Strategies Influencing Economic Development

 

The twenty first century has been a good one for the general economic development of the world. Africa has, with the greatest consistency since records began, achieved good overall levels of growth. The People’s Republic of China has lifted hundreds of millions of people from absolute poverty and greatly increased incomes. The overall effects of the PRC’s growth on other markets in Eurasia, Africa, and South America, have been profound. Sub-Saharan countries in particular have also benefited from the development of regional trade associations, such as the East African Community, the African Union, the South African Development Community, and the Economic Community of West African States.  This development has contrasted with slow or punctuated growth in the former ‘first-world’ and a largely internalised growth model in many countries of the former Soviet Union, which have been placed in many cases under sanctions, the restriction of trade or finance, or self-imposed protectionist policies.

Such developments allow the economist to consider the effectiveness of broad strategies of development, and to contrast them. There are, broadly, four leading sets of development.

The first, based on the ideas of the Harrod-Domar model, is associated with the creation of a stable and insured financial system capable of encouraging investment and planning with stable interest rates and small business growth. This has had a notable impact in the Kenyan deployment of the MPSESA microfinance system, and in the monetary coordination and control of the countries in the African Financial Community (CFA) through their common currencies and central banks. 

These schemes have also run alongside the existence of floating currencies or adjustable pegs which encourage productivity gains and low costs, the removal of government subsidies, and the encouragement of foreign direct investment. They have also gone alongside drives for membership of the World Trade Organisation. The fact that development has taken place despite Western slowdown suggests that an independent process of growth and rebalancing after centuries of imperialism is at hand, but could also reflect the way in which China and India have moved surplus dollars into the purchase of raw materials and low wage agricultural products rather than back into American markets.

The growth of more stable low-inflation markets has been made possible in many cases by the emergence of customs unions and free trade areas, such as in the East African Community, which have powered growth and autonomy. These areas had largely or progressively dealt with problems of land reform, either compensating larger owners for the break-up of older patterns of concentrated land ownership, or benefitting from previous nationalist confiscations of land. The redistribution of land led in many cases to the ability of citizens to borrow and invest.

A second set of development policies can be grouped under the heading of the Lewis model. This model assumes the development of an initially agricultural society in which people live at near-subsistence levels into one in which large parts of the economy become industrial. The movement of people from the rural to the industrial areas is assumed to lead to higher productivity, and also to rising incomes in the industrial areas, but to the concentration of land in fewer hands in agricultural areas. Cities become dependent on export-led income, and on the production of the agricultural areas, and inflation becomes a problem along with economic inequality. Eventually, an inflexion point is reached in which economies have to turn away from international markets (partly because they lose competitive advantage as wages rise) to develop internal service industries and to bridge gaps between rich and poor areas with infrastructure growth.

This ‘Lewis model’ of development essentially describes what has been happening to the PRC since c.2007-8. It has run alongside the unprecedented growth of US debt, which previously would have flooded the world with inflationary dollars. In the early twenty first century, however, these dollars have funded the US deficit with China, and the US international debt, and have been recycled into the Belt and Road initiative, global food and petrodollar markets, and the ultimate development of Africa and South America. These have not become economies dependent on China per se; they were economies kickstarted by Chinese re-spending of US dollars held in the Chinese trade surplus.

Global population growth has slowed as societies have become richer, and a demographic ‘greying’ has set in. The status of women, and the economic capacity of women to participate in markets and to earn has grown globally. These developments have had the effect of increasing the incomes of commodity-rich and agriculturally endowed countries. The Prebisch-Singer hypothesis, that industrial societies would always be richer and more productive than agricultural and extractive ones, has been delayed if not disproved, meaning that the terms of trade of formerly much poorer countries have increased.

Both the Harrod-Domar and the Lewis models have had a new lease of life in the twenty first century. This was in part because of the development of the Millennium Goals initiative by the UN and the Jubilee 2000 programme. The latter led to the cancellation or rescheduling of over $100 billion in debt owed by poorer countries at the start of the century, which was an immense boost. The terms on which the debt was cancelled, however—via trade deals, an expectation of monetary stability, and rescheduling to eliminate large interest owed to private banks—encouraged marketisation and stability. In tandem, gender empowerment, which is correlated to growth, sustainable environmental policies, microfinance, and deregulation were encouraged.

A third model of economic development, based around large-scale bilateral or multilateral government investment, has been discouraged in recent years. The Rostow model emerged during the Cold War and was predicated on lending to governments for infrastructure schemes such as dams or roads. Hydroelectric power, in the case, for instance, of the Nile Dam projects such as the Aswan dam, or the exports and trade facilitated by the road across the Congo, were expected to tip economies into an attitude of ‘take-off’ characterised by high growth, urbanisation, and temporary inflation, before a ‘cruising level’ of mature industrial development was achieved.

Instead, the Rostow model often resulted in high debt, environmental damage, the corruption of government parties and other actors, and domination by foreign multinationals. It is largely seen as discredited in general, though specific examples of success exist such as the Pergau Dam in Malaysia and the Three Gorges Dam in China (and the original Aswan dam, if not the multiple successors on the Nile, which have damaged agricultural production and encouraged silting and slower water flow.)

Government intervention in markets as a development strategy has not been generally discredited. In fact, joint ventures with multinational and foreign companies, buffer stock schemes to ensure food security, and seed capital for investment are now normal even, or perhaps especially, in nominally Communist countries. This has led to a fourth set of strategies, which could be categorised under a ‘globalisation’ or ‘glocalisation’ rubric. In globalisation, governments aim to attract foreign direct investment (FDI) on the capital account of the balance of payments as well as creating the conditions for export-led growth on the current account. The influx of money has a tendency to raise living standards, so long as it is reinvested and not diverted into the overpurchase of imported consumer goods. Financial confidence is achieved by fiscal and monetary stability, cross party agreement on development, and the passage of the approximately 1200 laws and regulations regarding copyright, metrics, and standards required for WTO membership. ‘Glocalising’ which has been characterised from a western perspective as a kind of de-global uncoupling of local markets from global ones, is in fact a kind of regional globalisation, in which comparative advantage is worked out and developed amongst stable local partners. This is most evident in the Association of South East Asian Nations, the various versions of the trans-pacific partnership, and the East African Community in which Burundi, Uganda, Tanzania, South Sudan, Kenya and Rwanda have achieved strong and mutually supportive growth.

Overall, though the twenty-first century so far has seen a ‘rebalancing’ away from the gross inequality of the past three hundred years cause by imperialism, the effect has been seen as one of turmoil, wage and purchasing power pressure, and economic difficulty in the West. For most of the countries outside of the former first world (with some exceptions in South America, parts of the middle east and North Africa, and parts of Eurasia) it has been a time of growth and interdependent improvement, even in the face of the 2008 financial crisis, Covid-19, and global food and energy pressures. This has been enhanced, as with the mpesa system or modern Egyptian urbanisation, by the tendency of countries which were underdeveloped to be able to invest in technology and infrastructure in advance of older and more expensive societies.