The Post Keynesian and Marxian alternatives
John Marangos
In 1989, John Williamson (1990) presented the term ‘Washington Consensus’ (WC) to describe the consensus between the Washington-based United States Executive Branch, the International Monetary Fund (IMF) and the World Bank (WB). These three entities are the main financiers of developing economies. Originally, the WC term was associated with the policies and conditionalities imposed by ‘Washington’ upon Latin America. Subsequently, the perceived ‘success’ in Latin America gained international appeal, making the WC the dominant set of policies and conditionalities for international development. Nevertheless, the WC evolved as a prescription for international development under the burden of condemnation, assessment, and ever-changing economic conditions. By 2003, the WC policy-set for international development was modified. Accordingly, Kuczynski & Williamson (2003) substituted the original term with a new name, ‘After the Washington Consensus’ (AWC), designating a supposedly ‘new’ set of policy reforms for developing economies which did not significantly deviate from the original WC.
Williamson (1990) identifies ten WC policy instruments regarding fiscal discipline, public expenditure priorities, tax reform, financial liberalization, exchange rates, trade liberalization, foreign direct investment, privatization, deregulation, property rights, and institution building. The AWC is an attempt to remedy the defects of the original WC while maintaining its fundamental tenets. Even though the original goal of the AWC was to accelerate economic growth, the goal was expanded to include improving income distribution. It appears that there is significant but incomplete overlap between the WC and AWC; some reforms are the same, while others were added in the AWC, such as institution building, income distribution, and the social sector.
The dominance of the WC and the AWC for international development is based on mainstream economics and has been imposed by Washington upon debt-stranded developing countries. Consequently, there is a need for an alternative to the static mainstream model of international development. The purpose of this chapter is to develop dynamic alternative schemes and recommendations for international development based on heterodox economics, in particular pulling from the Post Keynesian and Marxian traditions.
Post Keynesians reject the WC and AWC reforms due to the conditions surrounding their implementation, the content of the policies, and the rapid pace at which they are implemented. Post Keynesians argue that debt-ridden developing countries are effectively blackmailed into applying austere macroeconomic discipline and free markets policies which are at the root of economic crises.
From a Post Keynesian standpoint, the AWC and WC are unrealistic and impractical blueprints which ignore “specific historical and institutional conditions prevailing in developing countries” and completely abandon the “Keynesian notion of aggregate demand and income distribution set within a nonergodic world” (Gnos & Rochon 2004: 190). The free market goal of the WC and the AWC is not the actual economy we encounter. According to Davidson (2004), the WC and AWC are only applicable if the three classical axioms are satisfied: neutrality of money, gross substitution between goods, and an ergodic economic environment. For this reason, Keynes expressed serious skepticism that in the long-run the economic system was self-adjusting and argued that full employment was “a rare and short-lived experience” (Peterson 1987: 1591). In the following, I outline the policies proposed by Post Keynesians, based on Keynes’ ideas, about how to bring developing countries out of their current disadvantaged state. The dynamic Post Keynesian perspective for international development aims to establish a civilized social provisioning process based on a social-democratic capitalist system, along with a variety of property forms and a market with state intervention within a democratic political system (Davidson & Davidson 1996; Marangos 2000).1
The WC and the AWC require developing countries to sustain primary surpluses, even in periods of recession, since fiscal deficits are held to ignite inflation. This policy stance warrants elaboration. Keynes is known for heavy criticism regarding the effectiveness of fiscal discipline, especially in times of recession. Deficits are the result of recession (Camara-Neto & Vernengo 2004: 335). So, avoiding deficits and recessions requires stabilizing the cycle by stabilizing investment through public investment. Private investments are not necessarily superior to public investments (Chang & Grabel 2004a: 195).
Davidson (2004), referring to Keynes, suggests that developing countries embrace a national investment program directed to achieving full employment and shun inflation targeting that damages the economy by diminishing output and employment. There is no clear relationship between fiscal deficits and inflation (Ocampo 2002: 398; Gnos & Rochon 2004: 190; Saad-Filho 2007: 522). Fiscal policy should instead target economic stabilization, investment programs, and incentives for the private sector to support the government’s social provisioning goals (Saad-Filho 2007: 524). Unfortunately the WC and AWC have driven a substantial decline in public investment, adversely affecting private investment (Camara-Neto & Vernengo 2004: 341; Saad-Filho 2007: 521). The elimination of industrial policies and sectoral incentives has also had a negative effect on manufacturing investment, a sector that had been traditionally heavily protected and subsidized in developing countries.
It is not surprising that a significant proportion of public expenditure reduction falls upon those groups with the least political and economic power: the poor, the unemployed, and the sick (Chang & Grabel 2004a: 191; Saad-Filho 2007). Hence, one of the main concerns regarding the WC policies is that income distribution is not even mentioned. Meanwhile in the AWC, the unequal distribution of income is framed as the result of volatility. The IMF’s and World Bank’s obsession with fiscal austerity, inspired by the WC and the AWC, restricts economic growth and public expenditures and so harms social provisioning. “Cross-country and historical experience show that strategic, well-designed and well-managed programmes of public expenditure are critical to the promotion of economic growth, investment and the alleviation of social ills” (Chang & Grabel 2004a: 197).
Post Keynesians express heavy skepticism on the emphasis placed by the WC and the AWC on buttressing the social safety net rather than on expanding the modern welfare state; effectively, subordinating social provisioning to market-based reforms (Ocampo 2004: 310). Public expenditures in education, health, and infrastructure “are clear pre- and co-requisites for private investment” expected to crowd in private investment (Chang & Grabel 2004a: 183). Consequently, the position of Post Keynesians is establishing a modern welfare state and directing expenditure on social programs, including retraining the structurally unemployed.
For the Post Keynesians, the development of a tax system should be based, not only on revenue considerations, but also on the social and cultural background of the society. Preventing tax evasion is at least as important as expenditure reduction in the face of budget deficits (Chang & Grabel 2004b: 288). Meanwhile, the aforementioned fiscal policies require a modern tax system and an expanded tax base (Saad-Filho 2007: 522–523). Davidson & Davidson (1996: 91–92) hold that there is a definite link between tax compliance and civic values. In a dynamic civilized social provisioning society of the Post Keynesian mold, there is a conscious payment of taxes by members of the society and non-compliance is not considered an alternative. Non-compliance is the result of the diminishing role of civic values in a society. The development of a civilized society in the Post Keynesian framework encourages tax-paying norms consistent with civic values, where individuals would have had to pay their taxes as part of their moral duty. “In a civilized society where civic values and self-interest flourish, the citizens must be willing not only to die for their country but also to pay for it” (Davidson & Davidson 1996: 217). The Post Keynesians propose establishing a modern tax system, expanding the tax base, increasing tax revenues, redistributing income, and strong enforcement of the existing tax laws; the reduction or elimination of the deductions, exemptions, and loopholes favoring the well-off; increase in the tax rates; taxing wealth and large or second properties in rural and urban areas; and taxing interest income, capital gains, financial transactions, and international capital flows.
Financial liberalization, defined as freeing financial markets from any intervention and allowing the market to determine the allocation of credit, is a source of financial instability and crises. Arestis (2004: 256) suggests that the “appalling performance of financial liberalization policies should not be surprising [as] it can be readily explained by its problematic theoretical nature and its poor performance at the empirical level.” The financial liberalization proposition is based on an ideological commitment to free markets that is grounded neither in empirical evidence nor economic theory. Financial fragility, in contrast to WC and AWC perception, is not the result of accidents, policy errors, government failure, or exogenous shocks. Rather, financial fragility is built into the market capitalist system as Minsky long ago pointed out (Nissanke & Stein 2003: 296). From a Post Keynesian standpoint, interest rate liberalization has a negative effect on investment, financial liberalization is less likely to enhance long-term growth prospects, and a free banking system is unable to respond effectively to financial crises (Arestis 2004: 258).
Post Keynesians accentuate the need for greater regulation of financial markets together with a relatively closed capital account that will allow for lower interest payments, lower debt servicing spending, and more space for public investment. Interest rate policies should target a stable and permanently low level of interest rates and state-directed credit to specific parts of the economy (Arestis 2004: 262, 265). “If there is any single idea that Keynes propounded in The General Theory and adhered to throughout his life it was the necessity for interest rates to be low if capitalism is to function effectively” (Peterson 1987: 1617).
Davidson (2004: 217) holds that “the Washington Consensus has created perverse incentives that set nations against nations in a process that perpetuates a world of slow growth (if not stagnation).” By chasing the ‘competitive exchange rate’ instructed by the WC and the AWC with the intention of making domestic industries more competitive in the absence of capital controls, risks stability and capital flight. Unemployment becomes a problem for not only the competing economies, but also the trading partners of the ‘successful’ export-led country. Even if the search for a ‘competitive exchange rate’ were to succeed, the end result would still tend to increase the global inequality of income and likely reduce domestic living standards and social provisioning. Chang & Grabel (2004a: 179) support an adjustable pegged exchange rate regime matched with capital controls. Kregel (2008: 551) recommends an exchange rate anchor as part of domestic price stabilization policy. In other words, “whatever the exchange rate regime, it must be managed carefully” (Saad-Filho 2007: 529).
The theory of comparative advantage rests on outdated assumptions about technology, industrial structure, macroeconomic conditions, and the mobility of labor and capital (Chang & Grabel 2004a: 60). Any efforts by many nations to obtain competitive gains by implementing policies that will reduce the domestic monetary costs of labor or the exchange rate can only foster further global stagnation and recession. Each nation that attempts to regain a competitive edge induces similar depressionary policies in other economies. In addition to this, trade liberalization around the world is partially biased, as products produced in developing countries are subject to the highest levels of protectionism in developed economies. Seeing that trade liberalization can disproportionately affect the poor, the pro-poor strategies require the regulation of the balance of payments (Saad-Filho 2007: 528).
Davidson (2004: 218) and Ocampo (2002: 397) propose an international trade reform program built on Keynes’ Bretton Woods proposals. These were designed to obtain an international agreement without surrendering monetary policy, domestic banking systems, or fiscal policies, and also to allow a sufficient degree of freedom to governments to pursue their goals. Davidson’s (2004) reform plan for international trade, updating Keynes’ proposals, takes into account those dynamic systemic features that were at the basis of Bretton Woods’ success: fixed but adjustable exchange rates; capital flow restrictions; and reduction of trade imbalances, initiated by surplus nations. The creation of the International Clearing Union would require only an international agreement among its national members, preserving the core of the Keynes Plan.2
Keynes (1980: 276) was firm that movements of capital should be controlled as “we cannot hope to control rates of interest at home if movements of capital moneys out of the country are unrestricted.” For Post Keynesians, capital controls are the necessary complement to Keynes’ fiscal policy proposals and are also necessary for the socialization of investment and social provisioning. It appears that a sustainable growth path is a precondition for private capital inflows (Chang & Grabel 2004a: 16; Camara-Neto & Vernengo 2004: 337).
The race for foreign direct investment (FDI) serves as a formidable constraint to the promotion of expansionary, redistributive and labor rights policies (Chang & Grabel 2004a: 23). However, not all investment by multinational corporations (MNCs) can be prone to flight. Investment decisions by MNCs are grounded on factors such as a large domestic market, an educated workforce, rising incomes, economic growth, and sound infrastructure. So, FDI can be regulated and achieve developmental objectives as part of a national development strategy and/or industry policy. In the meantime, there is no single appropriate strategy for all types of FDI and for all developing countries. Policies regarding FDI must be tailored to the particular dynamic conditions of each industry, sector, and economy. It is growth that stimulates FDI and not the other way around (Chang & Grabel 2004a: 143). In sum, the Post Keynesians conjoin FDI with national development strategy or industry policy instead of dismantling the FDI regulatory framework as required by the WC and AWC.
In a number of developing countries, many state-owned enterprises (SOEs) became a source of budget deficit and wastefulness, but this is not a widespread feature of SOEs. Without a doubt, developed countries kept some SOEs that are quite successful. For the reason that it is easier to control state-owned enterprises, compared to private firms, the experiences of France, Austria, Finland, Norway, Italy, and Asia demonstrate a dynamic state-owned sector that played a key role in industrial development (Chang & Grabel 2004a: 87). Meanwhile, the experiences of developing countries subject to the WC and AWC privatization mandate reveal badly designed privatization programs, rent-seeking in the regulation of privatized enterprises, and the transfer of resources to insiders (Chang & Grabel 2004b: 288; Ocampo 2004: 312). There is a heavy expression of skepticism in establishing an unambiguous causal empirical link between the size of the SOE sector and economic growth. There is no evidence that a large SOE sector unavoidably causes countries to perform poorly. Consequently, economic and social development does not require a substantial change in property ownership. This is because ownership per se is less important than competition, the incentive structure, and the nature of regulatory policies (Marangos 2002). Thus, the policy recommendation from the Post Keynesians is to maintain SOEs as an engine of socio-economic development and a source of social provisioning.
The liberalization of the labor market is defended by neoclassical-Keynesians because unemployment is attributable to short-term wage and price rigidities or, in an open economy, to noncompetitive exchange rates (Davidson 2004). However, labor market liberalization contributes to increasing income inequality, while the centralized wage bargaining system counter-attacks such trends. In addition, labor market “flexibility should never be seen as a substitute for adequate macroeconomic policies” (Ocampo 2004: 311). In an unstable macroeconomic environment, further flexibility increases uncertainty and firms respond by reducing ‘formal’ labor employment and/or eroding working conditions. Flexibility has negative externalities, such as damage to job security (Ocampo 2002: 403–404). Therefore, government intervention should encourage productivity growth, better working conditions, increasing the minimum wage and reducing wage dispersion, supporting trade unions, and offering tax and other incentives to firms to invest in targeted sectors that introduce new technologies and high wages (Saad-Filho 2007: 525).
The importance of property rights for an entrepreneurial market economy cannot be questioned (Davidson 2004: 209). Therefore, it is important from a Post Keynesian perspective to reform the land tenure systems in developing countries (Saad-Filho 2007: 526). However, Post Keynesians hold that property rights are only one element of the institutional framework for an entrepreneurial market provisioning process. The neglect of institutions in the WC was injurious to economic development (Ocampo 2004: 309).
Economic and social institutions, indispensable for a market economy of the Post Keynesian mold, must be subject to a democratic political process. This is because differences in the effectiveness of economic institutions are ingrained in ideological standpoints that can only be resolved via a democratic political process. This stance by the Post Keynesians signifies the actuality. There is no such thing as a unique institutional design of a market economy in terms of economic dynamism and stability, income distribution, social cohesion, and social provisioning. “The institutional heterogeneity is apparent” among countries today (Chang & Grabel 2004b: 278). Moreover, institutional development is essentially endogenous to each society and depends on a learning process and numerous historical determinants (Ocampo 2004: 312). It is not the role of ‘Washington’ to impose a dominant institutional structure. Instead, the Post Keynesians argue that institutions are endogenous to each society so as to guarantee social cohesion and social provisioning, and to manage conflict in the establishment of a civilized society.
The growth dynamics of capitalism and its dependence on the financial system is fundamental to the Marxian approach to international development. Marxians view capitalism as a dynamic historical process characterized by constant change. Development of capitalism is uneven; divergence is the rule and convergence the exception. These are central conclusions of the Marxian analysis of accumulation. These are to be viewed in contradistinction to the equilibrium approach of the neoclassical economics and the WC and the AWC. Stated simply, neoclassical economists insist on abstracting economics from all social relations and institutional arrangements. The real history of capitalism is lost and the idiosyncrasies of institutions, history, and culture are disregarded. Subsequently, capitalist relations can only allegedly advance naturally from human nature (Bracarense 2013: 335).
In this dynamic process, capitalist development or non-development is the outcome of the interaction between domestic and international forces. What Marxians bring to the table in the creation and dynamics of capitalist development and crisis is class analysis, exploitation, modes of production, surplus value, and power. ‘Class’ denotes people grouped together by a common relation, including ownership relation, to productive activity (Lippit 1988: 20). While most mainstream development theorists continue to argue that developing countries should emulate developed capitalist countries and see development policy as a way of speeding up the process (Bracarense 2013: 334), the Marxian dynamic process of international development paves the way for socialism as an alternative economic system of social provisioning. Socialism has a well-defined set of ends and values of freedom, democracy, social justice, community, efficiency, self-management, solidarity, prevention of exploitation of the weak, reduction of alienation, greater equality of opportunity, income, wealth, status and power, and the satisfaction of basic needs. In the socialist dynamic process, the working class prevails in the decision-making process at any level of the society.
Marxians argue that under-development has its roots to colonialism and imperialism, while at the same time colonialism and imperialism are part of the same dynamic process of capitalist development (Bracarense 2013: 336). The incorporation of the colonies into the world capitalist system established power structures that allow the former to develop by expropriating surplus for the benefit of the latter. “This process inevitably leads to the ‘development of underdevelopment’ in the periphery” (Ayres & Clark 1998: 89). Eventually, economic development takes place when the dominant domestic and foreign classes controlling the surplus value realize that it is in their interest to use the surplus in a way that will promote national development. Only then, the ruling classes invest in, for example, infrastructure, education, and health care provisioning (Lippit 1988: 23). That is to say, development reflects the specific class interests that set development in motion. During this dynamic process, countries must get rid of their cultural and social idiosyncrasies that separate them from capitalist world. They must replicate world capitalism, eliminate social peculiarities by applying the WC and the AWC. In contrast, Marxians abandon the dichotomized view such as ‘developed’ and ‘developing’ and ‘center’ and ‘periphery.’ Instead, they adopt a decentralized view of social change (Bracarense 2013: 339) with the ultimate goal of achieving socialism and genuine social provisioning.
The IMF and the WB have played a central role as a broker between creditors and debtors and as a global enforcer of the capitalist rules of the game mainly by imposing the WC and the AWC. In contrast to the Marxian goals of socialism, the IMF is placing the cost of capitalist under-development on citizens rather than those responsible for the crisis. Clearly, the international debt crisis not only made developing countries more dependent on the fetishized world of money and finance, but also led to increased levels of exploitation of the working class and greater misery for the mass of the population (Ayres & Clark 1998: 110). Marxians demand the repudiation of the debt (Cleaver 1989: 39), given that it is not a legitimate burden acquired by the majority of the people. They argue that there is no moral or ethical reason for continuing to repay the illegitimate debt. From a working-class standpoint, capitalists borrowed to increase exploitation and misery for the mass of the population. In the following, I outline the policies proposed by Marxians on how to bring developing countries out of their current disadvantaged state.
Budget deficits increased in developing countries because of the concentration of economic and political power run by dominant groups pursuing their own class and individual interests. Marxians suggest that fiscal deficits be avoided due to their implications for income distribution, planned allocation of resources, economic power, and social provisioning. Deficit financing can undermine state autonomy and result in the diminution of sovereignty, especially when financed with foreign savings, since the use of foreign savings increases the probability of government policy being constrained by foreign creditors and/or agencies. The hegemony produced by foreign debt establishes a high degree of default risk if government policies do not serve the interests of external financers (Harris 1991: 115–116). The global recession undermined the debtor countries’ ability to benefit from any reductions in foreign exchange and the rise in interest rates dramatically raised the cost of debt, further increasing depression. The enormous increases in debt servicing thus had significant negative consequences for development. Marxians therefore reject the use of deficit financing and argue that it is a mechanism through which developing countries are used to stabilize international capitalist finance.
No society appears to be too poor as a surplus value exists that can be used either to sustain capital formation or to fight wars or build monuments (Lippit 1988: 18). The use of the surplus value is conditioned on the prevailing class power and modes of production. The dominant capitalist class appropriates and uses surplus value in a way that is mandated by their class interests. Some uses of the surplus sustain development and social provisioning, for example investment. Other methods perpetuate non-development, for example luxury consumption, warfare, or monument construction (Lippit 1988: 18). If the working classes are in power in socialism, the pattern of development will reflect the interest of the majority of the population. The provision of basic needs such as education, housing, health care, the absence of exploitation, and racial and gender inequalities, the reduction of unemployment and achievement of economic growth denote socialist social provisioning. Marxians also insist that the state should establish and facilitate the establishment of democratic institutions, which allow for the full participation of the masses. This would require adoption of an educational policy that raises the political and class consciousness of the masses. Intensification of the class struggle for the realization of non-capitalist development must be the ultimate purpose of such an educational policy.
Overall, developing countries collect comparatively few taxes (Weller 2007: 369). Marxians are in favor of raising more revenue through greater progressivity; high capitalist incomes would provide tax revenue and reduce income inequality through transfer payments and social provisioning, increasing aggregate consumption. More efficient tax collection could improve revenues through using modern information technology, reorganizing local tax collection authorities, implementing effective self-assessment, and establishing credible deterrents for tax evasion. The result should be more revenue, greater fairness, improved transparency, and a larger formal sector. A consumption tax, such as Value-Added Tax (VAT), is regressive and, as such, is rejected by Marxians. In addition, Ricardian equivalence does not hold (Harris 1991:112). It is aggregate expenditure that drives tax revenues and not the other way around.
Marxians are quite conscious of the class nature of credit and of debt and the manner in which financial capital is used against workers. Credit, debt, and capital cannot be appropriated by the working class, but must be destroyed in communism. Then again, when money and credit cannot be destroyed, it must be used to advance working-class interests under socialist social provisioning. In comparison to financial liberalization which essentially invites foreign banking and savings to the economy, Marxians focus on increasing domestic banking and national savings. In line with this thought, industry must be financed and controlled by domestic sources. If industry is externally financed, national control may be lost (Ayres & Clark 1998: 108).
The rapid rise in interest rates in the early 1980s raised the cost of debt repayments and ushered in the global recession in growth, which reduced foreign earnings necessary to repay the debt. Inflation of external credit led to the debt crisis and the invitation of the IMF to reschedule the debt. Mandel (1962) evaluates ‘indebtedness’ within the framework of a theory of capitalist crisis and credit creation, and suggests that the international indebtedness of developing countries diminishes the impact of the capitalist crisis by reducing the scale of the global downturn and by stimulating growth. “Debt is therefore viewed as a necessary consequence of the intrinsic laws of global capital accumulation” (Yaghmaian 1989: 102). Consequently, developing countries are no longer passive recipients of debt, but consciously accumulate debt as an integral component of their industrialization and economic development and also as a process of integration in the fetishized world of money and finance. Developing countries’ indebtedness is thus an intrinsic tendency of capitalist development during the stage of the internationalization of productive capital. Decisively, “debt is a structural tendency that is primarily governed by the dynamics of global accumulation, as opposed to abrupt fluctuations in the world commodity and financial markets” (Yaghmaian 1989: 103–104) for which financial liberalization is an essential prerequisite.
A system of internationally negotiated controls on capital flight was necessary, whereby countries would have been required to return capital that was moved abroad in violation of a nation’s laws. Such returned funds would have been confiscated if the owner was convicted of illegal capital flight, providing a powerful deterrent. “We need to penetrate the fetishism of money and question the changes in class relations that underlay the rearrangements of world capital flows” (Cleaver 1989: 22).
Through the socialist customs union, a fixed exchange system will eliminate the instability and negative outcomes caused by the flexible exchange rate system. Depreciation of the local currency hurts social provisioning and working-class consumption of imported goods, which in many countries includes basic subsistence goods (Cleaver 1989: 31). The concept of comparative advantage had its origins not so much in economics as in politics. It was created within the context of colonialism, war, nationalist rivalries, and military power. Prices and wages are the products of specific historical processes. Experience revealed that free trade did not benefit everyone equally. Trade liberalization did not facilitate the closing of the technology gap, which is central to industrial development. Developing countries face growing global protectionism with respect to advanced technology and most transfers are intrafirm. In the same way, knowledge is increasingly tied up in patents, which are controlled by multinational corporations. Developing countries have traditionally relied on cheap labor to attract foreign investment, but this policy does not necessarily bring access to technology. Furthermore, the tightening of controls over technological knowledge creates barriers to entry into high technology industries and thereby inhibits the transformation of developing countries (Ayres & Clark 1998: 112). MNCs have higher import propensities, industrial exports have a higher resource content and lower manufacturing valued added than locally owned firms (OECD 1988: 71). Efforts by developing countries to impose domestic content levels have generally failed due to the power of MNCs (Ayres & Clark 1998: 109).
The expansion of mutually beneficial international trade requires government planning. A customs union of several socialist countries is feasible, comprising a common market with close cooperation, a common external tariff, and perhaps a common currency. The socialist customs union will provide the means to avoid the destructive elements of free international trade with the capitalist countries and, at the same time, will become a vehicle for the development of socialism. A supranational planning body will ensure that prevailing regulations and interventions in member socialist countries encourage social provisioning, equality, and ecological responsibility. The socialist customs union is underpinned by the notion that “the precondition for the free development of each would be the free development of all” (Blackburn 1991: 233). The socialist customs union will be based on an international socialist market, guided by a supranational planning body based on the principles of consultation, debate, democracy, and self-government among member states.
Marxians emphasize the importance of independent industrialization. However, that does not exclude participation of foreign capital in the socialist economy. The mandate of socialism is to provide for social provisioning and to equalize incomes in the national economy, meaning domestic incomes could increase through the participation of foreign capital. The socialist control of investment would, however, require some regulation of foreign investment. Meanwhile, socialist countries will be able to use their custom union members’ resources without damaging the socialist cause and falling into the trap of providing concessions to international capital by eliminating restrictions. This is because FDI in developing countries is attracted to poor labor conditions and low wages, contributing to the growth of exports while resulting in distorted development (Ayres & Clark 1998: 113).
In his later Marxian-oriented work, Hymer (1972) investigates how FDI by MNCs gives rise to ‘the law of uneven development,’ whereby the interests of developing countries are subordinated to those of the elite in developed nations who effectively control MNCs and FDI. This hierarchical organization of the world “pulls and tears at the social and political fabric and erodes the cohesiveness of national states” (Hymer 1972: 133). Thus, while Hymer acknowledges the private welfare-enhancing role of MNCs and FDI, he concludes that the impact of FDI on social welfare is harmful as “it creates hierarchy rather than equality, and it spreads its benefits unequally” (Hymer 1972: 133).
The IMF and the WB demand and pressure for privatization to break workers’ leverage with the state. Privatization in developing countries has simply resulted in enriching the capitalists, without any benefit to the workers or to production. For the Marxians, the distribution of ownership is a major concern because it determines the distribution of power and influences equity, efficiency, and social provisioning. Because markets do not approximate perfect competition and are instead dominated by domestic and international monopolies, the distribution of property increases inequalities. Developing economies typically lack domestic capitalists with the necessary financial capital to purchase enterprises, making foreign ownership the only means of privatization. It was not by coincidence that foreign capital came to the ‘rescue’ of developing economies. This is an act of purposeful action by developed economies, ensuring that foreign ownership was the only permissible method of privatization. A debt crisis process implicitly has the goal of initiating the destruction of any institutional barrier, thus inhibiting the penetration, influence, and power of foreign capital. The IMF is responsible for creating the depression in developing economies. In such an environment, the only interested buyers come from abroad at a price “for next to nothing” (Gowan 1995: 45). Equally important has been the pressure exerted on governments in developing economies to sell state assets and public utilities to MNCs (the only possible buyers) in order to reduce fiscal deficits, lower inflation, and discipline the labor market by inducing high unemployment. Competition, not the lack of it, is the source of instability, crises, and uneven development and not a cause of equilibrium or development. In the labor market, the rigidity of wages is not the cause of unemployment. Wage or price flexibility is neither a necessary nor a sufficient condition for full employment equilibrium. The 1970s ‘anti-inflationary policy’ was a synonym for ‘anti-wage policy’ (Cleaver 1989: 28). Overall, state-owned enterprises should remain state-owned from a Marxist point of view to be used as vehicles of socialist social provisioning.
Socialism is typically defined as the public ownership of land and capital. But socialist development does not call for an exclusive commitment to state ownership. It is the dominance of working-class interests rather than state ownership that defines the socialist social formation (Lippit 1988: 23). Forms of ownership are determined by, among other things, the varying degree of concentration of the productive forces. Diverse forms of technology gave rise to diverse forms of socialization, as technology is not neutral (Barratt-Brown 1995: 361). Thus, to impose a common form of ownership is inconsistent with social reality. It could hardly have been correct to describe the progress of socialism as a mechanical increase in the share of state-owned assets at the expense of other forms of ownership. The simplistic view that state property is clearly superior to all other forms of ownership cannot be sustained. Markets and planning in conjunction with a number of different kinds of ownership institutions, both private and collective, are suitable in socialism.
Marxians argue that state ownership per se does not guarantee efficiency. If the structure of state ownership conflicts with the changing economic realities, state ownership could be a negative rather than a positive element in economic development. State property is no longer seen as sufficient, or even necessary, for socialism. Within the socialist economic system, and based on state property, a variety of property forms can exist. Thus, all forms of property—individual, cooperative, and state—are important and are consistent with socialism. Capital will be socialized and rented to firms. Private property is considered complementary to state and group ownership. Individuals should be permitted to operate their own enterprise, being the most effective structure for the development of labor-intensive activities and the service sector, subject to certain regulations administered by local government.
Marx emphasized the importance of supporting institutions for accumulation and the fact that institutional choice did not take place in a vacuum. Moreover, given human behavior, the institutions have to be altered so that the social provisioning was consistent with the social interests of efficiency, equity, self-management, and solidarity. From a Marxian perspective, orthodox economists continue to overlook the significant role of class relations in the institutions of socio-economic development. Ruccio (2011) states that existing institutions within developing countries often serve to create and to reproduce relations of capitalist exploitation, as well as appropriation of surplus value created by the direct producers. The surplus generated is utilized to strengthen the exploitative institutions in safeguarding the institutional conditions of surplus value extraction. From a Marxian point of view, Ruccio (2011) proposes institutions that impede the appropriation of surplus value through capitalist forms of exploitation and that promote alternative forms for redistribution of surplus in a non-exploitative way for socio-economic development and social provisioning. Ruccio (2011: 575–576) also suggests the implementation of “rules and norms that make it possible for the direct producers themselves to appropriate and distribute the surplus they create.”
This chapter presents the Post Keynesian and Marxian perspectives on international development. To give structure to the debate, the analysis was concentrated on identifying the reactions of these heterodox schools to the specific policies of the WC and the AWC. In particular, fiscal discipline, public expenditure priorities, tax reform, financial liberalization, exchange rates, trade liberalization, foreign direct investment, privatization, deregulation, property rights, and institutions building were examined in detail. Unquestionably, these policies are not the only preconditions for economic prosperity.
The dynamic Post Keynesian and Marxian approaches developed in this chapter may appear at first sight contradistinctive. The dynamic process of Post Keynesian perspective for international development is to establish a civilized capitalist social provisioning process, whereas the dynamic process of the Marxian perspective for international development is to establish socialism as an alternative economic system of social provisioning. Nevertheless, Marx (1904: 12) clearly stated that
no social order ever disappears before all the productive forces for which there is room in it have been developed; and new higher relations of production never appear before the material conditions of their existence have matured in the womb of the old society itself.
When each social order of social provisioning has exhausted the dynamic nature all the productive forces, the new social order of social provisioning appears. Socialism, in other words, would not be possible until capitalism had exhausted its potential for further development either in the neoclassical or Post Keynesian mode. Consequently, the dynamics of international development in developing economies pass through the dominant neoclassical paradigm in the form of the WC and AWC to a civilized capitalist social provisioning process and then to socialism as an alternative economic system of social provisioning, based on Marxian historical materialism.
For Post Keynesians the dynamic nature of social provisioning ends in the form of a civilized capitalist economic system, whereas for Marxians the dynamic nature of social provisioning unfolds in the form of a socialist economic system of social provisioning. The linkages between the Post Keynesian and Marxian approaches to international development are unsurprising. Linkages exist with respect to public expenditure (priorities on social programs), tax reform (aggregate expenditure drives tax revenues), exchange rates (fixed exchange rate), trade liberalization (clearing/customs union), privatization (maintain state-owned enterprises), deregulation (government intervention in the labor market), property rights (all forms of property are consistent), and institutions building (endogenous created). Contradistinctions are present with respect to fiscal discipline (deficits should target full employment versus fiscal deficits should be shunned) and financial liberalization (low level of interest rates versus financing only through domestic sources). The linkages between heterodox approaches, in this case Post Keynesian and Marxian, have the potential to advance heterodox theories of international development in theory and practice. This is a thought-provoking and crucial objective for all heterodox economists.
I am grateful to Shaina Sorrel and Sean Alley for their valuable comments.
1 The Post Keynesianism approach discussed in this chapter refers mainly to American or fundamentalist Post Keynesianism. It is acknowledged that this is a narrow view of Post Keynesianism, excluding those who hold a radical vision of society (including Kaleckians, Sraffians, and radical political economists).
2 For an application of the plan for international trade in Eastern Europe in the form of an Eastern European Clearing Union, see Marangos (2001).
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