The neoclassical development paradigm, by Michael Yates
Source Louis Proyect
Date 03/11/26/09:42

This follows up some things Louis has been saying.  First, let me quote
myself (please note that the long quote reflects what mainstream
economists think and what some progressive support in part, but not what
I think):

"Why are there rich countries and poor countries?  This question implies
a more fundamental one: Why are some countries poor? What is missing in
them that is present in the rich countries?  The neoclassical answer to
this question has various strands.    Since neoclassical economists see
capitalist economies as much more productive than any prior economic
system, they contend that one reason why some countries are poor is that
they are as yet insufficiently capitalist.  Forty percent of the world's
workforce is still in agriculture.  In the poorest nations, much of this
agriculture is relatively primitive, labor-intensive farming.  This
agriculture is inherently inefficient; a large outlay of hard labor is
necessary just to feed rural families.  There is little surplus to feed
urban dwellers, much less trade with other countries.

  What is true for agriculture is true of much of the rest of the poor
economies.  The main problem is low productivity.  What makes an economy
productive, capable of raising its output with fewer inputs, is capital.

  Poor countries are poor, the neoclassical economist tells us,  because
they lack capital.  Without capital, the cannot use modern capitalist
techniques of production and must resort instead to highly labor
intensive work processes.  Capital is not just machinery and modern
technology, however.  It is also a trained and skilled workforce.  Poor
countries lack what the neoclassical economist calls "human capital."
Poorly educated and trained workers are bound to be relatively unproductive.

  The poverty of a nation, deriving from the lack of capital, in turn
impoverishes the government, which cannot perform certain vital
functions, such as maintaining the law and order necessary for smoothly
operating markets.  People unable to support themselves adequately
otherwise will try to use the government for their own advancement.
Thus poor countries show a marked proclivity for public corruption, and
this makes the economy still less productive, as valuable resources are
stolen or used to support a swollen state bureaucracy.

  A look at the rich countries reinforces the neoclassical arguments.
In all of the rich countries, almost all economic activity goes through
markets and is subject to competitive market discipline.  Only the
efficient survive in such markets.  Agriculture takes up a tiny fraction
of the labor force, and farming is ultra modern, with the ubiquitous use
of sophisticated machinery and equipment.  As a consequence, agriculture
is extremely productive, producing a large surplus over basic
consumption needs, both for rural communities and the nation as a whole.

  The labor displaced from agriculture provides workers for industry,
and capitalist competition soon develops industry, providing a surplus
of labor for work in the service sectors now dominant in all rich
capitalist countries.  The states of rich countries have sufficient
resources, because incomes are high, to finance infrastructure and the
institutions necessary to make the economic system still more efficient.

  Workers are highly educated and trained to be ever more productive.
The chance to move up the economic ladder?absent in poor countries?keeps
workers on their toes, working hard, and making their economies
productive.  In the rich countries, fully developed markets create an
environment in which prosperity feeds on itself.  Wealth creates
opportunities, the seizing of which creates more wealth: a virtuous
circle of growth, opportunities (realizable through market competition),

  What does the neoclassical economic advisor recommend to the poor
nations?  First and foremost, a poor nation must attract the requisite
capital.  Since the rich countries have the capital, the poor countries
must obtain capital from them.  This means opening up domestic economies
to foreign capital.  Any barriers to foreign capital, such as rules
which limit foreign ownership or access to domestic currency, must be
eliminated.  Strong government structures must be put in place to
guarantee the safety of foreign (and domestic) capital.  Capital must be
assured that it will not be nationalized or otherwise expropriated, and
it must be certain that it will get to keep whatever profits it makes,
minus a fair share for domestic taxes.  Capitalists must not be forced
to pay bribes to operate.  Tariffs on foreign products must be speedily
eliminated, so that cheaper foreign goods can get into the country and
benefit domestic consumers.

  To make economic progress, a country must be willing to specialize in
those goods for which it has a relative cost advantage.  In poor
countries, labor is cheap, so specialization can begin in those areas
where foreign capital is looking for relatively cheap labor.  In
addition, many poor countries are especially suited for the production
of certain agricultural commodities and minerals.  Foreign capital
should have access to the land and mines (through purchase on the
market, of course).  These enterprises could then hire the abundant
labor to help produce crops and minerals for export.  The foreign
exchange earned from the exports could finance imports of other
necessary capital equipment.  As these sectors develop, they will
naturally become more modern and capital intensive, freeing labor for
production of manufacturing goods in urban areas.  Then a similar
process will occur there, and eventually production will shift to
services as the poor country comes more and more to resemble the rich

  Poor countries can be helped along through foreign aid from rich
countries and loans, perhaps on favorable terms, from multinational
agencies like the World Bank and the International Monetary Fund.  These
can help governments to build the infrastructure necessary for efficient
market operations, from roads and dams to modern financial markets.
Along with taxes from rising wage incomes and business profits, loans
can help nations to build modern state bureaucracies, uncorrupted and
responsive to democratic processes.  Money can be spent for education
and training, so that workers can take advantage of the growing demand
for skilled labor that neoclassical economists assume accompanies
economic growth.

  If poor nations actively encourage the development of markets, open up
their economies to foreign capital, and build modern state structures,
the neoclassical theory predicts that over time there will be a
convergence between per capita incomes in the poor and rich nations.
The demand for labor in the poor countries will be relatively greater
than the demand for labor in the rich countries, and this will cause
wages in the poor nations to rise relative to wages in the rich nations.

  The relatively greater investment in the poor countries, attracted
initially by the high rates of return, will cause the poor nations'
economies to grow relatively more rapidly than the rich ones.  This
means a convergence of GDPs per capita, assuming that population growth
is not larger in the poor countries.  This should not be the case,
however, since higher economic growth rates will discourage large family
size as they have in the rich countries.  In addition, some persons will
emigrate from the poor countries, attracted by higher wages, and this
will further reduce population growth."

  It is curious that some radicals appear to accept elements of this
analysis.  They seem to take it as inevitable that rural people will be
uprooted from their land and move to work in the towns and cities. They
even claim that there is something liberating about this, as peasants
escape the idiocy of rural life (but see the Notes from the Editors in a
recent Monthly Review where it is argued that the appropriate
translation for what Marx said is the "isolation of rural life,"
something perpetrated on peasants by capitalism which leaves rural areas
devastated enclaves of very old and very young).  What they fail to see
is that the destructive forces of capitalism ruin whatever possibilities
there were for liberation within rural areas (and denigrate the many
struggles by peasants to make better lives in rural areas) and for the
integration of rural and nonrural areas. It then appears, from the
perspective of a desolated countryside, that migrating peasants achieve
a better life in the cities.  It may be true that different forms of
struggle are possible in cities and in manufacturing enterprises within
nonurban areas.  But to call working in a maquiladora plant liberating
mocks the word.  And whatever gains might be achieved by collective
actions in the new workplaces and homes can be very quickly undermined,
as we see now when the Mexican plants are moving to China.

  Even if we look at the U.S. we see similar things.  It is true that
the peasants and the children of peasants who took up work in the steel
mills and auto plants of U.S. cities won better lives for themselves as
a result of heroic union struggles.  But to suggest that this was
liberation as does Jack Metzgar in his new book "Striking Steel" is
incorrect in my view.  The liberation Jack sees as a consequence of the
US Steelworkers efforts in Jack's hometown of Johnstown, PA amounted to
a lot more money, better work conditions, freedom from arbitrary boss
control, and so on, and these were of great importance to people and
represented a sea change from the semi-feudal conditions in Johnstown
before the union.  But the workers did not win much control over their
destinies (and least of all the black workers, who faced discrimination
by the union).  The liberation lasted a little more than one generation,
long enough for Jack to escape (and me too from my factory town) but not
long enough to be called a real liberation.  The mills of Johnstown are
now closed, and the future of the people who live there is not bright.
The union is pretty much a memory, as it is in my hometown.  After Jack
left town, he just visited.  But I worked in Johnstown for 32 years
while Jack lived a million miles away in Chicago.  It is a pretty
miserable place now.

  Just as there is nothing inherently liberating about the decline of
rural areas (and the export agriculture that replaces peasant farming),
so too there is nothing inherently liberating about trade.  It should be
understood by now that capitalism created great inequalities among
nations, dividing the world into rich and  poor nations, largely by
force and violence.  Once it did this, the market itself tends very
strongly to perpetuate this inequality, with force and violence in
reserve but used when necessary.  Trade can never be abstracted from
this structural inequality.

  There is no real chance to change this as long as we operate within
the context of capitalism.  If this were not so, wouldn't we have seen a
lot more development by now?  After all, capitalism is not exactly a new
system. (Similarly, wouldn't we think that in a country with such
phenomenal productiveness as the US, there would be a lot less poverty,
low wages, high imprisonment, etc., etc. after all these many years?).
No amount of trade, aid, export agriculture, migrations out of rural
areas is going to liberate us as long as capitalism rules the world.

  Some radicals seem to have a difficult time saying these things.
Saying that there is now no way for the urban areas to absorb the
billions of peasants at risk of losing access to the land.  Saying that
we should be looking for ways to keep people attached to the land and to
make the land produce food for local consumption.  Saying that we should
look to Cuba for lessons here. Cuba has managed to achieve near food
self sufficiency without capital intensive agriculture and massive doses
of pesticides.  Havana is awash in gardens!  And farmers get good
education and health care too.  Finally saying the word "socialism" and
saying clearly and resolutely that it really is socialism or barbarism.

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