POL 4410: Week 10
Domestic Development
Structure
1. Inward vs. Outward looking Development
2. Pre-War: Fascism, communism, social
democracy, and liberal democracy
3. Post-War: Embedded liberalism, ISI, and
export-oriented growth
4. 21st Century: Education and technology (Celtic,
Baltic, and East Asian Tigers); China and India;
Africa
What is
• Increase
in per capita income.
development?
• How to achieve this? Economists view
this as coming either from increases in
capital/labor ratio or from ‘augmenting’
labor. All with a fixed technology.
• Technology transfer could improve
technology
• Neo-endogenous growth theory
predicts that technology is itself an
effect of investments in education.
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Inward-facing
development
Self-sufficiency in all goods, including highend goods. But what if you can’t produce
everything?
Develop own capital stocks, human capital
stocks, and technology.
Capital stock must come from domestic
savings
Cannot import educated workers
Cannot import technology
Inward-facing
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ADVANTAGES: self-reliant, can produce
all kinds of goods, no concern about
economic volatility, no need to have
austerity measures
DISADVANTAGES: limited range of
goods, must save to invest, need to
reduce consumption demands, poor
access to Western technology, difficult to
earn foreign currency
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Outward-facing
development
Rely on international demand for your
goods. Potentially remain producing lowend goods.
Borrow capital so as to invest more than
you save.
Import Western technology and skilled
workers.
Import intermediate goods in order to
produce final goods.
Outward-facing
• ADVANTAGES: earn foreign currency,
receive foreign capital and technology,
freedom for citizens
• DISADVANTAGES: subject to economic
shocks and austerity programs, may not
be self-sufficient in important industries,
influence of foreign owenership
Inter-war Strategies
• Great Depression leads to crisis of
outward facing economic liberalism.
• Replaced by FASCISM, COMMUNISM,
SOCIAL DEMOCRACY
Economic
Liberalism
• Gold standard required prices and
wages to drop during times of economic
crisis.
• Trading system meant domestic firms
had to compete with ruthless foreign
firms.
• High unemployment if wages did not
drop
• Democracy vs. technocracy.
• High politics and heavy industry
Fascism
• Italian fascism begain in
1922 with Benito Mussolini.
• Fascists disdained liberal
order but also feared the
working classes.
• Alliance of farmers, petty
bourgeoisie, and heavy
industry vs. working class
and ‘effete liberal
bourgeoisie’
Fascist Economics
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Fascist policy was often contradictory: celebrated
agrarian life but pro-industry.
Supported large cartels in industry
Kick-started economies with reflation, deficits,
spending. Full employment policies
Worked by repressing workers in order to keep
prices manageable. This encouraged private
investment.
Abandoned gold standard and developed quasiimperial trading zones. Large tariffs to protect
domestic industry
Nazi Development
• Hjalmar Schacht was architect
of Nazi economic policy
• Massive public works schemes
ended unemployment in 3 yrs.
• 5% GDP budget deficits but no
inflation. ‘That’s what
stormtroopers are for’
• Nazis reneged on all foreign
debt and created mercantilist
trade zone in Eastern Europe
Communism
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Bolshevik Revolution in 1917 overthrew
Kerensky.
Communism would require capitalism,
then socialism. But Russia was barely past
feudalism.
Civil war 1918-1921 meant ‘war
communism’ - all factories owned by govt,
all production planned, private enterprise
banned. Requisitioning and rationing.
NEP to Stalinism
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Peasant hoarding and military mutiny led to New
Economic Policy 1921-1930.
NEP permitted private agriculture and domestic trade
(industry, finance, and foreign trade remained govt
controlled).
Impressive growth but failed to lead to industrialization.
Foreign threats loomed. Stalin’s Five Year Plan from 1928
forced collectivization of farms. Workers also squeezed.
Heavy industry was focus.
Consumption went from 82% to 55% of GDP. Soviet
Union fully industrialized by 1937.
Stalinist Production
• Gosplan
• Since prices were centrally
set, profits and losses
were irrelevant.
• Stakhanovism
• Incentives to misrepresent
Social Democracy
• Liberal democracy was under threat.
But Keynesian demand management
provided a solution.
• Massive public works schemes. Leave
gold standard and inflate economy to
encourage demand.
• Permit inflation and try not to direct
heavy industry.
• Support working class with social
insurance
New Deal
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Roosevelt left gold in 1933
Attempts to cartelize and set prices reminiscent
of fascism, rejected by Supreme Court.
Move from industrial policy to public sector
spending. Works projects: WPA, CCC, TVA
Introduction of Social Security in 1935
National Labour Relations Board, 1935
Promotion of trade: RTAA 1934.
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Sweden
Famous Red-Green alliance and rise of
Social Democratic Party
‘Crisis Policy’ of public works, cost 3%
GDP, devaluation.
Social insurance: unemployment 1934,
universal health care, child care, maternity
benefits, pensions. Cradle-to-grave.
Saltsjobaden accord. Labor got high
wages, full-employment, social insurance.
Business got labor peace, free trade, and
property rights
Next class
• Postwar development
• Current winners and losers.