This book describes struggles of different countries and their development after World War II. It presents a panorama of different ideologies of accelerated development, which dominated the world just before the war and in the next 40 years. The author explains why in the 1970s global and local elites began to turn away from the state, exchanging statism for the belief in the «invisible hand of the market» as a panacea for underdevelopment. He focuses not only on the genesis of underdevelopment, but also on the causes of popularity of economic planning, and the advent of neoliberalism in the discourse of development economics. This book evaluates the power of state as a vehicle of progress and focuses in detail on the Soviet Union, China, Poland, Ghana, Tanzania, and South Korea.
Chapter 9. Conclusion. The politics of growth: 1943–1980
The eminent historian Witold Kula once wrote that past economic decisions often appear incomprehensible and clearly absurd in retrospect. Commenting on the research of another historian, Tadeusz Korzon, Kula wrote:
[Tadeusz] Korzon, in exploring the history of the factories founded by magnates in Poland in the eighteenth century, found he was unable to explain them using modern, rational categories. Everything about them, starting with their “poor” location, seemed absurd. He thus turned to explanations based on the “unprofessionalism” of the feudal lords who founded them. But if we introduce into our analysis an eighteenth-century category that was no longer part of the calculations made by businesses in Korzon’s times, namely the distinction between cash and non-cash expenses in a feudal economy, the problem can be explained according to internally consistent criteria. How many of the elements that determined human behaviour in Poland in the eighteenth century are we unaware of?1005
Korzon, wrote Kula, simply accepted that all business enterprises were established to earn profits. But this was an ahistorical assumption. Prince Karol Radziwiłł, (1734–1790), for example, founded the famous Slutsk belt factory for political reasons, as well: he gave the belts as gifts during the Confederation of Radom in order to win over supporters, and used them to reward his allies and show off his wealth and splendour.
Concepts about economic growth that were widely held in peripheral countries in the postwar period are presented today in an equally ahistorical manner. From the perspective of the neoliberal economic thinking and writing that has dominated since the 1980s, earlier ideas seem to be wrong, absurd and incomprehensible, and are often explained as being merely products of ideology.1006 Here are just two of many such examples. In a booklet entitled “The Economy”, historian Wojciech Roszkowski describes the “rise and fall of the command system” as primarily an attempt to realise a communist utopia that was doomed from the ←323 | 324→outset to failure and led to tragic results. A much broader perspective is taken by journalists Daniel Yergin and Joseph Stanislaw, whose book The Commanding Heights: The Battle for the World Economy is an attempt to describe the intellectual and political sources of the free market’s return to favour in the 1970s and 1980s. The popularity of economic planning and state intervention in the economy is for them a historical mistake, though perhaps an understandable one in light of the circumstances – including the Great Depression and the popularity of Keynesian economic theory – but also something that was finally overcome.1007
The thesis of the present book is different: it attempts to show the rational nature of the political ideologies underpinning efforts to achieve economic growth in underdeveloped countries. It also attempts to show the theoretical and historical contexts in which economic decisions were taken that today may seem absurd and incomprehensible, but which at the time were considered, even by experts, natural, rational and innovative. It therefore represents an attempt to show the historicity of this project.
It is difficult to reduce to a single model the wide variety of ideas about the economy found in peripheral countries after 1945. The means used to attempt to achieve accelerated development, however, had many common features. Thus, although there were many of them, it is worth trying to describe an ideal type (as defined by Max Weber) from among these political and economic strategies.
They can generally be divided into three main spheres – the goals and values pursued; the political and economic techniques rulers had at their disposal to achieve them; and finally, the political calculations that both allowed them to build a social base for their power and that limited their room for manoeuvre. All of these spheres were organically linked. Many modern scholars of political thought, most of whom adhere to rational choice theory, would most likely accept that ideology is the mainstay of political power and provides the only justification for it. From this perspective, what counts most are the group interests of the elites; discourse is merely a product of these interests. Theory and practice went hand in hand, and it is impossible to prove the former preceded the latter. In Latin American countries, for example, a policy of import substitution had been in place since the 1920s, before economic theory provided a justification for it.
The model rhetoric for accelerated development included several commonly occurring views and arguments, which were expressed with different levels of intensity and in different configurations. The starting point was a critique of capitalism – if not capitalism in its Western European form, then that form with ←324 | 325→which the modernizing elites in peripheral countries were dealing with at the time. Here is a summary of these main arguments:
• The Great Depression demonstrated the limits of the opportunities for growth in free-market capitalism.
• The Great Depression also tangibly and painfully showed poor and agricultural countries their double dependence on the West – as a source of capital and as a market for locally produced goods. After the experience of the Great Depression, becoming independent from both one and the other became an obvious priority. Western capital markets started to become available to poor countries on a wide scale only in the 1970s. Before this time, the West could not be counted on as a source of capital (a painful fact many countries became aware of – among them Poland – during the interwar period): capital flowed in and out of countries according to its own dictates and was invested in export-oriented sectors such as mining, which often perpetuated an economic structure that was undesirable from the point of view of the modernizing elite. Global markets were equally capricious, and a fall in prices of a major export commodity – for example, cocoa in Ghana or coal in Poland – created problems for to the entire country (and its government).
• Peripheral capitalism was not conducive to growth: it did not assure an adequate rate of capital accumulation and investment. It was also inextricably linked to an anachronistic, semi-feudal social structure, which acted as a brake on development. The small surplus that that these very poor societies could generate was consumed by the traditional (and often ethnically foreign) elite or exported abroad, where it provided additional capital for foreign investors.
• Criticism of capitalism was generally associated with economic nationalism and social radicalism. Capitalism brought poverty and misery to the masses, and wealth to a small elite (often linked by family and financially ties to the former colonial powers or the USA). The fear of foreign economic and political domination increased the feeling of a need for mobilization. The fear of external threats – whether from neo-colonialism or an armed invasion – was common in modernization projects such as Stalinist industrialization, the Great Leap Forward in China, and Nkrumah’s economic programme. This was an important reason why industrialization also had a strategic and military dimension, and why economic interests were often deliberately subordinated to an imagined or real strengthening of the power of the state. It was also a reason for haste. For example, in 1929 the Soviet Political Bureau ←325 | 326→expected a Western invasion within five years.1008 The stakes for success in programmes for industrialization included their very survival. Extreme situations demanded – as many have said – radical methods.
• The last argument was that an accelerated programme of development was attainable, and its supporters provided as positive, or so they thought, examples: Fascist Italy and Germany (before World War II), the USSR and Japan. Imitation was never total: even South Korea’s Park Chung Hee, despite being in awe of the Japanese model, did not seek to duplicate it. The examples cited above serve to show that a “leap into modernity” in a short time was possible; it merely required a mobilising of resources.
This is not a description of reality at that time, only a summary of the arguments made then. It shows that from this perspective, economic development was always primarily a social and political endeavour, not an economic one per se. It also had a clearly outlined objective: emancipation from foreign tutelage and influence, a strengthening of the country’s military power, or at least a strengthening of its international position and the legitimacy of the power elites who had undertaken this great task. It also aimed to transform the country’s social structure and introduce modern technologies. Economic calculations and raising the country’s standard of living were usually left in the background, although they remained important, at least on the level of rhetoric. Business was to serve social objectives and not merely earn profits. Economic growth was only part of a wider modernization project. The standard of living of citizens was an important long-term objective, but if it had to be sacrificed in the short term, it was necessary to do so – for the sake of a better future. This was an essential element of Feldman’s the growth model in the USSR, of the practice of the Chinese Communists, and of Nkrumah’s and Gomulka’s programmes for industrialization. Since the country lacked capital and the West could not be counted on for help, it was necessary to acquire it in the only place it could be found, in the shallow pockets of the citizens. In poor agriculture countries, this always meant the peasants or farmers – both in the case of Stalin’s Russia and in Nkrumah’s Ghana. Although the level of violence of the two regimes (and their effectiveness) was incomparable, they shared similar ideas in regard to capital accumulation.
The general guidelines for economic policy grew out of these premises. The list of tools governments had at their disposal to move their countries onto a path of rapid growth was extensive:←326 | 327→
• Nationalization and direct investment in industry by the state. From the perspective of the time, a number of arguments spoke in favour of the state taking ownership of its largest enterprises. National assets would come under control of the national government: profits would flow into the national treasury, not into the pockets of foreigners, and could be used to support further domestic investments. The nationalization of oil production in Mexico in 1938. – one of many such examples – was seen as a great national triumph over the power of the West, and the crowning moment of the revolution.1009 “Nationalization” of the economy could vary greatly in scope. It could take the form of the government acquiring private companies that were struggling – as in Poland before 1939. It might only apply to key industries, such as energy, transport and heavy industry. Outside of countries like China, the Soviet Union and the socialist bloc countries, the state usually allowed a degree of market freedom: but even if it did not formally become the owner, it took the company under its supervision (more about the forms this took below).
• Changing the social structure of the country – and unseating the traditional elites – it was necessary to institute agrarian reform and divide up old feudal estates among the peasantry. This was not merely an act of historical justice. The rulers wanted in this way to gain the support of the peasants, to break the influence of the former elite, and expand the markets for local industry.
• Changes in the structure of agriculture served to accelerate accumulation: a commonly used mechanism was instituting a state monopoly on the purchase of agricultural products and setting prices at a level at which the state received the bulk of the surplus.
• Economic planning was universally accepted and recommended by international institutions. this took many forms, which differed in scope and the means of control – from the extreme methods of the command economy in place during the height of Stalinist modernization, by which companies had to fulfil dozens of targets designated by the chief planner, to planning by means of indicators which determined investment and production objectives for both state and private companies.
• The state assuming control of credit policy. This could involve the nationalization of part or all of the banking system, or even setting up a bank to finance development projects (such as BNDSA in Brazil).←327 | 328→
• The State taking control of foreign trade and treating it as a tool of development policy. This especially concerned customs duties, import permits and the promotion of imports; the primary focus was the importation of capital goods at the expense of consumer goods and the import of technology. The state also controlled exchange transactions, manipulating exchange rates in accordance with policy objectives. Monopolies were also often established on the exports of goods from the country, which had to go through state-owned commercial centres (in any event, companies were given strong incentives to make use of them).
• The state placed controls on prices and wages in the economy; it tried to manage the domestic market and ensure access to basic consumer goods – especially food – at low prices. This included centralization and nationalization of at least a portion of wholesale trade and a system of subsidies for the production of basic consumer goods.
• The state tried to carry out a revolution in how people lived – it sometimes altered the calendar and often changed family law; it prohibited traditional clothing, and tried to liquidate the old feudal or tribal power structures and replace them with its own modern administration. This was accompanied by the expansion of the formal education system, initially, at the primary level.
This required centralising power in the hands of the modernizing elite and providing it with greater control over social life. The forms this took could be more or less repressive – from Asian dictatorships and Latin American populism, to the total state of Mao and Stalin. Authoritarianism, however, was a common feature of most economic projects to make a “great leap forward”, and ideology provided a justification for it: the governing authorities had to fulfil their historical mission, act as the vanguard of the proletariat, or had a mission to defend the new nation from foreign domination. A characteristic feature of this discourse was haste: there was no time for party politics and discussions, the time for action was now.
Very different regimes were assumed within this wide range of instruments of power – from the mild authoritarianism of Nkrumah to Mao’s totalitarian state. Most of them built up their political base of support from people employed by the state – the army, and officials and employees of the formal sector in urban areas. They were the ones who primarily benefited from the low prices of agricultural commodities. It was upon them, not the scattered and poor peasants or farmers, on which the government’s survival depended. The city was modernity: in the city was industry, in which the state invested. Even Nyerere’s agricultural policy in Tanzania – carried out under the slogan of “villagization” – assumed a significant transfer of resources from the countryside to the cities. In Nyerere’s ←328 | 329→model villages, the state defined in minute detail what the settlers would grow, and purchased their crops (or at least intended to do so, because in practice the result was often quite different).
Various models of state-inspired growth can be included within this broad ideal type.
Imagine a poor, agricultural country – let’s call it Ruritania – making use of the best traditions in political science.1010 Let it be in Central Europe, because it was for this region that Rosenstein-Rodan formulated his theory of accelerated growth in a classic article in 1943. It is the year 1945, or perhaps 1948. In Ruritania, a group of resilient young intellectuals come to power, many of whom were educated in the West. They have read and appreciate Marx, even if they do not think of themselves as Marxists. They are clearly nationalistic in their attitudes. Their aim is to overcome centuries of backwardness in their country, while also attaining international recognition and strengthening the country, whose legitimacy rests on the promise of modernity and national emancipation.
Young intellectuals affiliated with the Democratic People’s Peasant-Workers Party of Ruritania (DPPWPR) are in full control of the country. More than 70 perent of Ruritanians work the land; the people are poor and uneducated (not counting a handful of landowners), and industry – where it exists – is in foreign hands. The main export commodities of Ruritania are raw materials and food – mainly coal and grain, because Ruritania lies in Central Europe.
Ruritania’e main problem, say foreign economists (whose views are confirmed by the few Ruritanians who have dabbled in economics at Western universities) is the low rate of investment. Ruritania allots only five to six percent of its GDP to investment; this often does not result in growth, because the money is used to support the mining industry and build small food-processing plants. Given this situation, the country is doomed to stagnation.
Additional capital is required in order to change the situation. In better times, this could be obtained from abroad. But presently, in the wake of the Great Depression, this in unlikely. In addition, foreign capital brings with it foreign influence – often from powerful enemies of the nation – from which Ruritania earlier ←329 | 330→liberated itself. Bringing in capital from outside on the scale required is therefore impossible; international capital markets are still in their infancy, and even if they were more open, such a move would be politically unthinkable (remember, this is taking place in the 1940s).
Ruritania must therefore increase its rate of accumulation by means of its own domestic resources. Economists propose a solution. Lower the standard of living of Ruritanians – temporarily! – and use the surplus for investment.
Of course, initially, the former elites can be forced to return what they have taken. This is easy, and moreover, historically justified. It is a great act of social justice (which Ruritanians could read, for example, in the writings of the renowned Polish economist Oskar Lange). Land needs to be distributed to the peasants, and foreign capitalist landlords expelled. DPPWPR builds a political base among nationalistically-minded Ruritanians, and is popular, but this does not solve the problem of accumulation. The elites consume conspicuously, but this is a small part of overall GDP.
So there are two ways to raise capital.
The first is the nationalization of industries – particularly mining, which produces for export. Coal mines in Ruritania become the property of the state, which sets the wages of the miners at a low level, and exports the coal abroad.
And what if Ruritania does not have such riches? Then the only source of capital would be the countryside, which is home to 70 percent of Ruritanians.
Here, the DPPWPR has a few instruments available.
First, the least drastic means is a state purchasing monopoly. Private intermediaries can be eliminated and prices for Ruritanian cocoa or corn set below market value. Food is then exported, and the resulting surplus invested. But it soon turns out that the peasants are selfish and stubborn and their selfish interests blinds them to scale of the national project. It turns out that they do not want to sell what they produce so cheaply. Agricultural production stops increasing. The government of Ruritania then seizes upon another means: it introduces quotas and compulsory deliveries. A political propaganda campaign in the countryside accompanies this policy, and heavy fines are imposed on recalcitrant farmers.
When this does not work, the DPPWPR turns to another method: collectivization. Peasants are grouped together in cooperatives that are placed under state control. The government will now direct production. Economists suggest that this offers a major advantage: larger farms that can produce more efficiently. Dividing the land into small parcels landowners made sense in the preceding stage of development, when the party was fighting for popularity; now it needs to change this policy. After several years of turmoil, thanks to the blood, sweat ←330 | 331→and tears of Ruritanians, the party manages to increase the rate of accumulation: it now reaches 20 percent. Questions still remain: who is to invest? And in what?
The first question is obvious: the state has to invest. In the wake of the Great Depression, Ruritanian elites associate the market with chaos and irrationality. Besides they believe that capitalism has kept Ruritania in a state of backwardness. In this system, Ruritania was a peripheral country, which merely provided raw materials to the western centre. Capitalists invest only in what brings them profits – and this is not necessarily consistent with the country’s long-term interests. State investments must be planned (even the UN encouraged the establishment of a planning committee!) and calculated over a period of years. No taking chances! Nothing can be left to fate: these issues are too important for the country to allow this. Ruritania has ahead of it a long march towards a prosperous future.
But what to invest in? What will bring the largest increase in production in the shorted possible time? The answer: steel mills and power plants, the chemical and machinery industries. First we produce the means of production, and later we will be able to develop light industry easily and economically, and target production to meet needs of the population.
This choice also has significant political advantages. First of all, it increases Ruritania’s military potential, and thus increases the security of the DPPWPR government. This is important because the DPPWPR elites are convinced they are threatened by domestic and foreign enemies. Secondly, it will free the country of the need for costly imports. Ruritanian economists have calculated that an hour of work in industry is worth as much as 6 to 10 hours of work by a villager in the field. This is why every imported machine requires a major effort to export, and is thus a huge burden on the countryside. The sooner we produce our own machines, the faster the standard of living in rural areas will rise, and Ruritanians (who are now underfed because the country needs to export food) will be able to live better.
An open question is whether nationalization should affect all of industry, or only the largest factories, and finally, should the state builds large factories itself or in cooperation with domestic capital. This depends on the political situation. Imposing controls on trade makes sense if market prices are high and inflation is eating into peoples’ incomes. In this case, the nationalization of trade should be considered, or, at least in part, in order to give the ruling elite a chance to catch its breath. In addition, the DPPWPR sincerely believes that shortages are not due to its politics, but a conspiracy on the part of speculators.
Now we can clearly see a third – and necessary – part of the Ruritanian strategy: the State must take full control of foreign exchange, capital flows and foreign ←331 | 332→trade. The DPPWPR cannot afford to have Ruritanians wasting badly needed hard currency, in order to, for example, import cars or luxury consumer goods. We need to state this clearly: “We cannot afford this” (According to Czesław Bobrowski, Władysław Gomułka often said this). Moreover, government policies would lead to capital flight abroad – we need to prevent this in advance, because capitalists think only about their own interests, and are generally held in contempt.
Increasing investment at the expense of lower consumption; government control over agriculture, industry and planning; control over foreign trade – these are the three pillars of the development model that the party proudly calls “Ruritanian socialism”. It is labelled Ruritanian in order to emphasize that this is a unique, home-grown achievement, not a copy of someone else’s ideas, even of those countries with whom Ruritania maintains a brotherly friendship.
How did things turn out in Ruritania? In the 1970s, shortly after the oil crisis, the country fell into stagnation, and then plunged into recession. For years, disgruntled Ruritanians demanded changes. To remedy the situation, after a long period of political crisis, Ruritania had to enlist the help of the International Monetary Fund and the World Bank in order to save itself from bankruptcy. A condition of the aid, however, was the implementation of a programme of free market reforms, prepared with the help of foreign experts, including privatization, trade liberalization and an opening up to foreign capital.
But this is a completely different story.
1005 W. Kula, Rozważania o historii, PWN, Warszawa 1958, p. 90.
1006 Cf. e.g. W. Roszkowski, Gospodraka. Wzrost i upadek systemu nakazowo-rozdzielczego, Warszawa 2008; L. Balcerowicz, Systemy gospodarcze, Warszawa 1989; W. Kuczyński, Po wielkim skoku, Warszawa 2012 (in particular, the Introduction by L. Balcerowicz).
1007 D. Yergin, J. Stanislaw, Commanding Heights… op. cit.
1008 Cf. A. Erlich, The Soviet Industrialization Debate, op. cit., p. 28.
1009 Cf. e.g. T. Rosenberg, “Latin America’s Magical Liberalism”, [in] Politics and Social Change in Latin America: Still a Distinct Tradition?, eds. H. J. Wiarda, M. MacLeish Mott, Westport–London 2003, p. 210.
1010 Cf. e.g. E. Gellner, Nations and Nationalism, Ithaca 2006, p. 58 ff.; L. von Mises, Theory of Money and Credit, 2009, s. 442 ff.; R. Klitgaard, Controlling Corruption, Berkeley–Los Angeles 1988, p. 6 ff.; the name comes from two novels written by Anthony Hope in the 1890s, the best known of which is The Prisoner of Zenda (1894).