Everything That Rises Must Converge: Michelle Baddeley and Testing our Models

In “Convergence or Divergence? The Impacts of Globalisation on Growth and Inequality in Less Developed Countries,” Michelle Baddeley explores the impacts of globalization on growth and development. Some of the key parts of theoretical section include effects of trade and capital flows as well as computerization. The empirical evidence presented indicates that globalization has been associated with increasing trade and financial flows to less developed countries. She also notes globalization has also “coincided with increasing penetration of the Internet suggesting that increases in informational flows have complemented economic and financial linkages, but the empirical evidence also shows that the current era of globalization has not been associated with convergence in economic outcomes” (392). She finds that “less‐developed countries have suffered from increases in international income inequality.” (392).                 

In Cypher's "The Process of Economic Development," he writes about the development of ideas of development and looking at the contemporary ones that are influential in development, we find the Solow growth model where total output is a function of technology, capital, and labor, with diminishing returns to capital and labor. In the model, technology comes from outside, and “it is this exogeneous technology which is basic to higher levels of income per capita over time” (150). The model predicts two important things. The first is that there is a steady state equilibrium that can be attained, and that there is a convergence between similar countries. Where there is a ceiling on levels of income per the rate of savings (151), so the model intuits that the way to growth is the increase the savings rate of the nation to raise that ceiling. Or we see the Harrod-Domar growth model. Unlike the Solow model which looked at the savings rate, the Harrod-Domar model sees the rate of growth as a function of both the savings ratio as well as the capital / output ratio (152). Cypher notes that all the theories lead to the same basic idea: “an expansion of total physical capital goods as a share of total output, that is higher levels of investment, that create higher income levels” (153).  One thing about this model is that instead of a steady state, there’s a real chance in the model for instability.

Ultimately, what we want to see is what these models look like when we take them from paper to the real world. Models are necessarily simplifications that exist to concentrate our thought, but what I could not stop thinking when I was reading about the more contemporary models was that the frameworks that are put down are not just simplifications, but something that we could look at and decide if they were true or not. The Solow model is the most attractive because it assumes that if the model is correct, then there are not that many levers we need to be able to pull to make less developed countries meet their peers so that the people in these countries have better lives.

Baddeley’s examination sheds some doubt on the validity of the Solow model. What she finds is that the data does not fully bear out Solow and suggest that something closer to Harrod-Domar is right – the targets are not as easy to hit as suggested, and if you miss them, there are negative consequences: “there has been limited convergence and limited equalization in the distribution of international income and / or that population growth has been too high” (396). The world has become more open, and globalization has allowed technology to be exogenous to other countries in that they have access to technology in unprecedented ways, but there is still a lack of convergence (406-7). Considering findings that trade, and globalization heighten volatility and do not lead to convergence, what do we do? Baddeley suggest that the answer is if we “more carefully regulated and monitored” the financial system as to “moderate the impacts of adverse selection and moral hazard on effective financial decision making” (407). There is a lot of heaving lifting built into that line, as it would include boarder global coordination, an outcome that feels much less likely now than when she was writing.           

For me, if the models are not working, we perhaps need to build new modes of thinking, or to find ones that were once ascendant, but were somehow eclipsed. These neoclassical models are still in people’s heads as their guiding background of how the world is structured and how it works. Since I’ve been in this class, the things I read have taken on development angle, so when I see David Malpass, the current US nominee to lead the World Bank say, “Finally, the bank should also facilitate the adoption of best practices for encouraging broadly shared growth and prosperity. Developing nations can benefit from lessons learnt all over the world. Nations that foster innovation and freer markets, and that have lower taxes, fewer regulatory burdens, and stable currencies, tend to alleviate poverty faster than others. If more countries adopt pro-growth economic environments, the global economy will be stronger” (“What I would do as the next president of the World Bank”), it makes me worry for the future of development strategies as empirical work like Baddeley’s shows we need different strategies because global catchup is happening, and we keep doing the same thing based on outdated frameworks.

Works Cited

Cypher, J. M. (2014). The process of economic development. London: Routledge, Taylor & Francis Group.

Malpass, David. “What I Would Do as the next President of the World Bank.” Financial Times, Financial Times, 7 Feb. 2019, www.ft.com/content/ec9a6924-2acb-11e9-9222-7024d72222bc.

Michelle Baddeley (2006) Convergence or Divergence? The Impacts of Globalisation on Growth and Inequality in Less Developed Countries, International Review of Applied Economics, 20:3, 391-410, DOI: 10.1080/02692170600736250

Smith and Marx on Development

If you talk about Adam Smith and the Wealth of Nations, there are two things you must talk about. The first is the concept of the “invisible hand,” where spontaneous order seems to come out of nowhere. Now we talk about equilibrium and clearing of markets as there is an equal amount of supply and demand at that equilibrium point. On a rough gloss, this has been taken to be an open and free advocation for these market effects. No matter that it is used as a metaphor only once in the book that is the Smithian legacy (Cypher 125). Image for a minute Smith coming back and seeing institutes in his name, forgetting that there was this other, first book that he worked on perfecting throughout his life as well.  We will not think about that too much because we have to cite that phrase early on in book one of the Wealth of Nations, where “it is not from the benevolence of the butcher, the brewer, or the baker that we expect or dinner, but from their regard to their own self-interest” (Smith Quoted in Cypher 126). What we often do not hear about is the more complex Smith, warning “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” (Smith). That is just to say that Smith was not the free-market absolutist he is painted to be, “Laissez-faire” a term available to him from the physiocrats, but not showing up in my index.

                On the flip side, Marx recognized the great creative power of capitalism. He was not the full-throated hater of the system, recognizing “[capitalism] has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades” (Marx 16).  What is important to remember is that both authors are working in the same tradition but have different evidence available to them and divergent frameworks of the social and economic system.

                For Adam Smith, the two key pieces of development are the division of labor and the law of capital accumulation as what determines “The wealth of nation” (Cypher 127). What Smith was able to see was that the rise of the factory system in England was concurrent with peasants being forced out of their home fields and pushed into the cities with the rise of the enclosure acts which denied people access to the commons. Instead of working from a home through all the processes of production, the worker was responsible for one part of the productive process (Cypher 127). This is highlighted in a famous passage in the Wealth of Nations where Smith describes a pin factory and the increased output that results from the division of labor. Productivity increases meant that raw materials were turned into finished goods at a much greater rate and were thus available for trade on the world market – a world market that the English crown helped grow through colonialism and the power of its navy.  For Smith, specialization had a snowball effect, and more specialization led to more specialization, and thus this should be the most productive state for world affairs, as all nations specialized and were opened to trade of all nations (Cypher 127-8). This created incentive for constant improvement of industrial processes, as profit-making opportunities were opened for individual entrepreneurs. For Cypher, Smith’s emphasis on expanding markets and the division of labor make him one of the most “optimistic of all the classical economists” (129), thinking that this was all that was needed to spread worldwide prosperity.  

                The Marxian world-view was a little less optimistic about the ultimate redeeming power of capitalism in the Smithian vein, as there were a couple of generations between the time of Smith’s writing. These were generations where industrial capitalism rose, and the great cities Engels described grew into slums – people from the countryside continued to seed subsistence wages in the cities as well as people from the near abroad as their own nations were ravaged by colonialism and famine. As Cypher notes, the role of technology was downplayed in the Smithian paradigm (128), but the great factories had a huge influence on how Marx saw the economic system. For Marx, wealth of nations was based more on the creation and circulation commodities, goods meant to be sold in the market. The rise of capitalism came on top of the circuits of money being exchange and lent at interest in a monetary loop, as well as a circuit of goods being bought and sold elsewhere at a profit, in a commodity circuit. What Marx saw was this creation of commodities in a production process, one that needed raw materials, often from the colonies, and the machines with labor aid converted these into higher-value products (Cypher 147). This process centered capital and technology so that the capitalist needed to keep growing and improving their processes through the nightmare logic of the system where all are slaves to it, even those who have the greatest absolute benefits from the system. This also cements the roles of other nations. If they are not at the center, they can easily be stuck down on the ladder of value unless they can import the know-how and thus grow their own markets (Cypher 148).

                Overall, both Smith and Marx were able to see the dynamic system that capitalism is and remains to be. Aside from the centrality of technology in Marx and the ignorance in it of Smith, the real difference is that they are not diametrically opposed, but Smith is much more optimistic about how the productive system will play out. Marx can look at the great productive aspect of Capitalism, but through his method of interrogating the world, Marx sees both the positive and the dark side. It is in recognition of this dark side, and the ultimate negative effects of the productive process upon these people at the face of the machine, that lends Marx the mantle of the adversary of capitalism.

               

Works Cited

Cypher, J. M. (2014). The process of economic development. London: Routledge, Taylor & Francis Group.

Marx, Karl, and Friedrich Engels. Manifesto of the Communist Party. Marx/Engels Selected Works, Vol. One, Progress Publishers, Moscow, 1969

Smith, Adam. Wealth of Nations, www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book01/ch10b.htm.

This Blood: Reflecting on The Open Veins of Latin America

In The Open Veins of Latin America, Eduardo Galeano details the centuries of extraction that that colonizing European powers exercised over the land and the peoples of Latin America. In the chapter “Lust for Gold, Lust for Silver,” Galeano highlights the purely extractive nature of this colonization. In reading, I learned several things that I did not know. The first being that often the colonization was often not a state endeavor, but one in which adventurers set out to make their names and their riches, but they need capital for boats and men to cross over with (14). The other thing was just how small the initial crews were who were so accomplished in being able to lay waste to the indigenous populations because of their more advanced weaponry, horses, and germs they carried with them, on purpose or not: “Cortez landed at Veracruz with nor more than 100 sailors and 508 soldiers; he had 16 horses 32 crossbows, 10 bronze cannon, a few harquebuses, muskets, and pistols” (16).

                What is striking about reading Galeano is that despite reading alternative texts like Zinn’s People’s History or Loewen’s Lies My Teacher Told Me is that the narrative I grew up with was based on North America, but it was more than that, it was a triumphal history of conquest. In America, we tell the stories of the Jamestown settlers or the Pilgrims outside of Boston and how they interacted with the natives. In one narrative, Squanto, who is famous for helping the Pilgrims is someone to be celebrated. But Squanto from another light is a race-traitor, allowing the white people to come in and take over the villages that had been abandoned because a plague wiped out all the native people. We do not know the stories of the native people because in part they had no writing. They had no one to tell their story of a plague that was on par or worse than the fourteenth century European Black Death. But they had no one to tell their story because they were the losers in the tale. We do not hear about them on the other hand because to think of them, or the victims of our four centuries of “Indian Removal” make the narrative less triumphalist.

                Galeano’s book is hard to read because of its detail. The problem is the detail is just one horrible thing after another about how the native peoples were treated. They died from contact, they died from war, they were enslaved in horrible conditions – and why? The goal was to pull a shiny metal from the earth. They took the treasures of the Incas and the Aztecs and “reduced it and made it bars” (19). Details like that make the contemporary reader shake their head in wonder at all that was lost culturally to go on top of lamenting the horrible conditions. You read of “Many natives of Haiti [who] anticipated the fate imposed by their white oppressors: they killed their children and committed mass suicide” (15). Reading those details makes me ask what we would do as a culture with a similar narrative. What would humans do if they met a similarly malevolent alien species, intent on using us as slaves? The stories we tell ourselves continue that triumphalism. In our movies, we fight back and defeat the aliens though unique human creativity or moxie. But the reality is that with novel pathogens and weapons, it would be hard to fight back. The ones who ended their lives may be more heroic than we know. Unfortunately, we westerners inherited the taboo against suicide, so that may be a harder act to undertake. Here is to hope that no aliens with bad intentions invade in my lifetime. That is a choice I do not want to have to make.

Works Cited

Cypher, J. M. (2014). The process of economic development. London: Routledge, Taylor & Francis Group.

Belfrage, C., & Galeano, E. H. (1997). Open Veins of Latin America: Five Centuries of the Pillage of a Continent. Monthly Review Foundation Incorporated.