Economic Development and Global Crisis

The Latin American Economy in Historical Perspective

José Luís Cardoso, Maria Cristina Marcuzzo, María Eugenia Romero Sotelo, José Luís Cardoso, Maria Cristina Marcuzzo, María Eugenia Romero Sotelo

• Publisher: Taylor & Francis
• Year: 2014
• Print ISBN: 9780415820820
• eBook ISBN: 9781136735677
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This edited collection uses a history of economic thought perspective to explore the evolving role of Latin America within the context of globalization. In particular, it examines the region's resilience in the face of the global financial crisis.

Economic Development and Global Crisis explains that Latin America is a region with distinct characteristics and peculiarities which have been shaped from the colonial era up to the present day. The contributions suggest that several features which were perceived as economic backwardness have turned out to be advantageous, and this may explain why Latin America is withstanding the crisis much better than Europe, Japan and the USA.

This book will be of interest to scholars working in the areas of economic development, economic history, the history of economic thought and Latin American studies.

Part I

Insights from the history of economic thought

1	Economic development
	Past and present
	Cosimo Perrotta^1

The very origin of the present crisis

The present economic crisis is new in nature, and seems to be much more complex that the previous ones. We should first single out the ultimate causes of it. In the current comments three causes are indicated or implied: debts of the states, globalization of trade, financial speculation.² Certainly, these are all powerful factors that reinforce the present crisis, but they hardly can be considered as the basic causes of it.

In the capitalist economy, crisis means lack of growth. As soon as investments stop growing, unemployment goes up and incomes go down. Public debt, globalization and financial parasitism are rather the consequences of this standstill, not the causes. Public debts tend to grow because stagnation diminishes the public revenues. Capital increases financial speculation (and the arrogance of their representatives) because investments in production don’t provide sufficient profits any more. This in turn is due to the fact that markets are saturated. For the same reason, globalization, as the export of plant and capital in search of low wages, has drastically accelerated.

In the last period of general development (about 1950–1980), productivity grew so high and so fast that it led to the saturation of the markets of traditional products in the richer countries. Besides innovations in the last decades have introduced technologies that destroy more jobs than are newly created. Then, the very causes of the present crisis seem to be the increase in productivity and its effects: market saturation and highly labour-saving technologies.

In order to understand how these causes work, let us consider the previous phases of development. The most important factor of development is technical progress, which increases productivity. Technical progress produces two different effects. On the one hand it reduces jobs, because it consists in replacing labour with mechanical movements. On the other, because of the increase in productivity, it needs a demand expansion that can absorb the increase of products.

In turn, the increase in demand can derive from two sources. One is external. For example, selling abroad; or increasing the consumption of unproductive classes. The other source is the increase in consumption by the producers themselves. This latter consumption raises further productivity, by improving the producers’ standard of life (today this is called investment in human capital). In the past, some development processes relied more on external demand, others on investments in human capital.

In the Middle Ages and in the first phase of mercantilism, development was export driven (as it is in many emerging countries today) and wages were kept down. But at the end of the seventeenth century, the international market (which then was based mainly on luxuries) was saturated. Then accumulation, due to a structural change in north-western Europe, undertook to expand demand via an increase in wages and in the consumption of the middle classes. This changed the nature of growth. The latter now relied more on investments in human capital; that is, on skilled labour. A similar turn was implemented in the twentieth century by the New Deal and by the Keynesian and welfare policies.

Towards the end of the eighteenth century, the first industrial revolution again changed the whole picture. The increase in productivity relied again on technical progress and on saving labour. Factories were born, where mechanization made labour more and more unskilled. Wages dropped and working conditions worsened dramatically. Factories destroyed a great deal of artisan jobs and created unemployment. The similarities with today’s emerging economies are striking. But also in developed economies some workers now suffer very similar conditions (see below).

At the beginning of the nineteenth century the Luddites tried to stop the introduction of new machines, in order to defend employment. But Ricardo maintained that technical progress was in the workers’ interest. According to him, technical progress increases surplus and profits. This allows to extend investments, then to increase employment. However, Ricardo later admitted that the increase in employment happened in the long run: then, redundant workers could not benefit by the future expansion (Ricardo 1821: ch. 31).

On Ricardo’s analysis Marx built up his theory of the industrial reserve army: the unemployed are used to keep wages at the subsistence level (Marx 1867: ch. 23, sect. 3). This process too is present today, both in the emerging and in the developed economies.

At the beginning of the nineteenth century, demand scarcity produced periodical gluts in the market. Malthus (1836: book ii, ch. 1, sects. 3 and 9) saw in this a sign that capitalist accumulation was unsustainable, unless a part of wealth is regularly devoted to unproductive consumption. Marx (1885: ch. 21) rejected this view: according to him, the surplus produced by accumulation was absorbed by the investments in means of production (not by the increase in wages).³

However, Marx saw in this fact a fatal ‘contradiction’. The composition of new investments was increasingly unbalanced: material capital was growing more and more, while labour and wages relatively diminished. The unequal distribution of incomes would increase progressively, which would lead to a general crisis. On this point Marx was a good prophet. We can say that the crisis of the 1930s was the consequence of such growing disequilibrium in investments between fixed capital and labour. Contrary to his purpose, Keynes implicitly confirmed Marx’s forecast: the crisis derived from too few and too low wages; that is from lack of final demand. Note that it is mainly the growth in the uneven distribution of incomes that determines the lack of demand.

Development in the twentieth century

The Keynesian-welfare development

Although Marx had grasped the main tendency of nineteenth-century development, he strongly undervalued the importance of technical and intellectual labour, especially in successive development. In fact there was an important growth of skilled labour; which gradually changed both the composition of investments and the type of the new technologies.

In the twentieth century the tendency described by Marx (that of the falling rate of profit) slowed down. Technical progress began to raise productivity, not by increasing fixed capital, rather by saving it. Labour became more important.

The new tendency was not in time to avoid the crisis of the 1930s, but certainly it was a powerful means to overcome it. After the Second World War, development relied on the increase in final demand, stimulated by the great US plans for aid to the other nations, and then by the welfare policies.⁴ This produced a boom of productive consumption in the period of the welfare state. Investments in skilled labour became strategic for further accumulation; as in the eighteenth century. All this boiled down to a strong reduction of income inequalities.

The welfare state put into practice Keynes’s policy, and went far beyond it. Not only did it increase demand, but it also increased investments in human capital, directed to the lowest classes. Development was driven by education, research, culture, health care, social security, support of the weak categories, housing, heating, household appliances, private and public transports, information, paid holidays, etc. Economic growth continued together with civilization and mass welfare. After ten centuries of development, in Western countries also the lowest classes radically changed their way of life. Economy tended to full employment and, at the same time, productivity grew enormously.

This allowed Keynesian development to last much longer than the short term that Keynes himself had forecast. But at the middle of the 1970s the first flaws appeared in this model and gradually developed. The traditional market became saturated. The deficit spending policy became less and less sustainable.

The welfare crisis in the 1970s: market saturation

The tendency to the saturation of demand has appeared many times in the history of development. At the end of the seventeenth century, it was overcome by shifting production from luxuries to wage-goods and comforts. At the beginning of the nineteenth century, the gluts in the market were compensated by the increase in the demand for means of production. In the 1930s, the solution was found in the increase in wages.

But the glut of the 1970s derived from the fact that it was difficult to increase demand further, because the needs of the lowest classes were relatively fulfilled. Thus we should stress that the scarcity of demand was only formally similar to that of the Keynesian analysis. In the 1930s demand was scarce because low classes had too low a consumption; in the 1970s, it was relatively scarce because the consumption of these classes was no longer able to absorb the growing supply. The latter was increasing too fast, due to the strong increase in productivity.⁵

On the other hand, the impetuous development caused not only a tendency to saturation, but also a tendency to full employment (which was the explicit aim of Keynes’s followers). This last tendency was reducing the gap between incomes in an alarming way for the rich. Both tendencies ended by slowing down productive investments.⁶

Of course in the 1970s and after, there were other needs to fulfil. But, in spite of the increase in public services, the market was (and is) mainly organized for the selling of private goods for profit. Today people cannot express an effective demand for many of the new needs: for instance a non-polluted environment, greener, family services, efficient public transports, better education, protection of common goods, hydro-geological reorganization, etc.

Certainly many consumers would have preferred to pay for some of these products rather than to buy repetitive goods. They simply could not express their own preferences on the market, in spite of Pareto’s illusion about consumer’s sovereignty.

After the 1970s: neo-liberal hegemony

It must be stressed that the crisis of the 1970s was never overcome. The standstill lasted so long that in the end it degenerated. The welfare policies, besides greatly improving living standards and civilization, had also produced or retained many unjust privileges and distortions to the benefit of large minorities. Besides the state did not check welfare spending sufficiently, nor did it cut public waste. These negative features, not corrected in time, created a perverse tendency.

Neo-liberals argued that the state’s involvement in economy is negative as such.⁷ But in the past phases of strong development, the state has nearly always been paving the way for private investments. Sixteenth-century England won the competition with Spain because the Tudors organized the workhouses, to assist the poor and put them to work; and obliged landlords, instead of exporting raw wool, to sell it to the domestic workhouses. It was a very successful policy of import substitution that secured England her take-off.⁸ In nineteenth-century Germany, the state implemented decisive policies for development, including Bismarck’s ‘welfare policies’. In the twentieth century the American New Deal and the Keynesian policy in Europe avoided the breakdown of the world economy and launched a new phase of strong development.

However, in the 1980s, developed countries did not look for new fields of investments; so they went into a deadlock. Neo-liberal policies had three objectives: cutting welfare expenditures to diminish the debt; dismantling the system of workers’ protection, and of market regulation, in order to restore free competition; lowering taxes on higher incomes and on financial activities, as an incentive for investments.

None of these targets was reached. Public debt went on growing, because expenses for protected categories were not touched. Deregulation and attacks to unions produced a wild market, in which the less scrupulous – not the more productive – prevailed. Illegality became usual; professional ethics weakened. As a result, the difficulties for free competition increased.

Finally, the cuts of taxes on higher incomes and on financial gains encouraged parasitic rents, tax evasion and financially unproductive speculation. They also increased the tax burden on the middle and lower classes, hindering their saving. Both facts made investments more difficult.

All these policies worsened the conditions of the middle and lower classes, and weakened demand. Since th...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Notes on contributors
• Introduction
• PART I Insights from the history of economic thought
• PART II Latin American development theory and experience revisited
• Index