The agreement recently negotiated between the Government of Ethiopia and the International Monetary Fund (IMF) not only imposes austerity on the government, but also risks destroying the country鈥檚 model of economic development.

Ethiopia, Africa鈥檚 second-most populous country, has featured tremendous progress in its economic development in the past twenty years. A developmental state driving public investment while imposing tight regulations on the financial sector, a managed exchange rate, and capital controls, achieved a significant decline in hunger and malnutrition, and improvements in literacy and other relevant human development indicators.

Nonetheless, Ethiopia is facing serious macroeconomic challenges including high inflation of close to 30 percent, a current account deficit, foreign exchange shortage, and slowing growth, jointly with domestic conflicts and climate change impacts. This situation has forced the country into negotiations with creditors on its external debt, even though Ethiopia鈥檚 external debt stock compared to GDP is less compared to other low-income countries. International financial institutions see government budget deficits as the main culprit in causing inflation and an overvalued real exchange rate that causes trade deficits and balance-of-payments problems while crowding out private investment in the country. End of July 2024, the Government of Ethiopia and the International Monetary Fund (IMF) concluded an agreement on policy action to be taken for a stepwise release of a loan of USD 3.4 billion from the IMF, starting with the immediate release of USD 1 billion, as well as additional grants and loans from the World bank. The agreement is built on the following : 1) floating the exchange rate; 2) modernizing the monetary policy framework going from reserve targeting to interest rate targeting; 3) ending monetary financing of the government budget via the National Bank of Ethiopia (NBE) and exiting financial repression; 4) improving mobilization of domestic government revenues; 5) debt restructuring with external creditors; 6) strengthening the financial position of state-owned enterprises.

What is wrong with the analysis?

This analysis of Ethiopia鈥檚 situation is misguided. Starting with inflation, at the Ethiopia鈥檚 government budget shows that over the past years, there have only been deficits if capital expenditures and current expenditures are considered jointly. Yet, keeping capital expenditures separately (it is appropriate to finance new investment with new loans to match additional output with additional money) reveals that current expenditures are more than covered by revenues meaning that the current budget is not even facing a deficit. Rather than by the narrow monetarist focus on government budgets, inflation can be better explained by past currency devaluations as well as various supply-side bottlenecks. For instance, multiple domestic conflicts in Ethiopia have impaired agricultural output, which, all along with population growth and urbanization, led to increasing food prices.

To be clear, there are problems arising from Ethiopia鈥檚 current economic framework in a situation of foreign exchange shortage: for example, instead of investing export revenues in production capacity, exporters often decided to use the part of foreign currency, which they were not obliged to surrender to the NBE, to exchange it at a favorable rate in the illegal parallel market or to illegally import consumer goods, which are sold at high prices domestically due to import restrictions. As another example, coffee farmers are forced to export coffee via marketing facilitators to earn the country foreign exchange. Yet, farmers would prefer to sell it in the domestic market where they could realize higher prices and better cover ever-growing living costs.

Yet, such phenomena, including the large disparity between the official and the parallel market exchange rate, are symptoms rather than causes of the existing problems. The bottom line is that increasing incomes stemming from Ethiopia鈥檚 strong economic growth have given way to growing import demand, which has hit the country鈥檚 balance-of-payments constraint. It is import substitution (for instance domestic renewable energy for fossil fuel imports) and export promotion that must do the job to improve the current account, ease foreign exchange shortage. Moreover, the country needs domestic investment, particularly in agriculture, to bring down food prices and overall inflation. This would correct the current wrong systemic incentives and move economic activity away from the parallel foreign exchange market.

What is wrong with the agreement?

In the IMF鈥檚 ideal world, the policy action agreed on in the deal will solve the problem: a floating exchange rate means that there is no parallel market anymore; austerity will stabilize prices. Both actions combined will restore international competitiveness because the market exchange rate will be such that imports and exports balance. Private investment will not be crowded out anymore by the government鈥檚 borrowing. Instead, it will prosper both domestically and via foreign direct investment (FDI), thus earning the country鈥檚 foreign exchange in the future and bringing it on a lasting growth path.

A lot is wrong with this optimistic projection. The most essential question is: how will the availability of foreign currency change as a result of the agreement鈥檚 implementation? The trade balance, on the one hand, may improve thanks to exchange rate depreciation but it is not clear how significant this effect is because exports (imports) are much more affected by changes in foreign (domestic) incomes than by changes in relative prices. Moreover, we are still to see how much relative prices even change once inflation goes up, thus undoing the nominal depreciation. On the other hand, the agreement has led to the , which is now increasing import demand. Income flows will lead to an additional loss of foreign exchange because foreign investors are now allowed to repatriate their profits more easily. It is doubtful that this can be counterbalanced by inflows from growing foreign investment itself. Other flows such as remittances and official development assistance, beyond international financial institutions鈥� bailout, will supposedly not change significantly. 鈥淪trengthening the financial position of state-owned enterprises鈥� essentially comes to privatization such as it has been announced for , meaning that the government is planning to sell out precious and strategic assets. This will yield short-term returns, including conditional finance from the World Bank, but a continued drain of foreign exchange from profit repatriation.

At the time of writing this text, the exchange rate has depreciated by about 100 percent. The NBE facilitates the floating regime by holding foreign exchange auctions with commercial banks to determine the rate. For the time being, this is quite a restricted foreign exchange market with the NBE as the key regulator by deciding on foreign exchange supply. Moreover, the current regulations still include some foreign exchange retention requirements and relatively tight capital account restrictions. Exchange rate floating thus only takes place within restrictions, which is why the parallel market is expected to stay in place since on the capital account side of the balance of payments, money is still trying to leave the country.

Taking stock of the economy鈥檚 expected structural change, it seems like in the short term there are additional foreign exchange losses whereas the additional inflows may or may not take place in the middle to long term. Immediate crisis is avoided by injections of foreign exchange from international financial institutions and, maybe, privatization returns. Overall, a larger share of foreign exchange trading may go through official channels than via the parallel market as compared to the previous situation, but a loss of foreign exchange is still a loss. It remains to be seen how far the Government of Ethiopia is willing to satisfy the IMF鈥檚 expectations once inflation has started increasing and foreign exchange shortage intensifies again once the additional liquidity that followed the IMF agreement is used up. That would be the opposite of the expected outcome.

If, in such a situation, the journey continues towards more liberalization to give the country more of the same medicine, the next step would be the removal of capital controls. Money currently being restricted from leaving the country could turn into a surge of capital flight, putting further pressure on the exchange rate and becoming self-enforcing. The NBE would have to use foreign exchange reserves to entertain capital flight. Inflation would shoot up from an already very high rate. In the worst case, balanced trade is not achieved via depreciation directly but indirectly due to collapsing import demand caused by a deep economic crisis. As the that the NBE 鈥渕ay have to take further policy action by raising interest rates to ensure inflation quickly returns to a downward path鈥�. To be less diplomatic, the NBE would have to increase its policy rate by an enormous amount in its fight against currency depreciation because the alternative policy instruments such as capital controls would have been removed. Given such a scenario, it is hard to imagine how private investment shall come in and bring the economy on a sustainable growth pattern, let alone the investment in key sectors to ensure food security, external balance, and internal structural change. There is still a window of opportunity for the Government of Ethiopia not to pursue this path to its end but to embrace more effective reforms.

The reforms needed

This critical view shall not deny that there is need for reform. The new that the NBE announced while the negotiations were still going on is a step in the right direction. So far, the monetary policy has been conducted in a rather monetarist way by targeting reserve growth, which constrained lending to productive and green investment. In contrast to the IMF鈥檚 misguided approach to monetary theory, this framework will and finance public investment to co-exist with private investment without any crowding-out. Public investment must play a key role to achieve the joint goals of domestic growth, price stability, poverty reduction, and a stable balance of payments. Austerity, high interest rates, and selling out public assets are the opposite of what is needed. Instead, regulation of the external account is necessary to maintain the Government鈥檚 policy space.

Moreover, while the real exchange rate may not be the most critical variable defining trade performance, it is clear that a fixed rate has led to real overvaluation after years of high inflation. Yet, this does not require a floating rate and the removal of capital controls. A (stepwise) devaluation can achieve the same goal. Likewise, increasing mobilization of government revenues is a welcome move if it takes poor households鈥� financial constraints into account. But again, this is a domestic issue that does not need financial liberalization.

It also must be admitted that Ethiopia needs FDI to facilitate technology transfer and increase the economy鈥檚 productivity. But this should not come with treating all capital flows the same way, irrespective of whether they contribute to long-term growth or are merely looking for short-term profits.

The coming months, and possibly years, including the continued debt restructuring negotiations with creditors, will show if the Government of Ethiopia is willing to maintain and improve the key parts of its successful development model. The alternative will be most likely be capital flight, austerity, and a tight constraint on long-term development.

Basil Oberholzer is Senior Associate Research Scientist at the Centre for Development and Environment, University of Bern, Switzerland. You can reach him at: basil.oberholzer@faculty.unibe.ch.

Photo: Addis Ababa. Rights reserved to DevEcon and the author

by C.R.Yadu and Sahil Mehra

A major theme that dominates the literature on development economics is the narrative of 鈥楽tructural Transformation鈥�, which, based on the experience of developed economies, envisages a gradual 鈥榤odernisation鈥� of the economy. This process is expected to unfold in a similar way across the economies of global South, where the importance of non-agriculture/high-productivity/capitalist sectors in terms of both contribution to national income and labour employment would increase and that of agriculture/low-productivity/pre-capitalist sectors would fall, ultimately leading to dissolution of this dualist structure of the economy (Lewis, 1954; Kaldor, 1967; Kuznets, 1968). This transformation is expected to bring productivity gains across all sectors, reduce poverty, and lead to high levels of economic prosperity. According to Monga and Yifu Lin (2019), structural transformation is 鈥渁rguably the single most significant concept and social goal in the global quest for prosperity and world peace.鈥�

However, many of the economies of the global South have not been able to undergo this expected path of structural transformation. For example, in 2019, for sub-Saharan Africa, the average contribution of agriculture to GDP has been around 14% while the proportion of population employed in agriculture is 53%. The GDP contribution and employment figures range from 8% and 27% for East Asian and Pacific economies to 17% and 42% for South Asia respectively (World Development Indicators, 2021).

The dominant narrative, largely propagated by international agencies like the World Bank, still advocates the validity of the process of structural transformation, continues to use this framework to understand the labour and employment transition in the global South, and advocates policies to achieve the same. In contrast, within various critical strands of literature, there is an increasing realization that the nature and pattern of structural transformation that unfolded in the global North might not be replicable in the global South (Dorin, 2017; Scherrer, 2018; Breman, 2019). Building on some of these criticisms, we argue that the possibilities of attainment of a North-style structural transformation remains bleak in the contemporary global South. This is majorly because the socio-economic and political context which facilitated the process of structural transformation of the economies in the global North is no longer available to the global South. The process in the North was, to a large extent, fostered by colonialism which allowed these economies to undertake expropriation and extraction of resources, without much concern for ecological limits, as well as to transfer a proportion of their population to the newly found lands in the temperate regions. Given the significant changes in the structure of capitalism now as compared to the earlier phase, it is worthwhile to investigate the possibilities of the global South experiencing the envisaged path of structural transformation.

In the following sections, we elaborate on why the received wisdom in development economics no longer provides an adequate framework to understand capitalist development in the global South.

Colonial legacy and imperialism

The narrative of structural transformation often does not take into account the historicity of structural conditions, particularly the role of colonialism in the development of capitalism in these countries. The majority of the countries in the global North were able to successfully undertake capital accumulation and subsequent industrialisation because they could establish political control over many of the tropical and subtropical countries (Bagchi, 1972, 1976; Patnaik & Patnaik, 2016). The resource plunder and exploitation of these economies fuelled metropolitan capital accumulation in the colonial centres, while producing immiserisation and de-industrialisation in the colonised territories (Naoroji, 1901 [1876]; Bagchi, 1976; Sen, 1982; Patnaik, 1991). Thus, colonial rule had deeply shaped the structural conditions of the economies of the global South that had a long-lasting impact on them even after their independence (Mitra, 2005 [1977]; Patnaik, 1972).

Though the days of overt colonialism are over, the economies of the global South remain subsumed within the larger power structure of global capitalism under new and different forms of imperialism which continues to facilitate the transfer of surplus to North (Harvey, 2005; Patnaik and Patnaik, 2016; Kvangraven, 2023). The subordinate position of the economies of the global South is reinforced by the processes of financialization and globalization which increased their dependence on the financial institutions of the global North. This puts the economies in the South in a disadvantageous position by exposing their domestic economies to the vagaries of global capitalism (Alami, et al., 2022).

The contemporary phase of industrialisation

The early phase of capitalist development and industrialisation as experienced by economies of the global North was characterized by advancement in technology that assimilated labour, outmigration of population (discussed below), and struggle for democratic political rights, which, on one hand, led to reallocation of labour to more productive sectors, and on the other hand, allowed for the benefits of productivity increase to be accrued to both capital and labour (though not in equal proportions). However, in the current phase, more so during the neoliberal era, there has been a shift in the nature and direction of industrial development, largely characterized by a capital-intensive manufacturing process. This, to a large extent, has contributed to 鈥榡obless growth鈥� in the economies of the global South (Storm, 2015; Hanson and Leautier, 2013).[1] Further, as a result, the increase in productivity benefits capital in a much greater proportion as compared to labour, as can be ascertained from the increasing gap between real wages and growth of labour productivity (OECD, 2018; Jain; 2019).

In addition, the economies of the global South have been undergoing 鈥榩re-mature de-industrialisation鈥� (Rodrik, 2016), which is a process of de-industrialisation in countries where income levels are still low (Scherrer, 2018). Now, instead of the manufacturing sector, the accumulation process in the economies of the global South is largely driven by growth in the services sector, where the employment generation and absorption capacity is typically more biased towards skilled labour (Ramaswamy and Agrawal, 2012; Nayyar et al., 2021). In addition, advancements in artificial intelligence are changing the way production and distribution is structured, thereby adding another dimension to the non-linear possibilities of future development. The proliferation of the gig economy, and growing informalisation and precarity of the work is symptomatic of a particular kind of structural change that underlies the current process of development.

Structural and demographic features

The contemporary nature of capitalism and industrialisation also needs to be seen in the context of various domestic structural and demographic challenges that confront the economies of the global South. The population growth rates confronting the developing nations today both in Asia and Sub-Saharan Africa are much higher than what were experienced by economies like Europe and Japan at the time of their industrialisation, who, thus, 鈥榟ad proportionately fewer people to absorb鈥� to the non-farm sector (Kitching, 2001, p. 150-151). While the early industrializers were able to manage the absorption of their labour into modern industry partly due to emigration of a significant proportion of their population, such options of emigration are not that readily available to the global South (Patnaik, 1995; Scherrer, 2018).[2]

The issues of high population growth and low labour absorption capacity of the formal manufacturing sector in the global South has meant that labour moving out of agriculture is able to find employment only in low-productivity and low-value generating informal manufacturing and services sectors, like petty production and trading.^[3] In much of the literature, domestic structural features and conditions perpetuating the continued persistence of informal economy is largely seen as a symptom of a 鈥榮tunted鈥� process of structural transformation, where the assumption is that it will wither away with economic growth (Ranis and Stewart, 1999; Bardhan, 2009). However, some recent strands of literature have argued that, rather, the continued existence of 鈥榯raditional鈥� agriculture and non-agricultural informal segments might be a consequence of a particular kind and nature of capitalist transformation these countries are undergoing (Sanyal, 2007; Bhattachrya, 2017; Bhaduri, 2017; Bhattacharya and Kesar, 2018). The larger structural dynamics underlying the process of development in these economies raises questions on the unraveling of the process of structural transformation along the expected lines.

Changing role of the State

The dominant narrative of structural transformation often evades the role played by the State in affecting the direction and quality of structural transformation in an economy (Chang, 1994; Lin, 2014; Storm, 2015; Djurfeldt, 2018). In fact, this has been observed not only in the case of most of the successful economies (Yifu Lin and Monga, 2010), but also in the case of various late industrializers like East Asian 鈥榤iracle鈥� economies, especially South Korea and Taiwan. Though in dominant discourse, the success of the miracle economies is largely attributed to rapid adoption of technologies, investment in rural infrastructure, limited taxation, and well-functioning markets (World Bank, 1993), it has been argued that without the directional thrust and vision provided by the State policies and planning conducive to industrialisation, private sector entrepreneurship may not have proceeded smoothly (Stiglitz, 1996; Kay, 2009; Storm, 2015; Djurfeldt, 2018).

However, areas of State intervention which fostered capitalist development in the North have become conspicuously absent with the rise of neoliberalism. The economies in the global South have to strictly adhere to constraints imposed by international institutions in terms of fiscal consolidation, which strongly limits its ability to intervene in the market. Moreover, the idea of development planning and State activism has increasingly been categorized as an impedance to the process of successful reallocation of labour to the productive sectors. At the same time, there has been continuous assaults on labour rights and pressure on the governments to push for labour flexibilization. According to Breman et. al. (2019), the thoroughly informalized workforce in much of the global South are no longer embedded within the rights of citizenship and seem to have wasted their value as a commodity.

The ecological limits

A major issue that largely remains disregarded is the limitations imposed by ecology on capitalist expansion. The rise in production and productivity comes by exploiting nature and its resources which are finite. Historically, the process of industrialisation in the global North expanded through various resource control regimes without much concern for ecological damage, or putting the burden of such unbridled exploitation on future. Moore (2015) argues that whenever capitalism went into a crisis of expansion, it saved itself by finding 鈥榮patial fixes鈥�. Even currently, North continues its unfettered exploitation of resources across the globe and mass consumption of goods and energy resources without any cognizance of ecological limits.

Ecological degradation and the looming threat of climate change pose a new set of challenges to various production activities, particularly in agriculture, which, in turn, limits the ability of economies in the South to expand production and productivity. Dorin (2017) projects that even in 2050, the farm labour productivity of Asia would be 245 times lesser than that of North America. It is argued that global capitalism as an ecological regime 鈥榟as reached, or will soon reach its limits鈥�, and the chances of saving it by finding spatial fixes are no longer available (Moore, 2015). The possibility of the global South 鈥榗onverging鈥� with the North in terms of capitalist expansion is 鈥榓 systematic impossibility and an ecological dead end鈥� (Moyo et al, 2012).

Towards a new paradigm

In this short essay, we argue that there is a need to re-examine the narrative of structural transformation as a universal phenomenon which is expected to unfold in a linear way across time and space. The received wisdom in development economics largely neglects the political and historical roots of capitalist development, and remains rather incomprehensive in its understanding of the contemporary nature of transformation taking place in the South due its fixation of gaze from a North-centric lens. Analyzing the particular nature of the processes of development specific to the South brings its own set of challenges that need to be understood in their own subjective context. The way forward is to break away from the North-centric notions of progress and change, and reverse the gaze, to formulate a framework that reflects on the structural conditions and the realities of the global South from their vantage point.

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Footnotes

[1] For example, in India, while the overall employment elasticity was around 0.792 between 1977-78 and 1982-83, it was only 0.009 between 2004-05 and 2011-12 (Basu and Das, 2016), in spite of the Indian economy experiencing peak rates of growth during the latter period.

[2] For example, after 1815, around 70 million Europeans had migrated to new found temperate lands (Stalker, 1994, p. 16). Between 1844 and 1858, annual emigration from the UK was around 1.1 percent of the population, and during the peak period of migration, annual migration from the country was around 1.8 percent of the population (Patnaik, 1995).

[3] In India, the informal sector, which employs more than 80% of the total working population and produces 60% of the national income (Kannan & Papola, 2007; CSE, 2018).

C.R.Yadu is Assistant Professor, School of Economics at RV University, Bengaluru, India.

Sahil Mehra is Assistant Professor, School of Economics at RV University, Bengaluru, India

The COVID-19 pandemic has swept across the global economy, causing havoc and leaving many economies teetering on the brink of economic and social collapse. Moreover, the arrival of a second and now third wave of infections and a further mutation of the virus is driving the economy further into peril and uncertainty. The announcement by Cyril Ramaphosa, back in March 2019, that two of South Africa’s wealthiest families and the pinnacle of big business, the Rupert and Oppenheimer families, would be donating R1 billion each was met with admiration from all corners of the country. These commitments have since been matched by the Motsepe group of companies and Naspers, donating R1.5 billion. To date, the fund has amassed over from a wide array of private, public, and political donors.

Responses of this type are understandable when combining the already bleak outlook for the South African economy with a significant and potentially catastrophic supply shock. However, a question that may be playing on many South Africans minds is: why, given the fact that South Africa’s economy has long struggled with growth and several structural issues, is this response from big business only coming now in the face of a global pandemic? An easy answer may be that there has not yet been an event of this magnitude for big business to respond. However, a counter to this argument is that businesses should continuously be re-investing their profits regardless of the economy’s health.

South Africa has a long history of the inefficient use of profits, which favours hording cash and conducting unproductive investments such as mergers and acquisitions. These uses of profits are a direct result of the skewed incentives facing the agents of many large companies. For instance, many CEOs are incentivised through sizeable bonus packages to maximise the shareholders’ value rather than focusing on the long-term health and sustainability of the business. This short-term view causes CEOs to opt to retain earnings rather than embark on risky research, development, and innovation endeavours that often fail but may result in enormous payoffs if they succeed economically and socially. Short-termism is a result of a corruption of the idea of value creation where price is associated too closely with true value, nuturing an entrenched system of extraction that contributrs to worsening economic and social conditions. This is something the professor in the Economics of Innovation and Public Value at University College London, and director of the Institute for Innovation and Public Value, Mariana Mazzucato laments in her book .

Economic incentives should be designed better through appropriate nudges and a better understanding of the behaviours of firms during normal economic conditions and during times of economic downturns and panics. Moreover, incentives should be combined with the correct framing of problems and potential solutions that arise through collaborations between the public and private sectors.

In this post, I use Mazucatto鈥檚 idea of value in arguing that South Africa currently possesses weak incentives that makes value extraction more attractive to big business than value creation. Weak incentives are created by the State, thus far, fostering an economic order that prides itself in winning at all costs over progress within society. In the words of, Susan Strange and others, including Mazzucato, is a looming spectre that will continue to haunt South Africa unless incentives can be better designed and managed to popularise an altruistic business environment that puts people before profits.

How economic incentives are crucial in driving investment

Policymakers use incentives to encourage private sector firms to create jobs, invest in communities, and strengthen local industries. Incentives aim to harness an individual’s self-interest in the service of the . Nevertheless, the idea of self-interest and individual well-being maximisation is a driving force behind many capitalist economies today and gained prominence in Adam Smith’s 1776 book The Wealth of Nations. In the , Smith suggested that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. However, the butcher and baker pursue their self-interest, led by what Smith termed the invisible hand. This invisible hand is meant, as Smith writes in chapter I of his Theory of Moral Sentiments, to lead the individual “to promote an end which was no part of his intention.” This is often the role attributed to the state in debates regarding its involvement in the development of the economy. Many believe the state has a much more significant role in facilitating and directing economically and socially optimal outcomes. 

This more prominent role for the state highlights the importance of incentives and their ability to direct economic production and resources held in private hands towards ends that will benefit the public good rather than enriching a few and further exacerbating the economic and social inequalities that continue to plague our developmental prospects. can also be offered either as direct incentives, indirect incentives and non-fiscal incentives to address market failures. They can also justify government intervention to correct externalities and information asymmetries and assist infant industries. The most common form of incentives includes taxes, rebates, subsidies and other financial incentives. In addition, however, incentives can extend to disincentives that come in the form of punishment as a way to encourage a particular action. This is the typical carrot and stick analogy.  

Given the immense barriers to entry (BTE) that characterises much of the South African economy, the most recent incentive of government is the Black Industrialists Strategy (BIS) programme that focuses on structurally transforming South Africa’s industrial base through various financial incentives to introduce more small, micro, and medium-sized enterprises (SMMEs). It also aims to among previously disadvantaged people and communities. The BIS programme is primarily funded through state departments such as the dtic and other government entities with a mandate of economic development like the IDC and Public Investment Corporation (PIC).

As history has shown, however, that programmes such as BBBEE have registered very little success. Instead, they have tended to reinforce the prevailing economic structure. Similarly, the BBBEE-linked Enterprise Development Programme tried to funnel private sector investment into fledgling black-owned businesses with several incentives. However, this programme again struggled to achieve its targets as many companies approached it more as a compliance exercise to access the incentives. The failings of these programs have left many black-owned companies without the necessary funds to grow their businesses and have given rise to corruption on several levels.

Rethinking and redesigning incentives for inclusive development

There could be many reasons why incentives fail to achieve their mandates and targets. One of these could be a disconnect between the government’s current list of development targets and their accompanying incentives and the private sector’s own goals and targets. A rethink of these incentives is necessary to identify where existing incentives fall short of sparking positive and productive investments by big business in South Africa. The economic crisis that is looming over the South African economy can be widespread if not addressed correctly.

In the past few years, companies listed on the Johannesburg Stock Exchange (JSE) have been hit hard by a on the back of negative sentiment surrounding emerging market economies. As a result, revenues and profit levels have also seen in the last couple of years. These declines have also come with a decrease in the number of listings, particularly firms with small and medium market caps, has meant that the money available for expansionary capital expenditure has decreased in response. The decrease in available funds means that big business in South Africa might increasingly tighten their pockets and possibly consolidate their respective markets in response.

In response to this, the government needs to think of new ways to incentivise big businesses to utilise their profits productively by investing in productive and expansionary assets rather than allowing them to engage in investments that will ultimately lead to greater degrees of market power and increased concentration. Research, development, and continuous investment into developing new markets and products is the cornerstone of a dynamic economy. In the words of Mariana Mazzucato, these types of investments are rather than the value extracting investments that we have continually witnessed in multiple industries and sectors in South Africa.

Using this framework, the government can shape market outcomes rather than purely taking a reactionary stance focused on market fixing. Given the dire situation that the South African economy finds itself in and given the limited effectiveness of policy incentive programmes such as Broad-Based Black Economic Empowerment and the Black Industrialists Scheme, the attention of government should shift from one of reaction to one more focused around shaping the future outcomes of the economy. A potential economic and social crisis such as the one South Africa currently is in means it is the right time to examine and correct existing economic incentives to channel investment to realise socially and economically beneficial outcomes. A careful reexamination of incentives is crucial because when push comes to shove if the economy crashes 鈥� everybody loses.

Unfortunately, however, the economic track record of South Africa shows that the public and private sectors have often failed to find common ground when it comes to designing the right economic incentives that result in productive investments to develop new products, industries and markets. The problem, it seems, is designing the incentives to attract and reward productive investments by big business while at the same time addressing some longstanding structural inefficiencies that have continually hindered economic progress.

Furthermore, this rethinking extends to the respective roles of the public and private sectors in enhancing growth prospects to be more inclusive to a more significant portion of society. Economic theory suggests contradicting roles for the state and its involvement in the economy beyond what classical economics terms its essential duties. These include defending the country from attack, administering justice, educating its population, and, as Adam Smith noted, “erecting and maintaining certain public works and certain public institutions”, which are not deemed profitable for any individual or business to undertake. Nevertheless, private businesses and firms have an integral role and the capacity to enhance inclusive growth prospects because of their ability to . These benefits can further spill over into other industries and firms, creating a virtuous cycle of investments that redefines the relationship between big business, society, and value.

Jason F. Bell is a Researcher at the Centre for Competition, Regulation and Economic Development at the College of Business and Economics, University of Johannesburg. He tweets at .

Photo: President Cyril Ramaphosa addressing the South Africa Investment Reception on the margins of the World Economic Forum (WEF) taking place in Davos-Klosters, in Switzerland. By .

In a co-authored with L谩szl贸 Bruszt and published in a of Review of International Political Economy, we identify a developmental state in the least likely  of times 鈥� the period of hegemonic neoliberalism in the 1990s and early 2000s 鈥�  and the least likely of places, namely the post-socialist Central Eastern European (CEE) economies conventionally described as FDI-dependent (DMEs). 

We were dissatisfied with the single-minded focus of the developmental literature on high-tech 鈥�lead sectors鈥�, which are often , capital-intensive sectors controlled by a handful of MNCs. In open emerging economies, these sectors often stopped pulling the rest of a national economy through inter-sectoral linkages as theorized by and now . By shifting our focus to low- and medium-tech sectors, we uncovered a sectoral developmental state in a time and region usually considered a cradle of neoliberal shock therapy, while a comparative framework allowed us to consider how different actor coalitions and institutional trajectories pulled similar post-Socialist countries towards statist or neoliberal developmental projects after 1989.

Using a most-similar case research design, we compare the Polish and Hungarian strategies for restructuring their dairy industries after 1989. While both cases started from comparable positions, economic outcomes (operationalized as the value-added and export revenues of the sector) and social outcomes (the proportion of small farmers pushed out of the market) proved substantially better in Poland than in Hungary by 2010. Whereas Poland grew into one of the largest dairy exporters in the EU, Hungary鈥檚 dairy industry downgraded its portfolio to the lower value-added products and was on the verge of collapse by the 2010s. A crisis in the coordination of the supply chain, split between MNC dairy processors and supermarkets on the one hand, and atomized producers on the other contributed to the popularity of economic nationalist solutions promoted by the Fidesz government, which promised a radical break with neoliberal developmentalism in 2010. 

These outcomes reflected radically different institutional and political trajectories: In anti-Communist and starkly neoliberal Poland, a paradoxical developmental coalition emerged between farmers and politicians to save Socialist dairy cooperatives promised for privatization. Not only did the state actively resist pressures from the IMF and the EU to modernize its agro-food sectors by selling dairy processing plants to Western MNCs and open up its food retail sector to FDI, but the state utilized funds from the World Bank and the EU to upgrade its own administrative capacities in charge of managing, monitoring and financing agricultural development projects. Maintaining domestic dairy cooperatives which integrated thousands of smallholders and processing plants, allowed to maintain trust and vertical coordination in the supply chain. In Hungary by contrast, the production, processing and retail segments of the supply chain were fractured after 1989 as the Ministry of Finance sold processing plants to foreign MNCs in a bid to service foreign debt inherited from the Socialist period, while the Ministry of Agriculture oversaw the production (farming/husbandry) segment. This administrative separation immediately destroyed vertical coordination and obviated the mobilizational capacities of farmers severed from the ownership of the means of production (dairy processing plants).

Our study highlights the complex synergies of public-private developmental alliances and paradoxical recombinant institutional trajectories of state socialism and post-socialism: In Poland, the mobilizational capacities of dairy farmers were key to winning political support from a diversity of political actors at a time when the World Bank, the IMF and the EU actively promoted a neoliberal developmental agenda. The Polish sectoral developmental state emerged as an answer to these private demands, which found political support in both Left and Right-wing parties. In Hungary by contrast, the mobilizational capacities of farmers were obviated by the post-Socialist state when processing plants were sold to MNCs, which used their crushing market power to build demand for their products and kill local competition in a scorched earth strategy: once this was achieved, many shifted production abroad and left the Hungarian market, leaving behind a supply chain on the verge of collapse. 

A further twist is that in Poland, it was the failure of sovietization in the 1950s, which later empowered dairy farmers to save 鈥淪ocialist鈥� cooperatives after 1989. In Hungary by contrast, successful sovietization in the 1950s left state managers unaccountable in devising strategies to reform the dairy sector under both state socialism and after 1989. In Poland, the nationalization of independent farmer cooperatives was reversed in 1957 following a decade of social resistance to Soviet-style Socialism. In Hungary, the nationalization of agricultural land and processing units was complete by the 1960s. The consequence was that in 1989, the Polish state was forced to negotiate its modernization agenda with farmers who enjoyed control over their means of production, whereas in Hungary state managers were left largely unaccountable. 

We also paid attention to the complex role of EU integration in the two cases: the EU provided financial resources to candidate countries but also used dairy food safety standards as a non-tariff barrier to trade, protecting Western European member states from Central European dairy exports. This represented a tremendous challenge of regulatory compliance for Poland and Hungary during the EU accession process. Hungary鈥檚 solution was to outsource regulatory compliance to dairy MNCs, whose superior access to technology and finance quickly made dairy products compliant with EU standards but actively downgraded the entire sector鈥檚 overall competitiveness and social inclusiveness. Poland chose the harder route of directly financing the sector鈥檚 regulatory compliance utilizing every resource available (national funds, EU pre-accession funds and World Bank loans). Poland鈥檚 public-private developmental alliance could have devolved into pure rent-seeking: inadvertently, the EU鈥檚 stark food safety standards provided an objective sanction mechanism, which allowed the emerging alliance to use financial resources effectively to co-produce verifiable improvement in the sector鈥檚 export competitiveness. In Hungary, a nationalist alliance between the state and domestic capitalists emerged after EU accession and the GFC by 2010: short of an external sanctioning mechanism however, state interventions only served to redistribute market shares from MNCs to politically loyal entrepreneurs without an actual developmental roadmap to improve the sector鈥檚 overall competitiveness and even less concern for keeping cash-poor farmers in the sector. 

Our study contributes to the renewed literatures on , and state capitalism, by showing that low- and medium-tech sectors are understudied sites of domestic developmental agency even in developing countries typically considered to be passive competition states reliant on foreign capital and technology. The shift from high- to low and medium tech sectors is sometimes sufficient to uncover developmental states hidden in plain sight. We show that the developmental effects of regional markets and regulatory integration projects such as the EU are always mediated by different interest coalitions of domestic and transnational actors at the national level, producing radically different developmental outcomes in comparable economies. Our paper illustrates the failures of neoliberal developmentalism as well as the continuous need for the state鈥檚 active role in providing administrative and financial support for industrial policy. On the other hand, we also depart from deterministic dependency theory, which reifies the notion of passive peripheral underdevelopment under neoliberal globalization. We show that a developmental state鈥檚 are not a pre-requisite to kickstart industrial policies: improving public administrative capacities to steer development . Finally, we don鈥檛 romanticize the capacity of domestic public-private coalitions and recognize the real danger of rent-seeking alliances: our study also shows that a disciplinary mechanism is necessary for incentivizing developmental coalitions to use financial and administrative capacities efficiently. 

David Karas is a political scientist based in Kyrgyzstan, teaching International Political Economy and International Relations in Central Asia at the OSCE Academy in Bishkek.

This post was originally published on . Photo by  on 

When looking at the way contemporary global value chains/global production networks (GVCs/GPNs) and the articulations of globalised capital have been studied, it is clearly visible that the hegemonic power of Multinational Corporations (MNCs) has monopolised the empirical and theoretical analysis. Indeed, their ability to maintain control over the technological, financial and commercial flows through private-led governance has impacted most of the industrial development and underdevelopment of the Global South. Such footloose private operations have often caused undesired consequences such as eroded environmental standards, low wages and scrapped social protection rights. Governments have joined in a race to the bottom on fiscal and labour deregulations in order to attract foreign direct investment in exchange for low and semi-skilled jobs, resulting in very low fiscal revenue, low productivity, balance of payment imbalances and poor social outcomes.听

The underpinning theory was that countries should follow their comparative advantages and let the market determine prices of labour (costs) and goods in order to be competitive in the world market and maximise returns. Yet, such losing game has been criticised since the start by who widely denounced how theories and policies of development forgot the role of the state in history and in the present. In other words, public institutions have always played a key role not only in the quantitative making of capitalist accumulation, but also in its qualitative distributional and developmental outcomes.听

Building upon the heritage of such scholarship, and in view of multiple and overwhelming 鈥榤arket failures鈥� in the global South and beyond, a new wave of Marxist-institutionalist inter-disciplinary literature spanning from Geography to International Economics and Finance has been trying to untangle the potential synergies between the public and the private domains by connecting the GVCs/GPNs and Developmental State approach.听

In this debate, it that the state should be seen as a facilitator (i.e. assisting firms in smoothing market transactions); a regulator (combined with distributor to mitigate inequality and negative market externalities); a buyer (i.e. public procurement); a producer (i.e. state-owned enterprises) and a financer as a result of state-capital reconfigurations through sovereign wealth funds and development banks. Therefore, such functions should be foregrounded in analyses of development, because they are key to understanding developmental sources and processes within GVCs.听

In my contribution to this debate, I have recently argued in a paper titled 鈥溾�� that the state can and should act as a coordinator of strategic developmental objectives beyond and across GVCs. I use the lens of upgrading 鈥� which is generally defined as a shift to higher productive value-added activities鈥�, as a result of improved access to, and use of, technology, knowledge and skills 鈥� to show how state functions can lead to organisational upgrading, namely a state-led coordination strategy able to link economic upgrading in GVCs with developmental objectives. Hence, economic upgrading, if effectively planned and coordinated, can lead to . To support this proposition, I underline three points: an epistemological, an ontological, and a methodological one.听

The first one is epistemological, and relates to the inter-scalar dimension of development: targeted macroeconomic policies on trade, macro-finance and innovation and industrial policies are instrumental in meso- and micro-upgrading processes and vice-versa. In other words, in order to understand the time- and space-specific dimensions of development processes, we need to adopt an epistemological approach which focusses on the dialectical relations between potential macroeconomic strategies and microeconomic operations.听

The second point is ontological and relates to the inter-sectoral possibilities of upgrading.听 The state, through coordinated policies, can create specific spill-overs across different sectors and industry, bridging the specificities and potential of agriculture, manufacturing and services. In the paper, for instance, I show that agricultural industries such as high-value crops are often neither understood within the more complex inter-sectoral labour relations that they can develop, nor for their contribution to potential value-addition and backward and forward linkages.听

Public governance can be an alternative to private buyer-led governance, which often disproportionately benefits lead firms, because it can help domestic agents and firms to capture value and power within the GVC/GPNs, as well as societal benefits in and outside the GVC/GPNs. The state can indeed shape the institutional context of GVC/GPNs through the establishment of (patient) financial and political partnerships with international actors to avoid predatory competition, it can coordinate inter-sectoral spillovers for short and long-term collective learning and capacity building and it can also create linkages which enable long-term developmental objectives. Such objectives cannot be pursued through private actors only. It is therefore necessary to underscore the of the state to spur such听organisational upgrading, namely a state-led coordination strategy able to link economic upgrading in GVCs while mediating inter-temporal economic and developmental objectives.听

The third and final point is methodological, and it relates to the quantifying tendencies of the discipline of economics, and how these have dominated the production of evidence and paradigmatic policy solutions. Far from being perfect, this performative approach has not only obscured the complex reality of social phenomena, both global and local. It has also too often been relying on poorly constructed secondary data, resulting in a priori biases in the analytical variables considered important to explain developmental processes. Race, class, power and gender relations have been simplified to adjust to deductive correlations, which has obscured the complex nuances of historical dynamics and structural barriers. By triangulating primary and secondary data and texts, and relying on inductive questions linked to theories, interdisciplinary research can investigate discrete but insightful patterns behind social phenomena, thus overcoming the dogma of 鈥榚xternal validity鈥�. 听

In conclusion, a new literature emerged that finally acknowledges and engages with the simple fact that coordinated state interventions are instrumental in ensuring the sustainability of the socio-economic transformations beyond and across GVCs. More and more researchers seem committed to develop a political economy of development scholarship able to explain how the real world actually works, and how it can be improved. We all should keep questioning the limitations of its modus operandi to adapt and cope with the unanswered multiple questions posed by the challenges of post-Covid economy, and hopefully, engage with the politics that can eventually lead to the much anticipated .听 In a nutshell, the state-market relationship can take many forms. While political movements strive for more progressive ones, both theories and policies should do their part too.听

Lorena Lombardozzi is a lecturer in Economics at The Open University in the UK. She tweets at . Photo by .

Brazil is in a crisis again. The COVID-19 pandemic has spread across the country and听听has led to a massive health crisis. Investment outflows have been听听and the Brazilian real has听 dramatically. The Brazilian economy is set to again after three years of weak positive growth.

Brazil鈥檚 development bank Banco Nacional de Desenvolvimento Econ么mico e Social (BNDES) has announced some听听to deal with the financial instability caused by the COVID-19 pandemic. However, these measures are being听听for being insufficient. Rather than being a temporary policy mistake that can be corrected easily, 叠狈顿贰厂鈥� passive response is linked to the bank鈥檚 structural retreat from the economy over the past five years.

During the 2000s, BNDES听was acclaimed as a catalyst of the country鈥檚 economic growth. Globally, developing countries such as saw the rise of BNDES as something favourable and sought to mobilise their own national development banks.

By acting as of major domestic companies, BNDES played a key role in Brazil鈥檚 state-activist growth model of which the observers have labelled 鈥�,鈥� 鈥�,鈥� or 鈥�.鈥� Furthermore, BNDES actively supported national champions鈥� strategy by financing export and investment activities. During and after the global financial crisis, 叠狈顿贰厂鈥� role extended and was used by the government to carry out .

A comparison of key financial indicators between BNDES and the World Bank illustrates the scale of 叠狈顿贰厂鈥� rise. 叠狈顿贰厂鈥� loan portfolio increased by over $200 billion during 2002鈥�2011 and it was comparable to the World Bank鈥檚 during the first half of the 2010s (Figure 1(Left)). 叠狈顿贰厂鈥� annual disbursement exceeded the World Bank鈥檚 from the mid-2000s and was over three times larger than the World Bank鈥檚 in 2013 (Figure 1(Right)). This rapid expansion was possible largely due to significant inflows of Treasury financing, whose share in BNDES’ total liabilities increased from 7% in 2007 to 58% in 2014.

Figure 1. Comparison of BNDES and World Bank (2002鈥�2019)

(L) Net loans outstanding / (R) Disbursements

(L) (i) BNDES and World Bank: As of and for the fiscal years ended June 30; (ii) End of the fiscal year exchange rates were used to convert the real into dollars.
(R) (i) BNDES: Calendar years, World Bank: As of and for the fiscal years ended June 30; (ii) Annual average exchange rates were used to convert the real into dollars; (iii) 2019 data for BNDES is annualised data using the data on 2019 1H.
Source: BNDES financial reports; World Bank Group financial reports

However, there was a critical juncture for BNDES when Brazil suffered a dual, economic and political, crisis during the mid-2010s.

A decline in commodity prices, a rapid withdrawal of foreign capital, and depressed investment sentiment caused the in the history of Brazil. There was also that involved the impeachment of President Rousseff and a revelation of complex corrupt networks composed of politicians and the country鈥檚 largest companies.

BNDES, a key financier of the Brazilian economy, was deeply involved in this turmoil. The development bank鈥檚 and came under scrutiny, and BNDES reform became a central component of the government鈥檚 economic liberalisation and fiscal consolidation. The pendulum began to swing to the other direction.

叠狈顿贰厂鈥� reversal of fortune was as dramatic as its rise. 叠狈顿贰厂鈥� loans outstanding, in dollars, has more than halved and its annual disbursement has shrunk by 84% since 2014, making both approximately a third of the World Bank鈥檚 in 2019 (Figure 1). If one holds the exchange rate constant to erase the effect of currency depreciation from around 2 real per dollar in 2014 to 4 real in 2019, the magnitude of changes is less dramatic, though similar trends are evident.

叠狈顿贰厂鈥� shrinking balance sheet was facilitated by the end of new subsidised funding inflows from the Treasury and 叠狈顿贰厂鈥� speedy debt payment to the government since 2015. As a result, the proportion of Treasury financing in BNDES’ total liabilities declined to 31% in 2019 3Q. In terms of assets, 叠狈顿贰厂鈥� loans with a subsidised interest rate () began to be with loans with a market-linked interest rate () based on the five-year real treasury rate and inflation rate in 2018. As the existing subsidised loan programme based on TJLP is phased out by 2023, 叠狈顿贰厂鈥� balance sheet reduction is expected to continue.

With the shrinking size, there has also been a multidimensional retreat of 叠狈顿贰厂鈥� operations.

Firstly, BNDES has lost its role as a credit-crunch fighter.

When the country鈥檚 credit growth rate began to decline with the effects of the global financial crisis in 2008, BNDES, alongside other public financial institutions, rapidly expanded lending until the early-2010s. As a result, public financial institutions鈥� proportion in Brazil鈥檚 total credit outstanding increased from a third in 2008 to half in 2013.

In contrast, Figure 2 shows that the growth rate of credit outstanding provided by BNDES, as well as public financial institutions in general, was below Brazil鈥檚 overall growth rate since 2016. Most notably, the growth rate of BNDES was approximately minus 10% for three consecutive years, indicating that BNDES contributed to, rather than countered, credit tightening.

Figure 2. Credit outstanding growth rate (2003鈥�2019)

Years ending in June. Source: Banco Central Do Brasil; BNDES financial reports.

Secondly, BNDES seems to be losing interest in stimulating industrialisation.

During the 2000s, one of the major concerns of the Brazilian government was the of the preceding decades. With the aim of reversing or slowing down this trend, BNDES actively provided loans to the industrial sector.

However, there are now signs of BNDES withdrawing its efforts to invigorate structural transformation in the form of sector-specific support. Instead, BNDES is increasingly focusing on ; concentrating on lending to the infrastructure sector and resulting in this sector鈥檚 share in the loan portfolio rising from 37% in 2013 to 53% in 2019. In comparison, modern productive sectors鈥� shares in loans outstanding have generally shrunk. The total amount of lending to the manufacturing sector nearly halved and its share declined from 26% to 16% (Figure 3).

Figure 3. 叠狈顿贰厂鈥� loans outstanding by economic sector (2013鈥�2019)

Years ending in June. Source: BNDES financial reports

Thirdly, BNDES is shrinking its role as a shareholder of national champions.

During its prime, BNDES became a key minority shareholder in some of the largest Brazilian companies in a swathe of sectors. The number of firms in BNDES鈥� equity portfolio increased from 130 in 2006 to 157 in 2012, with its average ownership increasing from 11% to 14%.

In contrast, BNDES is now participating in the Brazilian government鈥檚 . The number of companies in 叠狈顿贰厂鈥� equity portfolio declined from 155 in 2013 to 90 in 2019 3Q. In particular, 叠狈顿贰厂鈥� sales of shares in large firms, many of which were involved in recent corruption scandals, has gained traction over the past few years. BNDES completely moved away from Braskem, a subsidiary of conglomerate Odebrecht, in 2017. Ownership stakes in Petrobras and Vale have gradually been reduced (Figure 4).

Figure 4. 叠狈顿贰厂鈥� ownership share in major Brazilian companies (2006鈥�2019 3Q)

Source: BNDES financial reports

Though not reflected in the graph, BNDES all of its shares in Marfrig at the end of 2019. In February 2020, the development bank also a stake of 5.6% in Petrobras, which was 叠狈顿贰厂鈥� to date. The timing to sell shares of some other large firms such as JBS is also being . Prior to the recent financial turmoil caused by the COVID-19 pandemic, Privatization Secretary Salim Mattar听 that 鈥楤NDES could sell its entire portfolio.鈥櫶�

Lastly, the financial relationship between BNDES and the government is being disintegrated.

As well as ending subsidised funding inflows from the Treasury, another principal change in this regard is the dividend policy. Between 2002 and 2014, BNDES contributed to government revenues by paying 87% of adjusted net income as dividends on average. In contrast, the government has applied a much lower dividend ratio from the mid-2010s with the aim of strengthening 叠狈顿贰厂鈥� financial position (Figure 5).

Figure 5. Composition of BNDES’ adjusted net income (2002鈥�2018)

Source: BNDES financial reports

In 2017, a new dividend policy that sets the dividend pay-out ratio between 25% and 60% was institutionalised. This policy was dubbed the 鈥�鈥� in 15 years. Reformers that this policy would allow BNDES to accumulate retained earnings, strengthen capital structure, weaken dependence on state funding, and eventually curb government influence on 叠狈顿贰厂鈥� operations.

Through the multidimensional retreat of BNDES from the Brazilian economy, the reformers may now be seeing the anticipated results. The capital adequacy ratio has nearly doubled over the past three years, recording 36% in 2019 3Q. Return on asset and equity ratios have increased by around five-fold and three-fold, respectively. In the next few earnings announcements, we may even see 叠狈顿贰厂鈥� dividend payments temporarily increase despite low dividend ratio due to 叠狈顿贰厂鈥� recent sales of corporate shares.

Using these financial performances as evidence of success, the reformers will try to the market-oriented restructuring which has recently been due to the pandemic-induced economic instability. Despite these circumstances, BNDES is still surprisingly in its potential contribution to Brazil鈥檚 development. How the development projects in demand will be financed remains uncertain. Furthermore, the demand for the 鈥榬eturn鈥� of BNDES is increasing amid the COVID-19 pandemic.听 As a result, the on the desirable role of BNDES in the Brazilian economy will continue.

In sum, the trends since the mid-2010s suggest that we are seeing the beginning of a new chapter in 叠狈顿贰厂鈥� 68-year history. More broadly, the multidimensional retreat of 叠狈顿贰厂鈥� operations, as well as 叠狈顿贰厂鈥� to the COVID-19 pandemic, may be a signal of the beginning of the end of active state capitalism in Brazil. The retreat of BNDES may also be highlighting the fragility or weak of democratic state capitalism in the developing world. Developing countries which have been Brazil鈥檚 model of state capitalism should closely study the rise and fall of BNDES and refine their strategy.

Kyunghoon Kim听is a PhD student in the Department of International Development at King鈥檚 College, London.

Photo of BNDES by .

National development banks are in fashion and here to stay. A number of countries benefited from the global economic boom during the 2000s as exports and commodity revenues surged. These countries鈥� governments stored some of the current and fiscal account surpluses and used the capital to expand state financial institutions. Two prominent types of institutions have grown rapidly, namely (SWFs) and (NDBs), which often have financial return and development stimulation as their core mandates, respectively. Much attention has been afforded to how these organisations鈥� activities have turned into a . For example, the Norwegian SWF鈥檚 investment spans across , including shares in more than 9,000 companies, and China鈥檚 NDBs have emerged as the developing world鈥檚 project backer.

More recently, NDBs have been identified as important agents in funding domestic development projects in a wide range of . The perceived role of NDBs is from a reactive counter-cyclical role towards a proactive patient capitalist role. Popularity in NDBs may appear to be obvious due to the rising interest in pursuing state-designed and over the past decade. While many observations have focused on the growing inclination towards state activism as catalyst to NDBs鈥� expansion around the world, this piece examines three structural challenges incentivising developing countries to mobilise NDBs.听

The first, and the most obvious, rationale is to fix the capital market failure.听

The developing world鈥檚 financial markets and institutions have been expanding, though their aggregate size remains moderate. Figure 1 illustrates the depth of financial development or the significance of diverse financial instruments in relation to economic sizes. This figure illustrates that, despite a notable increase, the index of emerging economies in 2017 was lower than that of advanced economies in 1980. The growth of the index has been slow in low-income countries.

Figure 1. Financial development index: Depth (1980鈥�2017)

Source: IMF Financial Development Index Database

More importantly, patient capital providers have a weak presence in developing countries. Institutional investors, which include insurance companies and mutual and pension funds, have been identified as potential investors in development projects. However, these investors鈥� size in major developing economies is just over 40% of the GDP on average, which is small compared to that of advanced countries (Figure 2).听

Figure 2. Institutional investment assets (2017 or latest)

Note: EMD 20 = 20 largest emerging market and developing countries with available data
Source: World Bank Global Financial Development Database

The expectation that advanced countries鈥� institutional investors would do the heavy lifting seems to be exaggerated. While these investors may have with limited liquidity constraints, development projects often require different types of patience that cannot be understood in strictly financial terms. Moreover, international development finance institutions鈥� efforts to crowd-in private capital have, so far, been .听

Infrastructure financing is a key example. On top of the fact that the private sector as a whole accounts for a small fraction of total investment in the developing world ( in 2017), the contribution of institutional investors has been limited, averaging of total private participation in 2011鈥揌1 2017.听

Many developing countries are now trying to fill this gap, or fix the capital market failure, by mobilising NDBs.听

Secondly, the role of external development funds is shrinking in middle-income countries, causing the so-called .

As developing countries move up from the low-income to middle-income status, the relative size of aid inflows shrinks, and the terms and conditions become . Tax revenue often struggles to rise quickly enough during this period to fill in the gap.听

There has been a notable decline in the ratio of overseas development assistance (ODA) to GDP in middle-income countries (Figure 3). The recent ratio is only approximately a fifth of what it was 25 years ago. The ratio is now small for upper middle-income countries, averaging just 0.07% during the 2010s. This figure is higher in lower middle-income countries but has seen a dramatic decline from 3.2% in 1991 to 0.7% in 2017.听

Figure 3. Net ODA (1970鈥�2017)

Source: World Bank World Development Indicators

In addition, the tax revenue in middle-income countries has failed to keep up with economic expansion. The tax revenue-to-GDP ratio stagnated during the second half of the 2000s and declined by nearly one percentage point between 2011 and 2016 (Figure 4).听

Figure 4. Tax revenue (2005鈥�2016)

Source: World Bank World Development Indicators

The shrinking role of ODA and tax revenue means that the government must search for non-budgetary financial resources, such as those from NDBs, to conduct development projects.

Thirdly, NDBs can act as policy tools that enable governments to overcome legal and political constraints in fiscal management.听

The financial technocrats鈥� attachment to fiscal stabilisation has been highlighted as a hurdle in expanding development investment. As well as this factor, there are legal issues that make it difficult for governments to expand development financing. The developing world has been adopting fiscal rules with zeal from the early 2000s (Figure 5). In 2015, 60 developing countries had fiscal rules in place. While fiscal rules contain diverse characteristics in terms of coverage, strength, and flexibility, they tend to constrain governments鈥� investment capacity.听听听听听

Figure 5. Number of countries with fiscal rules (1985鈥�2015)

Source: IMF Fiscal Rules Dataset

Furthermore, fiscal reallocation is often challenging because existing budget structures are a reflection of past political and social struggles over priorities. More specifically, governments may arouse public discontent when attempting to redirect significant amounts of fiscal resources from consumption spending towards capital investment. This possibility can make governments lethargic, especially in democratic countries where elected officials start counting down for the next election from their first day in office.听

NDBs have been used by executives to bypass legal and political difficulties in mobilising fiscal resources in countries such as and . A number of newer democratic developing countries are also considering this option to navigate through constraints.听

Due to these issues, namely the limited role of private capital and donor funds, domestic institutional difficulties in expanding fiscal investment, combined with the moderation of the theoretical and ideological battle over state economic activism, the developing world鈥檚 interest in NDBs is expected to continue, as demonstrated with the case of Indonesia.听

Of course, NDBs are not a silver bullet: they are inevitably under the influence of the and and vulnerable to partisan politics and rent-seeking. NDBs鈥� effective operation requires of technical knowledge, market information, and coordination capacity. However, considering the structural factors highlighted in this piece and the colossal development goals, developing countries鈥� and 鈥�鈥� using NDBs should be encouraged with the potential challenges in mind.听

Kyunghoon Kim is a PhD student in the Department of International Development at King’s College, London.

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In this article I remind readers about the existence of 鈥渟acrificial generations鈥� within global capitalist history. By sacrificial generation I mean a group of people at a point in time that experiences suffering with the immanent or intentional effect of changing economic, political or social conditions, which are in turn disproportionately enjoyed by another group of people at a later period in time. I identify four areas in which there systematically exists sacrificial generations:听 three stages of capitalist development (state formation, capitalist property rights transition and early industrialization) and a cyclical aspect of capitalism (Polanyian-Marxian cycles). It could also be argued that the future generations which would disproportionately experience the environmental costs of past and present generations鈥� consumption are 鈥渃limatic sacrificial generations鈥�, but this will not be explored.

Constructing the Modern State (Weberian sacrificial generations)

Charles Tilly (1975) has famously shown that the creation of the modern state in Europe since the 14th century was associated with territorial aggression, wars and empire-building. The monopolization of the legitimate use of violence and the mobilization of taxes, were strongly influenced by the need to defend against foreign aggression and to engage in such aggression as well, involving a lot of deaths. Thus, Jeffrey Herbst (2000) argues that due to lower population densities in pre-colonial Africa (which decreased pressure for territorial aggression), strong states were not as prominent in this region as they were in Europe and Asia. Some might also argue that reconfiguring the state involves altering distributions of power and hence sacrificing the dominant class, as Atul Kohli (1994) shows was the case with the Yangban elites in Korea under Japanese colonization.

Instituting Capitalist Property Rights (Polanyian sacrificial generations)

The property rights characterizing capitalism which are supposed to be enforced by the state are supposed to serve at least the three functions of creating security for investors so that they have extended time horizons; to make asset transfers efficient, and to create incentives and compulsions for productivity growth (Khan, 2009). However, pre-capitalist social relations do not rapidly and automatically respond to price signals and capitalist profit and wage opportunities (and these signals may not exist or may be distorted). Therefore, the transfer of land from pre-capitalist social and economic embeddedness to capitalist embeddedness has often involved violence and dispossession, as and Karl Marx (primitive accumulation) observed. Mushtaq Khan (2009) calls this social cost the 鈥渢ransition cost鈥�. From the 16th to 18th century Enclosures movement in England, the destruction of the native pre-capitalist property rights and relations by settlers through dispossession, deception and/or genocide in America and other settler colonies (including South Africa, Northern and Southern Rhodesia, etc.); the dispossession of the Yangban landed elites in Korea under Japanese colonization; etc. In societies where such dispossessions faced the high risk of insurmountable uprisings, pre-capitalist property rights were left largely intact, as in India and many non-settler African colonies, which has negatively affected their land markets till today.

The Social Problems of Early Industrialization (Marxian sacrificial generations)

When the capitalist transition and industrialization gather pace as commodification of land and labour occurs, the flexible use of the labour power of the landless masses is prominent. Due to the unskilled nature and surplus nature of labour during the stage of 鈥渦nderdevelopment鈥�, the bargaining power of labour is weak (making exploitation more salient), and hence working conditions at this stage of development has historically been poor (think of 19th century English factories being called 鈥渟atanic mills鈥�, and contemporary factories in the developing world being called 鈥渟weatshops鈥�). Repressive labour conditions characterized the much-celebrated East Asian developmental states (Chang, 2009). Rural-urban migration may create slums and 鈥渦rban sprawls鈥� where hygiene and standard of living in some urban areas could be inferior to the countryside. Hence partly why some argue for non-capitalist economic paths; others argue for a 鈥渓abour-centred development鈥� (Selwyn, 2016); and others yet for a 鈥渄evelopmental welfare state鈥� with social policy ameliorating the negative aspects of early industrialization.

The Cycles of Contractions (Burawoyan sacrificial generations)

The global capitalist system is pervaded with cycles. Embedded within the broad Polanyi-Marxian cycle (of crises of overaccumulation following crises of legitimation, and vice versa) (Burawoy, 2010) is a series of business cycles (whereby the downswing involves contraction of incomes), (where the downswing of hegemonic transition may involve geopolitical instability and warfare), and (whereby the downswing involves a narrowing of developmental possibilities or even their reversal). Generations which live through the downswings experience the costs of the upswings enjoyed by the previous generation, and they take on the sacrifices needed to build new social structures of accumulation.

Difficult Decisions

If we remain under pre-capitalist conditions, we would constantly aspire to overcome their negative aspects, and our philosophers would continue to ruminate upon the essence of life bounded by the phenomena of high child mortality, low life expectancy, tyrannical social and gender practices, and so on. The capitalist system with its peculiar complex of incentives and compulsions is the only way we have come up with (, to a very large extent) to surmount these hard challenges of humanity and create beneficiary generations.

Yet it comes with many frictions, tensions, contradictions and sacrificial generations. We constantly attempt to ameliorate the stress for the sacrificial generations; yet state and nation building, capitalist transition, early industrialization, and global cycles will always be full of social tensions. Social democracy, 鈥淜eynesian鈥� expansionism, state capitalism etc., for example may attempt to pacify these dynamics (and may be successful for some periods), but they are also come with contradictions as they are embedded within the cycles of generational sacrifice as well (e.g. social democracy in the golden age of capitalism eventually coming under the pressures of crises of overaccumulation, and the forces of globalization and financialization associated with hegemonic cycles).

Efforts to transcend capitalism altogether through full-scale communism also face its own tensions and frictions 鈥� the sacrifices of enduring repression from the dominant classes during a revolution; the possibility of becoming deformed or degenerated workers鈥� states after a revolution; the real informational problems of central planning (as Friedrich Hayek) and the transition costs of reorganizing property rights and economic organization; the great challenge of opposition from the capitalist hegemon (which is part of the capitalist system, as neo-realists argue) which comes with the absence of a world revolution, as Leon Trotsky noted. Hence, even socialist and communist revolutions come with their own sacrificial generations and tensions. There are therefore few solutions which do not come with its own potential sacrifices; and everyone should be sceptical of anyone who says otherwise. This simply means that everyone and each generation is forced to mediate between, and live with, both toleration and hope, tradition and innovation, conservatism and experimentation.

References

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Chang, Dae-Oup (2009) Capitalist Development in Korea: Labour, Capital and the Myth of the Developmental State. London: Routledge.

Herbst, Jeffrey (2000). States and Power in Africa: Comparative Lessons in Authority and Control. New Jersey: Princeton University Press.

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Tilly, Charles (1975). The Formation of National States in Western Europe. Princeton: Princeton University Press.听

Abel B.S. Gaiya holds an MSc Development Economics from SOAS, University of London, and works as an analyst at the Busara Center for Behavioural Economics.

Photo 鈥淒arkness Unleashed鈥� by //

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A critique of this approach was compiled by Ingrid Harvold Kvangraven . The primary criticism is that the basic premise is flawed 鈥� we do not, in fact, have a very complete understanding of how the pipes come together. Often, we don鈥檛 even know where they are. The institutional architecture that determines economic outcomes can vary widely from one country to the next. With so much variation at the systemic-level the utility of 鈥渢inkering鈥� at the margins is questionable.

This blog series will interrogate some of the prevailing assumptions about the relationship between state and capital and look at why and in what ways some economies are deeply intertwined with the state. The structural conditions that actually exist in developing economies are often ignored in mainstream economic analyses 鈥� the prescription for countries with large state-owned sectors is usually some combination of more market liberalization, less protectionism, better enforcement of property rights. This ignores why the economy is structured that way in the first place, and therefore such prescriptions risk being disconnected from the reality on the ground, and thus ineffective.

Indonesia鈥檚 economic trajectory helps to illustrate this point. Despite a long history of sometimes violent anti-communist sentiment, massive portions of the economy are either partially or directly controlled by state-owned enterprises. According to Kyunghoon Kim 鈥�148 SOEs in Indonesia, and their total assets were equivalent to 56.9% of the country’s GDP.鈥� This includes the state-owned oil and gas company Pertamina, three of the four largest banks, the state-owned electric utility PLN which owns the entire national grid, airport operators Angkasa Pura I and II which operate every major commercial airport, the telecom giant PT Telekomunikasi Indonesia and the largest toll road operator Jasa Marga, to name just a few.

To understand why the state plays such an outsized role in the economy we first need to look at Indonesia鈥檚 history. In the 1950s as Indonesia was establishing itself as an independent nation-state, the government nationalized all foreign assets, such as the major shipping and railway companies, both as a knee-jerk reaction to colonialism and a way of establishing agency as a sovereign nation. There was thus no period of experimentation with the development of competitive private enterprise, as the country jumped straight from colonialism to mass nationalization.

When Suharto鈥檚 New Order came to power in the mid-1960s, the state became even more entrenched as the custodian of economic development. In the early years, Suharto鈥檚 signature economic policy was to make Indonesia self-sufficient in rice production, a goal which was achieved within a decade or so. This was during the 1960s and 70s, when the concept of the developmental state and import-substitution policies were very much in vogue. Economic policy in Indonesia was guided by a belief that it was the state鈥檚 duty to shepherd economic growth, intervening in markets as necessary to correct price imbalances and ensure that the citizenry had access to affordable staple goods like electricity, rice and fuel.

This state-led development became one of the defining features of the New Order regime 鈥� the state invested heavily in infrastructure and social services and generally protected domestic markets from foreign competition. The price of this state-led development was repression of dissent, muzzling of the media, and a rubber-stamp democracy that saw Suharto re-elected every five years like clockwork. Eventually, the cronyism and corruption embedded in this system were laid bare during the Asian Financial Crisis and Indonesia moved to a more decentralized governing structure, one that featured open and free elections for local and national legislative and executive positions.

From 2004 to 2014, economic growth continued at a steady pace, generally between 5-7%. This was mainly due to high global commodity prices, however, and deeper structural issues in the economy were papered over or ignored. When Jokowi became president in 2014 he inherited an impossibly cumbersome bureaucracy with redundant and often incomprehensible regulatory architecture. It could take years to get the proper permits and licenses to a start a business, and in the absence of an eminent domain law land acquisition could drag on indefinitely. Moreover, in the new decentralized governing structure, it was unclear who had the authority to break through these bottlenecks.

Jokowi鈥檚 solution was to re-concentrate administrative and legal authority with the central state government in Jakarta. Through a series of Ministerial and Presidential Decrees he equipped the central state with broad powers to issue financial guarantee for high-priority projects, circumvent regulatory requirements and acquire land in the public interest. He also found himself in an economic environment that was not very conducive to private investment, so he leaned hard into SOEs to do the heavy lifting of building roads, bridges, power plants, hospitals and airports.

The size of the state-owned sector, which was already large, has throughout Jokowi鈥檚 first term. The total assets of nine major infrastructure-oriented SOEs 鈥� airport operators Angkasa Pura I & II, the five largest state-owned construction companies, toll road operator Jasa Marga and state-owned railway company Kereta Api Indonesia 鈥� totalled Rp 119 trillion (US$8.5 billion) in 2013. By 2017, their combined assets had increased to Rp 432.5 trillion (US$30.8 billion), and that figure is still rising.

This metastasizing of the state-owned sector has produced concrete results. As exports have fallen as a share of GDP, fixed capital formation (including investment in major infrastructure projects) has increased to pick up the slack. To take just one example, from 2004 to 2014 around 250 km of new toll roads were built. From 2015 to 2018, that figure nearly tripled to over 700 km of new toll roads, virtually of which were built and are operated by state-owned companies. Given the narrow policy goal of building infrastructure quickly and given unreliable regulatory architecture and weak rule of law, the strategy of tapping SOEs to carry out major project development has .

The flip-side of this argument is that perhaps private companies would have fared better, and the dominance of SOEs is crowding out more competitive and sustainable private investment. Unfortunately, we cannot test this empirically as time moves in only one direction. But we can look at some sectors that were opened exclusively to private developers, such as renewable energy. Since 2013, Indonesia has been experimenting with various incentives to induce private investment in the renewable energy sector 鈥� yet, as I have written and , growth has been anaemic. Even with lucrative rates of returns, private developers just weren鈥檛 interested.

This is a complicated issue with many potential explanations, but the bottom line is that when private capital is left to fend for itself given the way Indonesia鈥檚 economy is currently structured, it often flounders. By contrast the state is uniquely positioned, for reasons of history as well as institutional design, to cut through the bottlenecks that can side-line private investment.

In his second term, Jokowi is focused on weaning the economy off state-led development and inducing greater private investment. Whether this will work or not is one of the in Southeast Asia over the coming years. There is also, of course, the question of whether state-led development is not simply a boondoggle for wealthy elites disguised as development. The CEO of state-owned airline Garuda was recently caught Harley Davidsons into Indonesia without paying the duty, and corruption scandals at SOEs are common.

But the purpose of this post is not really to weigh in on that question. It is to describe the political economy of a large and important developing country the way that it actually is. The state plays an outsized role in Indonesia鈥檚 economy because historically that has always been the case, but also because without invoking the power of the state it can be difficult to get big projects done.

This is ultimately why I find the idea of 鈥渢inkering鈥� at the margins to be somewhat limited. The political economy of Indonesia is structured so differently from what you might find in the United States or Europe, that any analysis of economic outcomes that doesn鈥檛 factor in these systemic considerations will be of little value. It is becoming increasingly apparent, at least in my view, that to move forward on big questions of economics and policy it is incumbent not to ignore such structural factors simply for the sake of a parsimonious model. Reaching a more subtle, nuanced understanding of how capital is intertwined with the state in different contexts seems to me to be a good starting point.

During the high period of global neoliberalism (1980-2008) the international development community essentially banned the heterodox concept of the ‘developmental state’ from polite discussion. One of the reactions to the global financial crisis and the Great Recession that ensued after 2008, however, was a growing call for the

If leading developmental state theorist defines a developmental state as 鈥渁 state that intervenes to promote economic development by explicitly favouring certain sectors over others鈥� then here we may simply add the epithet local to define the local developmental state model as 鈥榓 local state that intervenes to promote local economic development by explicitly favouring certain sectors over others鈥�. This revised understanding of the developmental state concept is meant to bring out into the open the historically important, but often disguised and overlooked, 鈥榖辞迟迟辞尘-耻辫鈥� structural transformation and industrial development successes that have many times been facilitated by pro-active sub-national governments. As I will show below, the LDS model has been successfully deployed across many vastly differing countries and regions and, moreover, lagging regions have dipped into the LDS experience of the more successful ones in order to build their own LDS models, thereby to achieve similar results. The LDS model is thus broadly, though clearly not perfectly, transferable.听

One important reason for the more recent success of the LDS model is that from the 1970s onwards the key driver of development was no longer heavy industry based on mass production serving large mass markets. Instead, not least thanks to new that can reap economies of scale at low levels of output as well as ensure the very highest quality and specification, the main driver of development is increasingly the technology-based and vertically and horizontally inter-connected (MSME) sector. Pro-active sub-national governments have been in a very much better position than central government to provide a range of and other stimuli to support the most important of these MSMEs get firmly established and sustainably grow. Crucially, the LDS model played a central role in helping enterprises into clusters, networks and subcontracting chains in order to reap important 鈥榗ollective鈥� economies of scale and scope.听

Providing the right impetus for sustainable development has thus increasingly been reconfigured as a local responsibility. Sub-national governments no longer need to sit back and await a solution to their problems coming ‘from above’, still less wait for market forces to ‘do their magic’; they can be far more pro-active and do things on their own, and very often much better. We have here, therefore, a new engine for genuinely inclusive development that might be used in future, even in countries wherein neoliberal-oriented central governments still reign supreme, in order to begin to equitably rebuild economies and societies undermined by nearly forty years of neoliberal elite-driven restructuring.听

Perhaps even more important is that the LDS concept provides an institutional eco-system that can be deployed to pursue even more radical economic and social outcomes. With the global neoliberal capitalist economy clearly in desperate straits today, the power of the local state can be turned towards building a feasible alternative to both neoliberal capitalism and state capitalism from the 鈥榖辞迟迟辞尘-耻辫鈥�. This is not . In many of its earliest incarnations, the LDS model proved crucial in building workable localized forms of democratic socialism.听

Notably this was the case in northern Italy, and particularly in 鈥楻ed鈥� Emilia-Romagna, where newly elected communist/socialist governments in the postwar period pursued a radically different model of . With strong support for trade unions and the (with their support provided in return), and facilitated through a wide range of state and non-state pro-active financial and non-financial business support institutions, regional and local governments essentially took the lead in building and coordinating a unique ‘institution-thick’ model of economic and social development.听 This so-called ‘ proved to be quite decisive in helping reconstruct northern Italy’s regions quickly and equitably. By the 1990s the region of Emilia Romagna was one of the richest in Europe. More importantly, it was regularly topping European 鈥楺uality of Life鈥� surveys thanks to the very high levels of equality, solidarity, security and cooperation it had generated for its citizens, a feature particularly associated with regional and local governments’ heavy emphasis on .

The Basque region of northern Spain also succeeded in building a radical new regional economy based on many core democratic socialist principles and similar institutional vehicles. Attacked by the central government after 1939 on account of its opposition to the fascist Franco Dictatorship, by the 1950s this declining industrial region was officially the poorest and most troubled in Spain. Thanks to a pioneering cooperative development experiment begun in the town of Mondragon, however, . The key to this success was Mondragon’s experience with a community development bank and a pro-active development agency, both owned and controlled by its cooperative enterprises. Crucially, with enormous economic and social success registered with the Mondragon model from the 1970s onwards, and with an acceptance of the cooperative option already embedded in the Basque region for many years, the broadly leftist regional government took notice and began to build a range of its own similarly-purposed Mondragon-style institutions in order to pilot the wider Basque region out of its decline. It thereafter succeeded in promoting and patiently investing in , , as well as in creating yet more cooperatives. The resulting institutional eco-system driven forward by the competent Basque regional government gradually turned things around, and by the 2000s the Basque region was Spain’s most prosperous and equitable region.

Albeit with less overt reference to any of the broadly socialist goals enunciated by those driving forward the model in northern Italy and northern Spain, elsewhere the LDS model has played a similar role in very successfully promoting economic development. The example of the former West Germany is instructive in this regard. While orthodox economists have for a long time been unwilling to accurately depict the decisive role that proactive local and regional state institutions have played in Germany’s massive post-war economic success, this is changing. Today, even unquestionably accept that it was the successful deployment of a range of decentralised state capacities and institutional vehicles that both created and sustained Germany’s economic miracle.听

The East Asian economies also exemplify the decisive role that the LDS model has played in reconstruction and development. Much of Japan’s rebuilding after 1945 involved the deployment of a wide variety of and LDS-type institutions in order to create the high quality/high technology/low cost MSME supplier base required for its larger industries to get started and expand. With similar LDS-type models deployed in line with Japan’s sophisticated local institutional structures, the stage was set for by far the most important success of the LDS model to date in China. With substantial autonomy from central government after 1980, across China began independently to build a wide range of proactive local development units and with the capacity to identify, invest in and support a special form of enterprise, the Township and Village Enterprise (TVE). The rapid expansion of the TVEs essentially created the basic industrial foundations for China’s economic miracle. Thereafter, the most proactive city governments were to continue to use their development-focused institutions, along with their acquired capital, knowledge and experience, to improvise and extend their development activities. The result was a whole new raft of much bigger industrial and technology-intensive state-owned enterprises, essentially turning China into the economic super-power it is today. Sadly, the orthodox economics community has consistently sought both to these successful LDS models.

In sum, historical experience strongly validates existing practical experiments based around the potential role that a suitably adapted and embedded LDS model can play in the average community. The LDS model of economic and social development is an important component of the developmental state model. As I have shown, it actually accounts for much, if not most, of the success otherwise attributed to the developmental state model in many locations, perhaps most notably in China. The LDS model has also enjoyed far more success than orthodox local neoliberal models of development, . Moreover, the LDS model has not just been productively deployed ‘from below’ simply to kick-start capitalist-oriented economic and industrial development, but also to help transition many local/regional economies in the direction of a much more equal, harmonious, fair, dignified, cooperative and democratic/participative society. Indeed, it is its very ‘localness’ that ensures it is a more tractable development model and that it can connect more easily to popular demands for a better overall quality of life for all, and not just for elites.听

Milford Bateman听is a Visiting Professor of Economics at Juraj Dobrila at Pula University in Croatia, an Adjunct Professor in听Development Studies at Saint Mary鈥檚 University, Halifax, Canada, and an Affiliated Research Fellow at the Future Forum, Phnom Penh, Cambodia.