation of political order within a market economy, Colombia’s historical trajectory shows that political order may also be achieved by constricting and limiting citizen’s access to institutions that guarantee their personal security, economic security, and that of their families, yet capable of guaranteeing institutional security to local elites and foreign interests. For example the land use policies of the 1920s that guaranteed access of the Colombian subsoil to Tropical Oil or the current mining policies and the supportive institutions and programs that provide access to foreign transnational corporations while at the same time limiting the rights of local artisan miners; past and present realities that allow the effective operation of the market system while at the same time limiting the actions of citizens within the political order.

Colombia’s founding fathers, the leaders that carried the nation into modernity, and those of the present time have never had as their central objective the construction of an open society or political order based on consensus. Citizen’s credibility on the political system and its institutions never impeded economic and political elites from insisting on the implementation of their own and unique political order, even after the emergence of guerrilla movements in the 1950s, the escalating pressure of labor unions throughout the Cold War, the indigenous movements, the emergence of narcotics trafficking as a parallel economy, the emergence of highly sophisticated criminal organizations, and the current array of armed conflicts that are asphyxiating Colombia’s society. Surprisingly, what seems to have mounted pressure on Colombia’s elites to consider moving toward a political order based on consensus has been the international system and their demand for a change in the political order that will allow Colombia to effectively integrate itself into the market system.

Foreign investors, transnational corporations, global resource extraction companies, and the powers of the global market system require new nurturing grounds for the expansion of capitalism, narrowing in on nations such as Colombia. It is these forces that are pushing for changes in the structural nature of the nation’s political order. Aware or unaware, Estrada advocates for changes that could transform Colombia’s political and institutional system into North, Summerhill, and Weingast’s consensual based political order.

Following a neoliberal line of thought, Estrada concludes that Colombia needs to move toward the consensus model in order to effectively navigate the international system and fully immerse in the complexities of a market economy, and that it must bring to an end the civil war and the numerous other armed conflicts that impede the nation from moving forward. What is ultimately recommended is that Colombia finds its own unique ways of establishing and securing political order, even it if means constructing a reality that projects institutional and programmatic order, and that generates civil credibility under a system that favors the interests of the international system.

The problem of constructing realities that project institutional and programmatic order.

The problem of constructing realities that project institutional and programmatic order.

Estrada uses the falsifiability test on North, Summerhill, and Weingast’s theory on political order to justify the promotion of neoliberal institutional change in Colombia. He suggests changes that apply to the particular idiosyncrasies of Colombia, including greater accountability, eliminating clientelism from political relations, the establishment of a system that fosters political and economic competition, consensus among elite groups, society’s unquestionable trust on the consensus based political order, a decreasing role of the state in economic and social matters, cultural change toward a model of meritocracy and self-discipline, and judicial, programmatic, and institutional adjustments aimed at improving investor’s confidence. These changes however do not guarantee the “creation of credible commitments” that, according to North, Summerhill, and Weingast, are necessary for the transition from an authoritarian political order to a consensus based political order.

The theorists suggest that in order to achieve this transition, citizens’ own belief systems must “translate into the institutions that shape performance.” Legitimacy and credibility may only be achieved if constructed by the majority; in other words, if Colombian’s collectively decide to move forward with a market economy. However this is impossible to achieve under current distributive realities. Politicians, representatives, and the bureaucracy must “honor” the rights and norms that regulate the consensus based political order, leading to the “self-enforcement” of the model. This, in the Colombian context, is impossible based on current realities and it would require a revision of the status quo, something that has historically lead to armed conflict. According to the theory, credibility on political and economic policies and institutions may only be achieved if the system guarantees citizens the rights and freedoms to prosper economically; security of income and investment become the crucial drivers of national economic growth. This again would require political and economic elites to accept a change in the status quo as well as the international system’s acceptance of a non-commodity supply role for Colombia, changes that seem utopic at this time.

The implementation of consensus based political order in Colombia seems unrealistic today. The foreign model does not fit with the nation’s current reality. Estrada’s approach forces us to question how effective is the implementation of foreign models and theories to explain local phenomena, knowing well that theorists like North are developing ideas and solution to complex problems that depart from their own cultural and social biases? Why rely on foreign solutions and explanations to resolve and transform local realities when it is clear that they are not a perfect fit? As in the case of Colombian political institutions, the dependency on foreign models at the end result in a frustrating experience of “putting round pegs in square holes.” The falsifiability test fails when one does not compare apples with apples; when one tries to force external realities into local contexts. The consensus-based model of political order fits well with the realities of the United States but not in Colombia. This is a country in the early stages of nation building, in the one hand closing the long chapter of a civil war while on the other juggling the complex realities of the market system.

The problems of importing foreign models to solve local problems of economic development.

The impact of importing foreign models to solve local economic development problems.

Further Readings

North, Douglass C.; William Summerhill, and Barry R. Weingast. (2000) ‘Order, Disorder, and Economic Change: Latin America Versus North America’. In Bruce Bueno de Mesquita and Hilton L. Root (eds) Governing for Prosperity. New Haven: Yale University Press, pp. 17-59.

North, Douglass C.; John Joseph Wallis, and Barry R. Weingast. (2012) Violence and Social Order: A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press.

Page, Scott E. (2006) ‘Path Dependence’ Quarterly Journal of Political Science, 1: 87-115.