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Economic growth throughout Import-substitution and neoliberal strategy up to 2019

In this post, I will present the economic growth from 1951 to 2019 of selected economies of South America, East Asia, Australia, and New Zealand. Mexico will be included given its importance as a Latin American economy.

I will differentiate two periods, one ranges between 1951 and 1979, and the other ranges between 1980 and 2019.

Remember that before 1980 the prevailing paradigm was the import substitution, and from that date onwards, a set of pro-market reforms took place worldwide to encourage trade and privatizations of public assets (Megginson & Netter, 2000). All these reforms are included in what is known as neoliberalism (Harvey, 2005). That is why I will call the interval 1951-1979 import substitution period, and the interval 1980-2019 neoliberal period.

I will consider the following three variables; on one hand, the growth rates of employment, and productivity. On the other hand, the growth rate of GDP. Take into account that the latter equals the employment growth rate plus the growth rate of labor productivity (GDP/worker).

 

Neoliberalism in the selected economies

The neoliberal reforms varied in time and intensity among countries. By and large, in South America neoliberal policies were widely carried out since the military cope in Chile in 1973, however, in some countries, such as Colombia, neoliberalism appears after 1980 with some withdrawal of the State from the economy, and got traction from 1990 through an opening-up policy known as “apertura económica”.

In Australia, from 1983, governments of the left and of the right implemented neoliberal reforms (The Economist, 2011).

But in China, the market reforms took place at the end of 1978 and were not carried out traditionally, given that after the reforms the State still plays an active role in the economy, as it is explained in the post The Chinese model and the manufacturing of its development. A noteworthy distinguishable feature lies in the successful use China made of neoliberal policies around the world, drawing upon the external sector (Harvey, 2005). 

In short, the mix of neoliberal policies varies from country to country and came about on different dates. However, we may consider that from 1980 it was in the government agendas of the selected countries and was being implemented onwards. Therefore, the split of time analyzed into two periods, 1951-1979 and 1980-2019, is justified to analyze the performance of GDP during import substitution and neoliberal periods.

 

General traits after the neoliberal takeover

In accord with the data disposable in the Penn World Table (Feenstra, Inklaar, and Timmer, 2015), before the implementation of neoliberal policies, the economies delivered higher growth rates on average.

Between 1951 and 1979, the East Asian countries grew over 8%, except for China, and on the other hand, many Latin American countries grew over 4%. However, after neoliberalism, the economies slowed down, the East Asian countries could not grow over 8% and significantly fewer Latin American countries could grow over 4%.

By and large, labor productivity also dropped. To illustrate the decline, during the import substitution period, while Brazil was the Latin American country with the highest productivity growth with 3.9%, in the neoliberal period, Argentina held the highest productivity growth of all South America with 3.7% and some South American economies delivered productivity growth close and below zero.

Another remarkable feature is that in the time of import substitution, on average, the labor engagement grew faster than during the neoliberal period.

To sum up, throughout the import substitution period, the economies used to grow relatively faster along with faster productivity growth and engagement of workers. In other words, investments boosted employment and productivity growth, thus, the countries underwent a rapid economic expansion.

Tables 1. Average Growth rates (1951-1979)

Own calculations. Table realized with data from Feenstra, Inklaar, and Timmer (2015)

Tables 2. Average Growth rates (1980-2019)

Own calculations. Table realized with data from Feenstra, Inklaar, and Timmer (2015)

 

Some countries performed better than others

The East Asian countries have expanded at a pace of over 6%, they have been rapid-growth economies in the course of the time analyzed, with the exception of Japan which skyrocketed on average only in the import substitution period (8.2%), and China that boosted its economy in the neoliberal period (6.5%). 

After the liberal reforms, these Asian countries slow down, although they continue to be rapid-growth economies compared to the rest, based on productivity instead of labor engagement. That is to say, it was an intensive economic growth because employment growth rates were positive, but did not increase as fast as productivity.

On the contrary, in the import substitution period, on average, only Mexico and Brazil expanded their economies by over 6%, followed by Ecuador with 5.9% among the South American countries. Most of these economies delivered an economic growth of over 4% and their productivity used to grow faster than the growth of employment.

A big change came about in the neoliberal period. Mexico and Brazil slowed dramatically their pace and were the most affected. No South American country grew over 6% on average. For most of them, the employment growth rate fell, but productivity growth fell deeper, therefore, the economy expanded based on employment instead of productivity.

Table 3. Gains in neoliberalism in comparison with Import-substitution strategy

Own calculations. Table realized with data from Feenstra, Inklaar, and Timmer (2015)

China was the main winner of the opening-up policy. Its economy took advantage of trade and expanded faster along with increasing productivity. Argentina and Bolivia also improved their economic and productivity growth rates in the neoliberal period; these two economies traditionally increased their pace with labor productivity growing faster than the growth of labor engagement.

In respect to Australia and New Zealand, while the former reduced its average economic growth, employment and productivity, the latter delivered a little improvement in economic growth and productivity. Australia grew based on employment in both periods.

A caveat should be made on the  Venezuelan and Bolivian cases. In these countries, what we have called the neoliberal period covers the time of the Bolivarian Revolution in Venezuela and the time when Evo Morales ruled the Bolivian government. Both periods were characterized by a nationalistic agenda carried out against neoliberal recipes. 

In some countries such as Argentina and Ecuador, in the neoliberal period, the government has been alternated between leftist and rightist, keeping back neoliberal measures in certain moments.

The above justify why it is not proper to point out neoliberalism as a cause of each downturn in the economic performance of each country. What we have here is a global trend in a neoliberal global context and each case should be studied particularly.

 

References

Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), «The Next Generation of the Penn World Table» American Economic Review, 105(10), 3150-3182

Harvey, David. (2005). A Brief History of Neoliberalism. Oxford University Press. P.247

The Economist. The Next Golden State. A 16-page special report on Australia. May 28th, 2011.

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The Chinese model and the manufacturing of its development

Ilustración realizada por el autor del artículo

Note: As the author of this article I am indebted to Reilly Zandes for assistance in English writing.

China has become an enigmatic economy. Its impressive economic growth sustained over time has summed to a huge size and has driven the country toward its transformation into a powerhouse economic pole that competes with the rest of the industrialized nations.

Although it is true that China has relied on low wages, as has been the case of all countries that have sought capital accumulation, its economic model has more than proven to be a success: its accelerated growth rates have been recorded along with substantial technological change. All of these changes have made possible a strong poverty reduction (Lin, Fang y Li, 1998) with real growth rates of wages, something that was stated by Marx (1865) when he recognized that capital accumulation brings about the strengthening of workers’ bargaining power over their wages, although such a favorable position does not last forever.

In the Little Red Book, Mao Tse Tung (1966) acknowledged that saving is a key element for output expansion. Today there is little doubt that savings and the extraordinarily high investment rates have allowed the fast economic growth of China (Knight & Ding, 2009). The allocation of resources to the expansion of the productive capacity is a common element of any economy that accelerates.  However, many international experiences have shown that for such an expansive dynamic of investment and long-term economic growth to take place, it is necessary for capital accumulation in the manufacturing industrial sector to rise the technological ladder (Chang, 2003; Chang, 2007; Chang, 2010), as is the case of East Asian countries, including China (Lin & Chang, 2009).

 

The mixed Chinese model

China took advantage of the following two elements. On one hand, it tapped into the market advantages of producing goods with exchange value (price and profits), where there is competency between private companies and also, individual enrichment. On the other hand, it stepped up on planning and State-owned enterprises (SOE) production, where the State monopolizes the production of goods with use-value to cater to the needs of the population without individual enrichment. In this sense, China has used both hands, as it was stated by John Ross (click here); the visible hand of the State and the invisible hand of the market.

China learned from socialist camp mistakes and set market reforms before the Soviets, and in the midst of their popularity joined by socialism, it permitted hold of political stability and national independence under the Communist Party’s rule (ibid).

It seems like the Chinese model is the logical development of the guidelines once made by Mao Tse Tung, who in his criticism of Stalin, (click here)  pointed out that in socialism, private ownership is to be maintained despite economic planning. In that way, as long as the capital goods are under the command of the bureaucracy, the consumer goods should be under the market logic.  The Communist Party of China took control of the main industries, and delegated the remaining industries to the capitalists, who seek the profits ruled by the law of value, having acknowledged the difficulties of planning these industries by virtue of the size of what is planned. The bureaucracy can define the use-value of the heavy industry and infrastructure, but it is unable to plan the huge amount of consumer goods, given the fact that it is not possible to define their use value (click here to see the article of Saikat Bhattacharyya about the topic).

Besides, in Mao’s view, such a commodity production in a socialist context is a commodity production that serves the socialist project. So what the Chinese have done, is to use the production of commodities, while maintaining the planning of the economy and key production of goods by the State; as it was stated by Mao (2004) nine years after the revolution in 1949:

The law of value does not have a regulative function. Planning and politics-in-command play that role… In our society the law of value has no regulative function, that is, has no determinative function. Planning determines production, e.g., for hogs or steel we do not use the law of value; we rely on planning. P.9

So, the market reforms of 1978, which allowed foreign direct investment to enter China, would be the continuation of a guideline already plotted, but this time based on the foreign production of commodities through international trade.

The market reforms, despite being in a country controlled by the Communist party spelled good business for foreign capitalists, who saw China as a big market of producers and consumers to profit from. Thus, the Chinese took advantage of the foreign direct investment, conditioning it for multinationals to transfer knowledge and technology with the purpose of learning and updating the economy.

The capital accumulation and the productive capacity are guided by production criteria driven by profitability, instead of by allocation decreed from above without economic criteria by the political bureau.  Data provided by Knight & Ding (2009) shows evidence that the investment, measured as a share of the GDP, between 1995 and 2005 was made mainly by the enterprises (around 29%), followed by the households (by 5%), and the government (which rose from 2.8% to 4.1% throughout the time).  From another perspective, if the investment is broken down by sector, the enterprises account for three-fourths of the total invested. Moreover, the private companies between 1994 and 2003 did not get to share in the State budget, while the state-owned enterprises and the collective owned enterprises were funded by 11% and 5% by the State respectively.

Lin (1998, 2004) argues that the Chinese strategy lies in the exploitation of the comparative advantages identified by the market and supported by the State. Labor-intensive industries were built given the large disposal of relatively cheap labor that allowed China to compete in the international markets and get a surplus to invest. Years later, along with the capital accumulation, China has become competitive in capital-intensive industries with much more technological sophistication.

 

Manufacturing as leverage for development

China belongs to the historical pattern of countries that industrialize thanks to State intervention (Chang, 2003, 2007). From a theoretical perspective, it can be argued that the State can play the role of the coordinator of industrial activities and channel the economy towards an industrialization equilibrium, with high productivity, with increasing returns to scale (Murphy, Shleifer, Vishny, 1989).

China has delivered a high level of industrialization, measured by 32% of the added value of manufacturing as a share in the GDP between 2004 and 2011 (click here to see data). Although it is true that manufacturing progressively loses share in total production, it still remains above the figures in Japan, Singapore, Switzerland, and, Germany; four of the most industrialized economies worldwide.

At least until the end of the ‘90s, China prioritized its production targets and employment levels over the profitability objectives, keeping its State-owned enterprises and holding its soft-budgets constraints policy to sustain the high levels of investment. After that, the reforms in the public sector came in the form of privatizations as a way to increase profitability (Knight and Ding, 2009). Nevertheless, China never abandoned its industrial policy, as it has been stated in 2018 by the White House Office of Trade and Manufacturing Policy of the United States, when it cataloged such a state intervention as a threat that distorts international prices.

In sum, the Chinese strategy consists of keeping the investment and output backed by the State, allowing the learning-by-doing process of workers through the accumulation of production in the manufacturing sector, which is characterized by its high productivity rates, and delivering its products through the external market, (Knight y Ding, 2009) while keeping the profitability and creating surpluses by way of the private sector (Lin Y Chang, 2009). It is in this way that China would have achieved the structural change that is reflected in its technological upgrade, making economic but no political concessions, as was once done by the Bolsheviks (Bukharin, 1921); restoring capitalism. The Communist Party of China holds the central ruling of the economy instead of a bunch of magnates ( click and click to read about the wealthy people in China and Jack Ma).

 

 

References

 

Bukharin, Nikolai. The new policies of soviet Russia, Chicago: C.H. Kerr & Co., 1921, pp. 43-64.

Chang, Ha-Joon (2003). Kicking Away the Ladder: The “Real” History of Free Trade

Chang, Ha-Joon (2007). Bad Samaritans: the myth of free trade and the secret history of capitalism. Bloomsbury Press.

Chang, Ha-Joon (2010). 23 things they don’t tell you about capitalism. ALLEN LANE an imprint of PENGUIN BOOKS

Knight, John. y Ding, Sai (2009). Why does China invest so much? University of Oxford.

Lin, Justin (2004). Lessons of China’s Transition from a Planned Economy to a Market Economy. Peking University and Hong Kong University of Science and Technology

Lin, Justin. Fang, Cai. y Li, Zhou (1998). The China miracle: development strategy and economic reform.

Lin, Justin. y Chang,  Ha-Joon. Should Industrial Policy in Developing Countries Conform to Comparative Advantage or Defy it ? A Debate Between Justin Lin and Ha-Joon Chang. Development Policy Review, 2009, 27 (5): 483-502

Mao Tse Tung (1966). Quotations from Chairman Mao Tse Tung. The little red book. Foreign Language Press: Pekin.

Mao Tse Tung (2004). Critique of Stalin’s Economic Problems of Socialism in USSR.

Marx (1865). Salario, precio y ganancia. Editorial Progreso Moscú.

White House Office of Trade and Manufacturing Policy. (2018). How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World. Recuperado de https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf

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