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Growth Medicine and the Sachs-Warnerian Narrative: The Development of the 'Resource Curse' in Economic Thought
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Date
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2013
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Creator
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Eng
Marnia, Marxa
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Environmental Studies
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Growth Medicine and the Sachs-Warnerian Narrative:
The Development of the ‘Resource Curse’ in Economic Thought
by
Marxa Marnia
A Thesis
Submitted in partial fulfillment
of the requirements for the degree
Master of Environmental Studies
The Evergreen State College
December 2013
©{2013} by {Marxa Marnia}. All rights reserved.
This Thesis for the Master of Environmental Studies Degree
by
Marxa Marnia
has been approved for
The Evergreen State College
by
________________________
Kevin Francis
Member of the Faculty
________________________
Date
ABSTRACT
Growth Medicine and the Sachs-Warnerian Narrative:
The Development of the ‘Resource Curse’ in Economic Thought
Marxa Marnia
Jeffrey Sachs and Andrew Warner are the forerunners of the highly influential
concept of the ‘resource curse’ associating natural resources with poverty. While
the ‘resource curse’ has always come under fire in critical circles due to its
relentless free trade orientation, recently the econometric basis of the ‘resource
curse’ has come under increased scrutiny as several researchers have replicated
the empirical work of the renowned analysts with varying outcomes and degrees
of critical feedback. Though most researchers begin their replications with Sachs
and Warner’s Natural Resource Abundance and Economic Growth (1995/1997)
this thesis asserts that whether one is interested strictly in the econometric
elements or in the ideological foundations such as in this work, a more
enlightening point of departure is the authors’ Economic Reform and the Process
of Global Integration (1995). Considered from the perspective of world-systems
analysis, cross-referenced by a review of socio-economic history and ‘thickly’
constructed, a sub-set of Sachs and Warner papers published between 1995 and
2001 are the basis of two main questions: When did natural resource abundance
become ‘bad’ for development and why? The evidence calls into question three
conduits of intellectual activity: (1) the diagnostic classification of the ‘resource
curse’, (2) the recommendations for ‘host’ countries to avoid the ‘resource curse’
and (3) the aim of supra-national leadership to ameliorate the effects of the
‘resource curse’. The examination found that the idea of the ‘resource curse’,
embodied as the Sachs-Warnerian narrative, justifies the systemic execution of a
competitive double standard in the promotion of economic growth more pointedly
for former economic hegemons currently in decline.
Keywords: ‘resource curse’, structuralism and asymmetric power relations,
sustainable development, political-environmental studies, economic
underdevelopment, economic sovereignty, global thought and governance
Table of Contents
Chapter 1
Introduction and Overview………………………………………………………1
Chapter 2
Historical
Overview………………………………………………………………………....7
Economic Development Since World War I.……….………………………..7
Classical International Trade and Development Theory……..………………10
Defining the ‘Resource Curse………………………………………………..20
Prebisch-Singer Thesis (PST).……………………………………………….21
The Subsumption of PST…………………………………………………….23
Introduction to the Literature Review
2.1 Characterizing the Current Discourse Environment...……………………….26
2.2 Organizing the Written Discourse…...………………………………............27
2.3 Analytical Perspectives on the Political Economy of the ‘Resource Curse’...29
2.4 Resource Boom Effects on Macroeconomic Performance…………………..32
2.5 Socio-economic Challenges of Resource Booms..…………………………34
2.6 The Political Economy of Resource Booms..……………………………...40
2.6a Regime Dynamics and Institutional Quality……….…………..…40
2.6b Conflict and Civil War……..…………………………………..…44
2.6b(i) Reviewing Civil War by Analytical Perspective...…..…47
2.7 Analytical
Discrepancies……………………………………………………………………50
2.8 ‘Red Herrings’ and Other Doubts of the Resource Curse………..……..…53
2.9 Policy
Recommendations………………………………………………………………57
iv
2.10 Beyond Policy: People and ‘Resource Sovereignty’.……..………………59
2.11 Quality and Quantity: A Call for Research Depth………………………..61
2.12 Quality Control: The Resource Opportunity Complex………...…………63
2.13 The Craft of Scholarship: Exemplifying Conflict Rhetoric………………64
2.14 Conclusion………………………………………………………………...69
2.15 Growth Medicine: The Development of the ‘Resource Curse’……..…….71
2.15a The Sachs-Warner Set….....…………..………………………...72
Chapter 3
Foundational Theory: Economic Reform and the Process of Globalization (1995a)
Convergence, Openness, and Growth…………………………………………76
Sachs and Warner on Convergence: Extended Discussion…....78
Implications of Conditional Convergence…..……..….87
Crafting the Case: Convergence through Openness and Growth…….……….89
Trade-driven Success: The East Asian Economies……………………94
Sachs and Warner on China’s Success………………………………..96
On Botswana, Hungary, and Tunisia………………………………….99
Showing Convergence: Sachs and Warner’s Regression Analysis…………...103
Trade Policy Changes in the Export Structure……………………………......121
Examining the Warrant for ISI………………………………………124
Timely Liberalization and Long-run Potential………………………125
Trade Policy and Macroeconomic Crises……………………………131
Superior, Inferior: Trade Policy and Crises Aversion……….132
The Hard Hand of Reform: Recent Reforms and Economic Performance….136
The New Ceteris Paribus: Not All Growth is Created Equal………..136
iv
In His Own Words: Interpreting Prebisch..................……………....148
Setting an Agenda for 2020: Sachs and Warner on the Global Spread of
Capitalism……………………………………………………………….150
Chapter 4
Historical Background: Reviewing Economic Reform and the Process of
Globalization
Overview and Introduction.....…………………………………..……….163
Liberalization and Global Integration Before 1970…………………..….167
Williamson, Reynolds, and Keynes……………………..….........173
The World After 1918…………………………………..………..175
Upheaval: Natural Laboratories and Social Experimentation.………...…178
International Economic Forces……………………...……………180
Macroeconomic Policies…………………………..……………..181
Intellectual Beliefs, State-Building and Political Economy…..….184
Macroeconomic Dimensions of Socio-Politics…………………..189
Socio-cultural Dimensions of Geopolitics………………..……… 196
Concluding History…………………………………………….... 198
Sachs and Warner on the Classification of Trade Policies………………. 199
Cross-Country Indicators of Trade Openness…………………………… 201
Testing Socialist Policies as Trade Growth Drivers …………..... 203
Sachs and Warner on Ideological Barriers to Trade……………………...207
Impact of Post-war Global Integration …………………...………..……..209
Impact of Global Integration on Openness and Growth Trends
……………………………………......…………………...………..……..210
Growth Effects of Trade Liberalization after 1975..……...………..……..212
iv
Chapter 5
Analyzing the Sachs-Warner Set
5.1 Natural Resource Abundance and Economic Growth (1995/1997).......213
The ‘Resource Curse’ and the Metaphor of ‘Dutch Disease’..……218
5.2 The Big Push, Natural Resource Booms and Growth (1999)………...224
Cross-country Results and the Latin American Pattern…….…….244
Natural Resource Booms in Latin America..……………….…….254
Sachs-Warner Model of Natural Resource Booms and
Industrialization………………………………………………......258
Critical Commentary on (1999)……………...…………………….260
5.3 The Curse of Natural Resources (2001)……………......……...............266
Critical Commentary on (2001)………………..………………...274
Chapter 6
Contextualizing the Sachs-Warner Set
6.1 Analytical Commentary on Set-wide Patterns……….……….............277
6.2 The Resource Curse from a World-System Perspective.……………...281
6.2a The Resource Curse as Intellectual Argumentation….………283
6.2b The Resource Curse as an Organizational Apparatus.….........287
Chapter 7
Synthesizing the Sachs-Warner Set……………………………………..297
7.1 Concluding the Sachs-Warnerian Narrative……….….……….............299
7.2 Replicating Sachs and Warner: The 1997 Working Paper.…...……….301
7.3 Concluding Comments………………………...…....…………………….306
References…………………...…………………….…....…………………….310
iv
iv
Acknowledgements
I would like to thank my reader Kevin Francis for being so helpful! I would also
like to thank my mother Bernice Harrison-Williams and my brothers Joseph
Williams, Aaron Clark, and Blair Clark for being the best support system I never
had to ask for. I would like all the beautiful women of Cultural Reconnection
Mission for availing their personal libraries and dining room tables to me, thank
you all so very much! And I want to thank the journey of Love, Music. It would
have been impossible without you. Thank you for Being. This work is dedicated
to those who have come before me in whose footsteps I stand and progress.
Mea’ashe, Ase.
v
Chapter I
Introduction
A subject of interest to political and macroeconomists studying the
underdevelopment of poor nations is the notion of the so-called ‘resource curse’.
Formalized by Jeffrey Sachs and Andrew Warner, the resource curse is the
empirically demonstrated inverse relationship between natural resource
abundance and economic growth. The demonstration implies that natural
resources are bad for development because it causes slow growth, or even
reverses growth.
While there is an array of explanatory theories for this, the most
commonly cited are centered on poor economic policies, low-quality institutions,
and incompetent political leadership. Sachs and Warner strongly advocate that a
lack of trade openness and a resultant adherence to autarkic policies causes the
slow growth characterizing the ‘resource curse’. According to Sachs and Warner
economic reform is the key to ameliorating the curse of natural resources,
particularly trade reform, and for this reason determinations of a ‘resource curse’
affliction and advised avoidance measures are often colored by globalization
aims. This is especially so since Sachs and Warner suggest that free-market nonadherence is not only a poor political decision but it also, consistent with the
length of non-adherence, is responsible for persistent poverty and thus strongly
advises trade reform as a measurable solution.
1
These premises and aims in concert with a history of highly-successful resource leddevelopments has created a great deal of skepticism about the so-called ‘resource
curse’ and had called for the statistical replication of the negative correlation among
other critiques that question the legitimacy of the claim.
It is well known that many of today’s wealthiest countries developed because
of natural resources and to that extent this thesis treats Sachs and Warner’s claims
that natural resources are bad for development rhetorically. Understanding the
origins of the so-called ‘’resource curse’ is critical as the ramifications and
implementation of trade reform-based austerity measures are extremely harsh and as
is demonstrated in Economic Reform and the Process of Globalization (1995a) is
also deeply detrimental to growth previously established in subjected economies.
The title of this work, Growth Medicine and the Sachs-Warnerian Narrative: The
Development of the ‘Resource Curse’ is in keeping with Jeffrey Sach’s tendency to
refer to poorly developing economies as potentially terminal patients that without
strong emergency treatment will continue to remain poor and marginalized. Sachs
prescribes austerity measures such as eliminating government-sponsored
employment, healthcare, and education in order to jumpstart rapid economic growth
resulting from increased attractiveness to wealthy foreign investors. The SachsWarnerian Narrative refers to the clear ideological stance that persists throughout
their empirical studies as well as the way their stance is structured from paper to
paper.
2
The object of this thesis is to critically analyze and historically orient the
rhetoric of the so-called ‘resource curse’ through the following sub-set of SachsWarner papers:
Economic Reform and the Process of Global Integration (1995a)
Natural Resource Abundance and Economic Growth (1995b)
Natural Resource Abundance and Economic Growth (1997R)
The Big Push, Natural Resource Booms and Growth (1999)
The Curse of Natural Resources (2001)
In setting the authors’ rhetoric in its socio-historical context, and drawing upon
the works of some of the early development economists, this thesis represents a
‘thickly’ re-contextualization of ideological premises and justifications of the
papers, with special attention paid to the policy effects associated with the
‘resource curse’ and economic reform.
While many researchers have taken sub-sets of Sachs and Warner’s papers
to task, none begin with Economic Reform and the Process of Global Integration.
The view that natural resources are bad for development marks a paradigm shift
in development economics, as it once was thought that natural resources were in
fact a requirement of economic development. It is asserted here that the shift was
not as much motivated by unsatisfactory theoretical answers as it was by the
highly pressing concerns of political and ideological instability. Whether a
researcher seeks to follow the thread of ideology through the ‘resource curse’ as
this thesis does, or understand the empirical foundation of the Sachs-Warner
result as many of the same critiques are made, a rich place to begin is with
Economic Reform and the Process of Global Integration. Heinrich (2011:9) does
include both Economic Reform and the Process of Global Integration (1995a) and
3
The Curse of Natural Resources (2001) in his reference of a Sachs-Warner subset, which lends credence to evaluating the continuity of Sachs and Warner’s
ideas by observing the set as a whole, though the ideas in Economic Reform are
not explicitly evaluated.
This is especially noteworthy because in general, SW’s Economic Reform
and the Process of Global Integration (1995a), is not cited among the resource
curse literature despite its influence on the theory as an embodiment of the
resource curse’s free-market rationale and original platform of the ‘Barro-style’
cross-country regression analysis upon which the Sachs-Warner results are based
and through which trade openness was shown to comparatively out perform many
other potential growth factors such as human capital and investment.
This thesis differentiates itself from the work of Lederman and Maloney
(2001) in that what I refer to as the Sachs-Warner papers commences with
Economic Reform and the Process of Global Integration rather than Natural
Resource Abundance and Economic Growth (1995).
Though it was Auty (1993, 1990) and Gelb (1988) who initially conducted
the earliest systematic, comparative analyses of country sub-sets exhibiting
counter-theoretical development patterns given an endogenous source of wealth, it
was Sachs and Warner (1995b, 1997) whose work, a systemic analysis of those
same patterns in a cross-country (N=97) sub-set, is widely cited for its
econometric value. Thus the earlier results, embodied in Economic Reform and
the Process of Global Integration, provides the econometric backbone of the
systemic ‘resource curse’-characterized poor development patterns.
4
Since the close reading of the papers relies upon a working understanding
of classical international trade and development theory, and the tripartite global
environment after World War II, chapters two and four walk the reader through
the historical and intellectual background of the ‘resource curse’ and through a
presentation of the recent literature which focuses primarily on the political
economy of the ‘resource curse’. The analysis of Economic Reform was broken
up into chapters three and four. Chapter three deals with Sachs and Warner’s
modeling of four main premises used to strengthen their ‘resource curse’
assertion. Those premises are that 1.) trade openness leads to increased growth
which can reduce poverty through convergence; 2.) the sooner an economy
liberalizes, the better off it will be in the long-run; 3.) trade openness is a superior
industrial policy and can avert macroeconomic crises; and 4.) growth resulting
from inferior industrial is not resilient to shocks and is unsustainable. Chapter
four mainly summarizes Sachs and Warner’s view of the tripartite background as
it forms the historical basis of the policy claim that the resource curse is the
consequence of poor policies and thus can be avoided by adhering to good
policies. In this chapter contrarian socio-historical contexts are provided in the
footnotes, though the position of the critical analysis should not be taken to
indicate a measure of unimportance in this case. The rhetorical analysis of the
remaining papers of the selected sub-set is in chapter five. In this chapter the
critical analysis in embedded in-line rather than offset. An analytical commentary
of the common patterns within the set is presented in chapter six along with a
world-systems perspective of the ‘resource curse’. Chapter seven synthesizes and
5
concludes the analyses of the sub-set, and the qualification of the SachsWarnerian narrative. Concluding comments following a summary of Graham
Davis’s Replicating Sachs-Warner: The 1997 Working Paper (2012) finalizes this
contribution to the literature.
6
Chapter II
Characterizing The Discourse Environment:
A Review of the Literature
Historical Overview
The purpose of this chapter is to review the literature relevant to both the Resource Curse
Thesis (RCT) and the ‘resource curse’ concept beginning with an overview of the
political-economic climate of post-World War II and the Prebisch-Singer Thesis (PST) to
the present day political economy of the resource curse. PST is often held as the
theoretical point of departure for studies of the ‘resource curse’ in suggesting that natural
resources might be bad for development. Drawn from economic development theory, the
RCT stands as an alternative to what was the conventional notion that natural resources
are beneficial to the development of a modernizing nation.
Economic Development Since World War II
The RCT evolves from a larger economic history commencing with research after the
Second World War. In the West, post-war development theories and policies were
necessary after Greece, W. Germany, France, Japan and Italy were in varying stages of
destruction. In 1944, the 21-day meeting at Bretton Woods instituted the International
Monetary Fund (IMF) and, predecessor of World Bank Group, the International Bank for
Reconstruction and Development (IBRD) to re-establish the war-torn nations. The
organizations were later extended to provide technical assistance and financial aid to
assist other nations desiring developmental beginnings. During this formative period and
through the late 1980s, the conventional wisdom on resource extraction held that mining
was key to the rapid development of a nation from a low-income stage to higher income
7
stage (Rosser, 2006; Viner 1952 and Lewis, 1955 as cited in Rosser 2006a), as
substantiated by the remarkable resource-based development of the Britain, the United
States and Australia (Rostow, 1961 as cited in Rosser 2006a). The policy implications of
extraction-based development were two-fold.
In the first place, for those countries already rich the implication was that they
would better be able to positively sustain their modern economies, while in the second
the implication for poorer countries was that they would be able to “generate the foreign
exchange, tax revenues and other assets necessary for economic growth and
development” (Davis and Tilton, April 2008:29). This began to change around the
late1980s when it was observed that many resource-wealthy countries were not
transforming into developed countries per historical expectation. In establishing the
observation as a fact and in explaining the underlying mechanisms of the stunted growth
many theories have been promoted.
The following section presents this traditional view as the historical context of
RCT from the perspective of University of Chicago international trade theorist, Jacob
Viner. Considered the “greatest historian of economic thought that ever lived”1, Viner
had a particularly contentious relationship to the precursor of the RCT. In 1950 what
came to be known as the Prebisch-Singer Thesis (PST) presented a highly stimulating
alternative to the traditional view, suggesting that declining terms of trade made the
development of natural resources bad for an economy in the long-run. Here it should be
said that the debate over trends in the terms of trade between primary commodities and
manufactured goods, while clearly still active, is much aged. It dates back as far as Adam
Smith, who exhorted the gains from trade in opposition to mercantilism, and David
1
http://www.econlib.org/library/Enc/bios/Viner.html
8
Ricardo, who in 1817 developed the theory of comparative advantage as a source of gains
from trade, was able to show when and how trade is profitable, thereby methodologically
supporting Smith. Most famously, Smith, Ricardo, Thomas Malthus and John Stuart Mill,
inaugurated the British Classical School of economic thought, which, on terms of trade,
held that the terms of trade of primary commodities should actually improve over time. It
is from this historical basis that development theory draws influence. Viner was one of
the most exacting advocates of the importance of making policy with an eye to the longrun as well as a preeminent and visceral opponent of the Prebisch-Singer Thesis, albeit
namely Prebisch’s views2 in that regard.
Viner’s nearly 700-page treatise on the theory of international trade, wherein he is
aligned with Adam Smith in his own 1776 text The Wealth of Nations in refuting the
fallacies of mercantilism, is considered one of his greatest works3. Viner’s
“…pioneering” doctoral dissertation, Canada's Balance of International Indebtedness
(1924), “…set the style for a highly productive series of studies in the working of
international financial mechanisms”4 and from 1928 to 1946 he also served as co-editor
of the Journal of Political Economy. Due to Jacob Viner’s prolificacy, his breadth and
depth of knowledge on economic history and theory, and his relationship to the early
reception of the RCT, this chapter presenting the historical context for the resource curse
2
For qualification see “Gains from Foreign Trade”, Viner’s third lecture given at the National University of
Brazil in the summer of 1950. In it he flatly rejects the proposal as he saw it fatally resting on the intrinsic
inferiority of resources used in primary industries relative to similar resources differently used in
manufacturing. Viner, Jacob. “International Trade and Economic Development”. (1953). Oxford University
Press at Clarendon. London. Pp. 34-54.
3
In 1965, near the end of his life, Viner also wrote a famous 145-page introduction, turned monologue, on
Adam Smith for a re-release of John Rae’s 1895 biography on the Life of Adam Smith.
4
http://etcweb.princeton.edu/CampusWWW/Companion/viner_jacob.html
9
thesis relies heavily upon his conservative perspective5.
Overviewing Classical International Trade and Development Theory
When he wrote his lecture on the economics of development, Viner lamented that there
appeared to be of lack of explicit definition for the term ‘economic development’.
Pondering upon the deficit he asked the question, “…What is an underdeveloped
country?” (1953:98). As he proposed it, development theory rested upon per capita6
level estimates to determine underdevelopment in terms of poverty, prosperity, and
population quantity; that is, how wealthy is the population per head (1953:98). Assessing
the literature of his time, he found that the most common criteria of underdevelopment
were (I) a low ratio of population to area; which Viner more specifically qualifies as the
presence of ‘empty spaces’ of any size that could support a populous settlement, i.e. good
climate, good soil, but was not being used as such, (II) high interest rates indicating a
scarcity of capital, (III) the ratio of productive population to total population7 and (IV)
the age of a country e.g. at this time, a young country would have some similar
characteristics of being underdeveloped.
For each of these criteria Viner had a respective rebuttal, (i) there are some
‘empty spaces’ that serve no ones interest should they be filled, e.g. the Arctic,
Antarctica, the Sahara desert, (ii) high interest rates are not decisive enough to determine
5
Viner, Jacob. “International Trade and Economic Development”. (1953). Oxford University Press at
Clarendon. London.
6
In this chapter per capita will be italicized as Viner had it but in the remaining work it will not be.
7
Viner referred to this as the ratio of “…industrial output to total output or industrial population to total
population” (97). He also noted this was the most commonly used criterion for classifying countries as
developed or underdeveloped.
10
scarcity of capital nor does it indicate which of the various modes of scarce capital8 is
acting on the ability to borrow, (iii) the case is likelier that prosperous people
industrialize more, rather than, industrious people are more prosperous9, and (iv) there is
no satisfactory criteria for the age of a country10 seeing as “…the countries outside
Europe with the highest per capita income were ‘empty spaces’ [i.e. underdeveloped]
until fairly late in the nineteenth century and some of the ‘oldest’ countries are the
poorest” (97).
Overall Viner found it more useful to define an underdeveloped country as one
that had good potential prospects for development but was unable to use its resources
(capital, labor, or natural) to support its present population at a higher standard of living
or to support a larger population at that same standard11. Viner’s definition of an
underdeveloped country focuses on per capita standards rather than aggregate thresholds
in practice he deemed them a more appropriate unit for determining underdevelopment.
With the term ‘underdeveloped’ so understood, economic development can be defined as
a process of addressing the decrease of poverty, the increase of prosperity, and the
management of population quantity relative to the levels of poverty and prosperity, from
a per capita standpoint. Viner perceived there to be four categories of obstacles to
economic development: (1) low productivity functions, i.e. the quality of the resources
and the resource base, (2) scarcity of capital, (3) conditions of foreign trade i.e. declining
terms of trade, and (4) rapid rate of population increase.
8
Low aggregate savings, low rate of savings, low credit status, unimpressive ratio of per capita capital in use
to per capita capital owned countrywide.
9
In per capita terms (97)
10
“The test of age, as is common, is the date of settlement by people of European stock but by this
accounting Brazil is older than the Unites States while neither China nor India was yet born” (97).
11
More directly, “ a more useful definition of an underdeveloped country which has good potential prospects
for using more capital or more labor or more available natural resources, or all of these to support its present
population on a higher level of living, or, if its per capita level of living is already fairly high, to support a
larger population on a not lower level of living” (98).
11
[I] Low productivity
Referring to high productivity criteria, low productivity functions undermine
developmentally amenable conditions such as a high quality labor force, abundant natural
inputs, and rapid transport to distant markets. Viner held that high labor productivity was
a consequence of the fitness and vitality of the labor force thus the quality of the labor
population relied upon a number of factors such as the quality of health, nutrition, and
education as well as “historical and cultural factors, from environment, […] and from the
quality of the leadership provided by the government and the social elite” (103).
Believing so much in socially supportive conditions that attended to the literacy, overall
health, and nutrition of mass labor, he exclaimed, “In many countries, I feel sure, if this
were achieved all else necessary for rapid economic development would come readily
and easily of itself”. Further, he understood that when poor conditioning was present,
either through weak promotion or general neglect, “it is not necessary to look for other
factors […] to explain pervasive poverty and excessive growth” (103).
Beyond these factors, another input of productivity relates to a nation’s ability to
draw on the knowledge-based economy (KBE) in order to acquire current and
competitive skills training for its work force. For largely agricultural countries, as many
underdeveloped countries are, there is normally a strong resistance to mechanization until
“it is made clear that acceptance of the training brings substantial and prompt economic
reward” (104). After this phase, the problem remaining is not getting the masses to accept
the training but getting trainers to the masses, a problem which would be relieved by
knowledge and management importation or least by exporting selected students to return
and train the work force. Today, this migration of knowledge is commonplace within the
12
KBE, but even then it was known that “managerial and engineering ‘know-how’ are the
most mobile internationally of economic goods” (104).
[II] Scarcity of Capital.
Viner speaks at some length about the perils of foreign investment and advantages of
domestic saving. The obstacle of capital scarcity refers to the inability of a nation to
pursue long-term economic development that would provide a high rate of return per
capita by borrowing investment capital. Some “general tendencies” (106) of the
traditional developmental perspective, are that (1) a country utilizing capital is likely to
often experience increased economic development relative to the lending country, (2) a
country with a higher rate of aggregate savings would suffer less capital scarcity because
it is theoretically better able to borrow capital, (3) the greater the inequality in the spread
of income, the greater the percentage of aggregate income saved because higher-income
earners are presumed to save more annually than lower-income earners, (4) Per capita,
countries that are low-income will save more slowly12 but, sparing unmitigated inflation
which is “generally held to be an obstacle to private saving” (107), if incomes increase
over time so should the annual per capita savings. Translated into policy, these general
tendencies would collectively foster supportive conditions for encouraging domestic
saving. The reward is that with a higher the savings balance the country would more
likely use the borrowing capacity to develop “productive facilities, material and human
(111), i.e. industry and human capacity.
One of the reasons countries borrow from abroad is to increase their rate of
economic development by investing the capital in remunerative activities. Still, Viner felt
it was “…not realistic for underdeveloped countries to place major reliance on foreign
12
Since the accumulation of capital per capita is derived from income per capita.
13
investment in their territories as an aid to their economic development” (110). In his
time, the field of foreign investment, a flow already tightened by war losses and
substantial taxation, was littered with obstacles for both creditors and debtors alike. The
contentious credit environment was characterized by widespread national economic
planning, which commonly saw planning governments get themselves into debacles
worsened, in the long run, by lending. Add to this, governments were feeling poorer as a
result of mounting national debts and few governments even had much experience, still
fewer positive ones, with international lending. And still further, the pool of potential
lenders was disproportionately small compared to the number of countries seeking credit.
Compounded, this meant that the global flow of capital was exceedingly constrained. The
agencies established to relieve some of the pressure were themselves so constrained, in
range of activity and terms of offer, as to be seen as overly stringent given the post-war
conditions under which credit was requested. In Viner’s opinion there were no, “obvious
grounds for expectation or hope that existing multinational agencies […] will make
quantitatively important contributions to the international flow of capital” (110).
In Viner’s view there was essentially a global credit crunch in the post-World
War II economic environment, in which multinational lending agencies were established
to assist but instead ultimately had two impacts, (1) they left borrowing governments
dissatisfied, and (2) their straight-jacket ineffectiveness strengthened the position of
lending governments who saw themselves in a more advantageous position in that they
were not only able to retain national autonomy but in the extent of their lending, could
remain highly selective as to who they elected to take on as debtors, and arbitrarily
determine the conditions on which they would make credit available to prospects. This is
14
not to suggest there was a per se free-for-all, or rampant frontier mentality. It was
understood, then, that there existed limits in the profitability of lending to governments.
This was especially so if the capital was used for public expenditure programs and other
non-remunerative investments as domestic political and strategic considerations may
have necessitated (111).
Still, as far back as Viner’s time it was held that, “debtor countries prefer to
borrow from governments” (108) and “borrowing from governments seems preferable to
borrowing from private capitalists, [while] borrowing from multinational agencies […]
preferable to borrowing from individual governments” (109). This being the case, it
would appear that effectively a predatory lending environment was created to the extent
that individual governments were fortified in their position to lend, multinational
agencies were generally ineffective in offering enough monetary relief or protection from
predatory actions. Further, only the most destitute governments would borrow from
private capitalists if the option were even available. In sum, large-scale international
lending could only be marginally effective in a greater lending environment trending
toward predation and access to foreign capital was tied a nation’s aggregate savings. In
the post-World War II environment the scene of international foreign investment seemed
dim and led Viner to conclude, “that foreign capital will make but a marginal
contribution to the capital needs of underdeveloped countries” (111).
[III] Conditions of Foreign Trade.
The concept of comparative advantage is a pillar of trade economics since its introduction
by Adam Smith and David Ricardo in the early 19th century. Normally a country gained
from foreign trade by getting “more goods or better goods”, than could be produced
15
domestically with the same quantity of productive resources, in exchange for those
products in which the country has a comparative advantage13 in producing (34). Raul
Prebisch theorized that, over time the terms of trade would decline between countries
exporting raw materials, who in theory had a comparative advantage in doing so, and that
countries exporting finished goods would, over time, outstrip demand for raw materials
as demand for finished products increased. Based on the consequence of a secular
decline in the terms of trade Prebisch advocated that countries become more selfsufficient. He posited that countries set their long-run industrial aims on manufacturing
finished goods rather than merely extracting and trading primary commodities for
finished goods for economic stability. Prebisch, and Hans Singer who independently
came to the same conclusion that in the long run manufactures would be more valuable
than raw materials, suggested that nations with endowments of primary commodities
should think more carefully about how to plan their economic growth. Some construed
the idea as advice that countries with a comparative advantage in natural resources should
not avail themselves of the option for fear of long-run impoverishment, which implied
that extraction was therefore bad for development14, and by default that the SmithRicardo theory of comparative advantage failed to hold for natural resource abundant
countries. Essentially heretic speech, the Prebisch-Singer thesis as it came to be called
became the subject of a 60-plus year debate still discussed today. Staunchly opposed, the
traditional view vis-à-vis Viner held that for at least three reasons such a notion was
patently ridiculous:
13
14
Or less comparative disadvantage relative to another producer-exporter of the same good.
And this is where a good deal of resource curse researchers pick-up the argument.
16
(1) The terms on which a country trades depends on the volume of its offerings
relative to the global demand for them and this is dependent on the country’s population.
This means that if the country’s population is greater than or equal to production there is
no surplus for trade but if production is greater than the needs of the population then
terms of trade are determined by the amount of surplus available to barter with. Any
proposed solution that prioritizes economic development would include a check on
population (less people, higher surplus, more trade, greater economic development); such
being an inherently independent problem for which there remains no easy remedy, (2)
Raw materials experience much more volatile pricing during the global business cycle
relative to finished goods and thus the solution is boom-time saving in anticipation of the
down-cycle, and the third reason was a common critique of the quantitative data
supporting Prebisch’s thesis, being that it failed to capture the increased superiority in
quality of finished commodities over time relative to the persistent quality of raw
materials thus the statistical data supporting diminishing terms are irrelevant. While
acknowledging that a decline in the commodity terms of trade is generally an unfavorable
outcome, Viner held that it was not necessarily associated with a decrease in the material
gains or the profitability of foreign trade. More so he asserted the nature of the
relationship between natural resources and innovation in that the quality of a finished
good is appreciated by innovation, which also often leads to novel goods, whereas only
the ability to access raw material is appreciated by innovation but otherwise has no affect
on the quality of the resource itself.
[IV] Accelerated Population Increase.
17
The rapid rate of population increase is the most difficult category of obstacles to
economic development and in the classical view the most important. The assumption here
is that wealthier and more educated people have fewer but more productive children who
would then contribute to a nation’s high level of per capita income thereby expanding the
economic prosperity of such a nation. In this way population rate is connected to the
earlier discussed issues of capital scarcity and low productivity functions. These high per
capita earning individuals and their parents would, in theory, save more and thus increase
the aggregate savings against which a nation can borrow foreign capital, if it had to. This
capital would then be invested in remunerative enterprises that further develop the
national economy. Such is the context within which poverty and population control go
hand in hand and leads to the population paradox.
As the logic goes, poverty is self-replicating because poverty-reducing factors
such as high levels of per capita income and education are too low and it is exactly these
factors credited with producing the high-productivity, low-population conditions
associated with economic prosperity i.e. more wealth earners15, fewer people, and by
merit16, more to go around. The population paradox characterizes the challenge of
attaining wealth from economic development as a narrow region between high per capita
15
Wealth is a highly specific term referring to accumulation (savings). The individuals who are able to
consistently save at a high rate, some percentage of their earnings, are those who can strive for wealth. By
this measure, wealth does not pertain to those who cannot for any reason including poverty, save consistently,
at a high rate, some percentage of their earnings. So “more wealth earners” paradoxically refers to a larger
elite class as it is the ability to attain and sustain wealth that demarcates the elite from the non-elite.
16
Having defined who can actually speak with ownership in a conversation about wealth, the idea of merit
among the wealthy refers to the ability to accumulate wealth on accumulated wealth; that is, the true
sustenance of wealth. Of the wealthy, those who can truly sustain their wealth merit more as wealth alone
indicates a higher education and level of productivity and therefore a higher worth. Akin to price measures,
wealth is an indicator of human worth the way price indicates scarcity in the market. A nation’s human
capital is measured in its wealth or as Mahbub ul Haq, founder of the UNDP human development report
supports, “People are the real wealth of a nation.” (UNDP HDR 1990:9).
18
income and mass poverty. That is, a fine balance between an industrious populous and an
overpopulating mass. As Viner puts it,
Whatever the opportunities for economic betterment
created by technological progress, by the discovery of
new natural resources, by economic aid from abroad,
and by the removal of foreign trade barriers, they can
have as their chief consequence an increase in the
number of children who survive to a short and wretched
adulthood.
It would be most damaging if the increase in population
is mainly the consequence of the application of modern
public-health techniques which result in a decrease in
infant mortality rates more rapid than the improvement
in health conditions at late ages and more rapid than the
rate of expansion of opportunities for productive
employment.
Lecture on the Economics of Development in
“International Trade and Economic Development”
(Viner, 1952:118).
Certainly a worse case scenario, population increases are not necessarily synonymous
with developmental suicide, in some cases an increase in population may “merely retard
economic progress” (118). In the best-case scenario, a healthy, better fed, and better
educated, population would have children more able to survive to an industrious and vital
adulthood17. Since a productive population earns more, economic welfare could be
promoted by their increased per capita incomes. Viner, seeming to take a turn for
‘nurture’ in the everlasting nature vs. nurture debate, stands firm that conditions
determine outcome and that the curse of the poor is the condition of their poverty.
17
In the best-case scenario the mass population could be regulated and conditioned enough as to be
assimilated into the industrious class of prosperity and contribute to the established rate of success. Those
already successful merit additional success for their utility in bringing about prosperous assimilation. This
incremental march toward overall prosperity is what Ronald Reagan referred to as “rising all boats”.
19
In sum,
The promotion of general reduction in trade barriers,
the freer international movement of capital on
reasonable terms, the facilitation of the general
diffusion of the world’s stock of technical
knowledge and skills, these are the major
contributions which the more favorably situated
countries of the world can make to those less
advanced and less prosperous. They are the
contributions of the most importance. But they will
not suffice. Without genuine co-operation from the
countries to be benefited they will not be effective
except perhaps in increasing still further the amount
of hunger, sickness, premature mortality, and
poverty in the world.
Lecture on the Economics of Development in
“International Trade and Economic Development”
(Viner, 1952:119).
The ‘resource curse’ stems from this broader development context so that many of the
trends about poverty, education, wealth, and opportunity are built into empirical analyses
as variable assumptions.
What is the ‘Resource Curse’?
The term “resource curse” or “natural resource curse” is credited to Richard M.
Auty, who in 1993 introduced the phrase with his text, Sustaining Development in
Mineral Economies: The Resource Curse Thesis (Stevens, 2003:3; Frankel,
2012:3). Generally, the phrase is understood as an explanation for why some
resource-rich nations are still impoverished. In this respect, the ‘resource curse’
largely finds its application in third world countries. Theoretically, the ‘resource
curse’ is a contemporary ideation extending from a misconstrued conception of
the Prebisch-Singer Thesis (PST), suggesting that resource extraction should be
avoided.
20
II.1 The Prebisch-Singer Thesis
As stated previously, Raul Prebisch and Hans Singer, independent of each other,
established the finding that natural resources could potentially be an impediment
to sustained economic development. They both attributed the conclusion to a
secular decline in the terms of trade for resource producing countries18. Neither
Prebisch nor Singer was the first to suggest a decline in the terms of trade for
primary products. In fact, also in 1950, Charles Kindleberger published to the
same effect19.
Prebisch and Singer posited that the decline in the terms of trade was a
result of the demand for raw natural resources growing more slowly than the
demand for finished products (Graham and Tilton, April 200820). Because
volatility was accepted as the nature of international commodity markets and the
structure of the global economy is inherently unstable, Prebisch and Singer argued
that developing nations relying upon natural resource exports would not be
working to their comparative advantage but instead would be operating at serious
disadvantage in the long view (Rosser, 2006a). To combat this, both Prebisch and
Singer recommended, “that developing countries diversify away from mineral and
other primary produce exports” (Prebisch, 1950 and Singer, 1950 as cited in
Graham and Tilton, April 2008).
18
Terms of Trade: The prices a resource producing country receives for their primary product exports
compared with the prices of the finished goods these countries import. ‘Secular’ refers to the time frame in
which a market trend operates, long (5-25 years) rather than one year or a few months/weeks.
19
Given this one would wonder why it was not the Kindleberger-Prebisch-Singer Thesis as all three advised
industrialization on the grounds of deteriorating terms of trade over the long-term. A rich source of historical
information on the intellectual environment of the Prebisch-era terms of trade discourse is Bethell, Leslie. Ed.
“Ideas and Ideologies in 20th Century Latin America”. 1996. Cambridge University Press. (236).
20
Based on 2005 United Nations, Natural Resource Forum, Davis and Tilton paper.
21
The views of the Prebisch-Singer Thesis were typified as radical not only
because they flew in the face of Smith-Ricardian comparative advantage but also
because of a more contemporary turn of events in the economic profession. Paul
Samuelson had just elevated neoclassical trade theory to “new heights of
elegance” by demonstrating how trade could serve as a complete substitute for the
migration of labor from country to country. He thus suggested that, “international
trade could potentially equalize income among nations”(Bethall, 1996:236).
While the basic assumptions of Samuelson’s career making concept were later
described as “rigorous” but “unrealistic”, Prebisch and Singer’s “much more
realistic” but “less rigorous” views would have to struggle in the shadow of prideinducing sophistication (Bethall, 1996:236).
Though never upstaging Samuelson, the Prebisch-Singer Thesis eventually
caught hold and went on to become highly influential as the basis of policy. The
thesis and Prebisch’s own 1964 position as founding Secretary General of the
United Nations Conference on Trade and Development (UNCTAD) lent
intellectual support for the autocratic policies, specifically of Latin developing
nations, in the 1960s and ‘70s. These policies manifested themselves in the form
of import substitution industrialization21 (ISI). Established to help accelerate
economic growth and produce a higher standard of living, ISI appeared to do the
exact opposite. For this reason it is now explained that, by and large, ISI was a
21
A trade policy that advocates substituting domestic products for foreign imports as away to develop in-state
industry and develop stability within the internal economy by making it less susceptible to global depressions
and other international price shocks. Mechanistically, the state nationalizes the resources, subsidizes its
industries such that they could get a toe-hold and gather strength in a protected environment building prior to
introduction to the competitive market. Additionally, high import taxes are levied so as to give home-grown
industry a chance, this is especially what liberalization objects to. Still, self-sufficiency through “…a
deliberate national policy of high tariff protection” was critical to the economic success of the United States
(Viner, 1953:116).
22
disappointment. The policy was subsequently abandoned during the 1980s and
‘90s (Graham and Tilton, 2005). The overall failure of ISI and the causes are still
the subject of debate, though notably a key feature of Latin American ISI was the
nationalization of the domestic mining industry. As ISI was rejected the influence
of the Prebisch-Singer Thesis began to wane22.
II.2 The Subsumption of PST
Nonetheless, at the height of its influence the Prebisch-Singer Thesis inspired a
significant debate as some researchers disagreed on whether or not the idea of
declining terms of trade would hold over the long term. The disagreement further
spawned questions regarding possible causes of the decline and the implications
for public policy (Cuddleton, et. al (2007), and Hadass and Williamson, (2002) as
cited in Graham and Tilton, April 2005; Stevens, 2003). The evolution of these
inquiries led to still another question. Was the decline in terms of trade bad for
development? If assumed true, then as natural resource abundance encouraged
mining, it would eventually lead to slow development, and as the terms of trade
for the raw material diminished extraction would ultimately be counter-productive
for development. Hence, mining is bad for development. Prebisch and Singer
thought it was plausible thusly suggesting that developing nations think more
carefully about mineral production since reliance upon extraction alone would
22
While PST did not upend the convention that natural resources are good for development, it is remains a
formidable alternative still being batted about today especially with the onset of China as a global economic
power. See: Kaplinsky, Raphael. “Revisiting the Revisited Terms of Trade: Will China make a Difference”.
(2006). World Development. Vol. 4. No. 6. Pp. 981-995.; Mollick, A.V. et al. “Can Globalisation Stop the
Decline in Commodities’ Terms of Trade? The Prebisch-Singer Hypothesis Revisited. November 2005. <
http://econpapers.repec.org/paper/ukcukcedp/0510.htm>. ; Maizel, A., Palaskas, T., and Crow, T. (1998)
“The Prebisch–Singer hypothesis revisited,” in D. Sapsford and J.R. Chen (Eds.) Development Economics
and Policy: the conference volume to celebrate the 85th anniversary of Sir Hans Singer. New York. St.
Martin’s Press.
23
eventually lead to slow development.
The extreme implication of PST marks the beginning of the RCT as later
researchers picked up the thread and began to ask if indeed resources are bad for
development (Rosser, 2006a; Graham and Tilton, April 2005). The nucleus of the
RCT is the statistical formalization of observation poor economic growth despite
abundant natural resources, which produced a negative correlation between
proxies23 for natural resource abundance and economic development. Sachs and
Warner (1995b), using share of primary commodity exports in GDP as a proxy for
resource abundance, were the first to make this statistical observation from a
comprehensive data set and since then several replicate studies have produced the
same results (Leite and Weidmann, 1999; Gylfason, et al., 1999).
In sum, the conventional wisdom of the early 20th century supporting
natural resources as a developmental requirement held sway from the late forties
through the early 1980s (Viner, 1952; Lewis, 1955; Rostow, 1961; Drake, 1972;
Balassa, 1980; Krueger, 1980; as cited in Rosser 2006a). Still, during that time
alternative views were being developed in a set of ideas Paul Krugman (2005)
refers to as ‘high development theory’ which includes Rosenstein-Rodan (1943,
1961), Hirschman (1958), Myrdal (1957), and Fleming (1954), as well as the
Prebisch-Singer Thesis (PST), which eventually gained influence especially
through the 60s, 70s and the early 1980s.
23
The proxies for resource abundance can often be case-based but in general researchers have used exportbased measures such as natural resource exports to GDP or natural resource exports to total exports. But
production and reserve levels as opposed to resource exports (Stijins, 2001), percentage of rents in
government revenues rather than levels of resource exports (Herb, 2003), level of natural resource stock per
capita (De Soysa, 2000) have been used along with labor force in the primary sector (Gylfason et al., 1999)
and crop land per capita (Auty, 2001). “Measures for development performance include average GNP per
capita and improved social indicators i.e. infant mortality, life expectancy, calorie supply per capita and the
UN Human Development Index (HDI)” (Rosser, 2006a).
24
Though the command of PST began to weaken by the late 1980s as its
practical justification, import substitution industrialization (ISI), was abandoned;
the space of the alternative view was not to be recaptured by the convention.
Instead, the Resource Curse Thesis (RCT) had been developing from the late
1980s through the very early 2000s; on the premise that indeed, natural resources
may be problematic for economic development (Gelb and Associates, 1988; Auty,
1993; Sachs and Warner, 1995; Leite and Weidmann, 1999; Gylfason, et al.,
1999; Sirraf and Jiwani, 2001; Isham et al., 2002; Eifert et al., 2003; Davis et al.,
2003; Sala-i-Martin and Subramanian, 2003; Bannon and Collier, 2003; Rosser,
2006a). From this perspective, PST was subsumed under RCT as one idea
(declining terms of trade) in a suite of related ‘poor development’ explanations.
Now considered a statistical regularity, the observation behind the ‘resource
curse’, embodies the continuation of an academic shift away from the idea that
natural resources are good for national development and toward the
conceptualization that natural resources are bad for national development. In this
way the current discourse departs from PST and begins to draw influence from
causal theories developed in the discipline of political economy.
The RCT is decidedly distinct from the ‘resource curse’ in the sense that
developmental economics and political economy are themselves distinctly
different. Throughout this paper references to RCT indicate developmental
economic commentary while the ‘resource curse’ indicates political-economic
commentary. It may also help to characterize the current discourse environment
by highlighting common avenues of discourse and the myriad backgrounds of the
25
research participants.
Introduction to the Literature Review
2.1 Characterizing the Current Discourse Environment
Today economic development is increasingly associated with the relationship
between conflict and natural resources. The ‘resource curse’ is a sub-topic in an
ongoing discourse about conflict, resources, and security. It is the subject of
extensive discourse in academic settings and increasingly so by the popular press
which indicates a widespread relevance. Key aspects of globalization, such as
international governance and investment, continue to stimulate attention toward
the many theories and policies of resource conflict (McNeish, 2011). Stability has
been an international concern of grave significance since the end of the Cold War,
coloring concern for extractive economies in the global south in the interests of
global security. The ‘resource curse’ audience is characterized by the international
participation of policy, development, and academic, professionals as well as a
readership of educated and/or politically appreciative news media consumers.
Taxonomically, research on the practice and theory derived of the RCT is largely
found in journals dedicated to both developmental and macroeconomics; political
science; international affairs; conflict resolution; international peacekeeping and
governance; human ecology; geography; ethnography; societies and dynamism;
international security; and comparative politics.
Institutional actors have authored industry reports, working analyses, and
26
background papers in lending their expertise and observations, primarily, to the
larger scholarship but distantly to the popular discourse as well. Institutions such
as: World Bank, IMF, National Bureau of Economic Research (NBER), Chr.
Michelsen Institute (CMI), Global Witness, IWGIA: Copenhagen/ Swiss National
Centre of Competence in Research North-South, NACLA Report on the
Americas, International Institute for Strategic Studies (IISS), Ralph Bunche
Institute for International Studies, Fride Foundation, IDS, World Watch Institute,
and Price Waterhouse Coopers. The ‘resource curse’ is also increasingly a subject
addressed in print and online editions of the popular presses such as New York
Times, CNN, Foreign Affairs, Financial Times, and many African continental
publications. The following section addresses the literature directly and outlines
major topics in the form of plenaries.
2.2 Organizing the Written Discourse
The RCT is based on a statistical observation of negative correlation between the
factors of natural resource abundance and economic development. This is not
proof of a causal relationship between these two factors. While every researcher
acknowledges this statistical law, and therefore recognizes the “inconclusive
nature of the evidence in support of the notion of the Resource Curse” (Rosser,
2006a:13; McNeish, 2010), the idea that natural resource abundance leads to the
retardation of economic growth and development (Rosser, 2006a; Davis and
Tilton, April 2005) is still a wide spread assumption.
Since, tenably, the development of policy recommendations to alleviate
27
the resource curse can be construed as an argument in favor of the notion of a
resource curse, those researchers so engaged, “have merely inferred causality
from the evidence of correlation” (Rosser, 2006a:12). Be that as it may, the
acceptance of the notion now supports a very active research frontier on the
political economy of the resource curse i.e. causation. The difference between the
questions: are resources bad for development and why are resources bad for
development identifies a taxonomic cleavage in the resource curse literature
separating econometric studies from causal political economy studies.
Comprehensive reviews of the ‘resource curse’ will generally cover both
econometric and political economic perspectives. This work presents the overall
categorization of the literature in four sections: one addressing macroeconomic
issues and three involving topics in the political economy of the ‘resource curse’.
Researchers who question the statistical validity of the resource curse form
another enclave of investigators (Melnaldo, 2010; Stijins, 2001; and Herb, 2003).
The causal explanations most attributed to the resource curse are: declining terms
of trade (PST), volatile markets, income inequality, ‘Dutch Disease’, the nature of
mining and rent-seeking behavior. There is a significant amount of overlap
between these literatures and suggested causes, creating scholarly outgrowths
even further subordinated to those listed. Several authors have written general
reviews on the resource curse (Rosser, 2006a; Heinrich, 2011; Frankel, 2010;
Frankel, 2012; McNeish, 2011; Cramsey, 2008; Jones, 2008; Hallum, 2011;
Wenar, 2008; Vinuales, 2011). Like all scholarly subject matter, inquiries and
analysis are framed in the context of disciplinary frameworks. The following
28
section describes the perspectives currently used to evaluate the resource curse.
2.3 Analytical Perspectives of the Political Economy of the ‘Resource Curse’
The interdisciplinary nature of the ‘resource curse’ informs several perspectives
currently in use by political economists and other causal analysts. The
frameworks and theories of economics, political science, sociology and cultural
anthropology, among others, lend contextual influence to namely, the behaviorist,
rational actor, state-centric, historico-structuralist, social capital, and radical
perspectives.
[I] The behaviorist perspective, typically captured by arguments citing
myopia, laziness, or hyper-optimism as side-effects of resource discoveries,
suggest that resource abundance induces irrational behavior i.e. emotional
behavior in the national leadership. This behavior in concert with professional
incompetence is said to contribute to poor policy making and diminished
institutional quality. Many times it is this perspective that appears in the popular
press.
[II] Perspectives centered on the ‘rational actor’, a kind of behaviorism,
suggest that political actors are rational utility maximizing individuals who will
make decisions that yield them maximum personal benefit. Theories on rentseeking and rent-seizing are especially at home in this perspective because weak
state structures offer opportunities to profit personally from resource abundance
as opposed to stewarding wealth into national development. Robinson et al.,
(2006) explains that this lack of national stewardship is further exacerbated by the
temporary nature of the resource boom, which focuses rent-maximizing efforts to
29
capitalize in the short-term. It is reasoned that the perception of the security of a
leader’s power alters this short-run behavior, in that the long-run management of
the resource becomes leverage in retaining power through the continuous flow of
rents (Robinson et al., 2006). While this perspective seems to focus on political
actors Torvik (2002) has found social actors i.e. entrepreneurs, culpable as well,
arguing that social actors can gain rewards from rent-seeking, and this in turn
incentivizes their participation in rent-seeking behavior. One of the differences
between statist and behaviorist perspectives is that on the one hand, the statist
perspective infers developmental sloth as a result of its distributive, rather than its
industrialization habits, and on the other, the behaviorist perspective is explicit in
its professional assessment.
[III] Statist perspectives, most associated with what is termed the ‘rentier’
state, suggest that resource abundance redirects a state’s capacity from the
promotion of income-yielding activities to benefit disbursement. Essentially
because the main source of income for these states is largely unearned i.e. in the
form of export taxes and production royalties, the capacity built is not in profitcreating activities such as industry but is instead focused on domestic service
spending, i.e. productive functions such as social welfare, education, and health.
While as explained earlier via Viner these functions are considered necessary to
economic development and prosperity, this perspective suggests that the problem
arises when resource extraction dominates a nation’s economy at the same time as
the nation is determining its institutional structures and articulations. This
potentially leads to the institutionalization of distributive policies rather than
30
policies of positive economic development. This perspective also fields the idea
that in developing countries resource abundance leads to ‘bad governance’
because financial autonomy equates to low citizen accountability (Moore, 2000;
2004 as cited in Rosser, 2006a).
[IV] The effect of resource abundance on the asymmetric power of
different social classes is addressed part and parcel of the historico-structuralist
perspective. Here the logic is that the existing wealthy business class, positioned
to capitalize on resource abundance, lobbies government to pursue self-serving
economic policies contrary to the larger populous interest. This elite activity
undermines social cohesion of the masses complicating management choices in
the face of economic shocks. Connected to this perspective is the [V] social
capital perspective, which associates historico-structuralist social tensions to the
relative accessibility of resources and who by i.e. those concentrated in particular
locations or diffuse over large geographic expanses; by political elite or by rebel
groups. The key difference between the historico-structuralist and the social
capital perspectives is that the former emphasizes the role of social groups ad
socio-economic structure while the latter emphasizes the degree of social
cohesion among social groups.
[VI] The radical perspective emphasizes the role of foreign actors as
central to the global structure of power. Natural resources are critical assets and
empower its owners in two ways: (1) established global powers can maintain their
dominance but (2) such resources can be a powerful means of independent
development for poor nations who can cooperate with each other. Absent
31
cooperation in the way of knowledge-sharing and support, developmentally poor,
resource rich nations sit as targets “for forced incorporation into the global
capitalist system” (Rosser, 2006a:17) that will continue to subordinate their own
interests to the whims of competition. Dependency theorists suggest that the
social actors of wealthy countries benefit from the corrupt and economically
damaging activities led by governments loyal to the dominant powers (Rosser,
2006a).
2.4 Sub-Corpus I: Macroeconomic Performance
Beginning in the late 1980’s through 2001 with Richard Auty, Alan Gelb, Jeffrey
Sachs, and Andrew Warner, the sub-corpus on the resource curse and economic
performance is the earliest. Their consolidated work product embodies both caseby-case and cross-country analyses, collectively establishing and continuing to
incite econometric research into the resource curse on the basis that “mineral
exporting developing countries suffered from poor economic performance”
(Davis and Tilton, April 2005). Some of the causal explanations most closely
aligned with economic performance have to do with volatile markets, the ‘Dutch
Disease’ and declining terms of trade, which is now synonymous with the
Prebisch-Singer Thesis previously discussed in detail.
The premise of the ‘volatile market’ i.e. volatile prices of natural
resources, suggests that the international markets for primary products, including
mineral commodities, are notoriously unstable as a result of the global business
cycle. Simply put, a resource-dependent nation chasing the value of their primary
32
commodity exports around an erratic global business cycle would seem to have a
difficult time pursuing “efficient and consistent development policies” (Davis and
Tilton, April 2005:30). A more diversified export economy would be less
vulnerable to the volatility of the global market because not all exports are
destabilized in the same way, at the same time during a recession; so the effects of
cyclical contraction would be staggered. An economy effectively dependent on
few or even a single export would have little fallback and be unable to benefit
from the relative balancing effect that a diverse export stagger can offer.
The ‘Dutch Disease’, mainstreamed into thought by W.M. Corden and J.P.
Neary (1982) describes a relationship between natural resource exploitation and a
reduction in a nation’s manufacturing sector as a result of inflation. In their
words, the ‘Dutch Disease’ is a “phenomenon whereby a boom in one traded
goods sector squeezes profitability from other traded goods sectors, both by
bidding resources away from them and by placing upward pressure on the
exchange rate”. As the premise goes, when resource deposits are sited, structural
adjustments must be made to capture the wealth inherent in the discovery; this
normally takes the form of offering higher wages to attract new labor. The
empirical consequence is two-fold: (1) established domestic industries suffer a
loss in labor and the manufacturing sector shrinks as a result of lessened
competitiveness with foreign production and (2) The influx of foreign currency
from the global price of the resource catalyzes inflation, which makes the
purchase of domestic products by other nations more expensive and again reduces
the competitiveness of domestic manufacturing sectors. Similar effects of ‘Dutch
33
Disease’24 can be found in the third world as a result of foreign aid, which acts as
an additional source of non-domestic currency.
The relationship between the ‘Dutch Disease’ and the Prebisch-Singer
Thesis (declining terms of trade) would seem to be such that ‘Dutch Disease’
affects the manufacturing sector over a relatively short time horizon whereas PST
affects the extractive sector over a much longer period of time. Sixty-plus years
after the introduction of the Prebisch-Singer Thesis, researchers are still unsure if
terms of trade actually have declined over time (Davis and Tilton, April 2005:29)
while the ‘Dutch Disease’ can either be identified or not evidenced by datasets
spanning 30 years25. Time aside, both these causal determinants of the ‘resource
curse’ share a mode of difficulty in adapting to inflation.
2.5 Sub-Corpus II: Socio-economic Challenges of Resource Booms
Beyond the macroeconomic features of the performance literature are socioeconomic aspects of development. The process of economic development is
intricate, expansive, and reaching well past commercial market exchange and
financial and business relationships. The socio-economic aspects of extraction and
economic development underline the causal explanations of income inequality,
the nature of mining, and rent-seeking behavior. Collectively, these social aspects
24
Additional information on ‘Dutch Disease’ can be found in Corden’s 1984 survey. Corden, W. M.
“Booming Sector and Dutch Disease Economics: Survey and Consolidation ” (Nov., 1984). Oxford Economic
Papers. New Series. Vol. 36, No. 3 pp. 359-380. Also, the literary foray into its foreign aid-based
effectuation is at present more connected to political economy.
25
Bjørnland (1998) shows the effect of North Sea oil on manufacturing sectors in the UK and Norway using
a dataset spanning 1970-1990. Bjørnland, H. “The Economic Effects of North Sea Oil on the Manufacturing
Sector”. Scottish Journal of Political Economy. Vol. 45. Iss. 5. pp. 553-585.
34
punctuate a governance picture of circumstance and consequence.
Leamer, et al., (1999:25) found that “income inequality is tied to
endowments via the economic structure they engender” and Davis and Tilton
(April 2005:30) noted that there is weak evidence to suggest mineral extraction
increases income inequality in the domestic economy. Presumably, this evidence
more so refers to an inequality of income across regions of a country (horizontal
inequality) since as Ross (2007:238) points out, “…surprisingly little is known
about the relationship between mineral wealth and vertical [between rich and
poor] income inequality” (bracketed definition added) and that “…data on income
inequality is missing for most of the world’s oil-dependent countries”. The
implication for the benefits of accountability and transparency, largely attributed
to democracy, come to the forefront as Ross (2007:238) continues on to highlight
the fact that there is a “…strong negative correlation between a country’s
dependence on mineral rents and the amount of data we have about its inequality
levels”. The evinced presumption is further supported by Power, who claimed
that, “the high wages and rents associated with mining can also exacerbate
income inequality within a country, increasing social conflict and political
instability” (2002:6). Taken together, greater income inequality is generally
dissatisfactory for the poor but can also slow subsequent economic growth
through increased horizontal inequality. Here, it should be said that while Ross’s
statements refer more so to a lack of evidence, a connection is conceivable
between missing inequality data and a push for accountability and transparency if
it can be said that the actions leading to inequality is supported by obfuscated or
35
even clandestine machinations i.e. rent misappropriation and capital flight. In
resource-rich environments, key actors often have an interest in secrecy.
Governments may want to hide figures on natural resource and other revenues in
order to maximize their bargaining power vis-á-vis foreign investors, while firms
may have a similar interest since their market position may deteriorate if they
“publish what they pay” while other companies do not (McNeish, 2010).
Indeed, as a topic of discussion, the nature of mining is rife with moral
contention. The decision to take an extraction-based pathway to development is
not one to be taken lightly as the consequences exceed purely economic concerns.
Some researchers such as are of the mind that the extraction of natural resources
offers a developing nation a ‘big push’ toward modernization, an idea initially
developed by Paul Rosenstein-Rodan in 1943 and further supported by Ragnar
Nurske and Kurt Mandlebaum. Walt Rostow’s second stage of growth26, relying
upon external demand for raw materials as a “precondition for take-off”,
especially supports the extractive development notion and is closely aligned with
the conventional perspective on natural resources as presented by Viner in support
of Ricardo’s comparative advantage. Even still, Power (2002) suggests that the
socio-environmental costs associated with mining may be too high for an
underdeveloped nation to bear. The literature addressing the nature of mining is
typically associated with the argument that mining is an enclave activity yielding
little beyond a share of the rent to the local economy from where the resource is
extracted; and that the bulk of the wealth is sent off-shore to service debt and
capital investments made by exogenous extraction firms (Davis and Tilton,
26
https://www.mtholyoke.edu/acad/intrel/ipe/rostow.htm
36
2005:239).
While few would dispute that, “most of the rents realized by the country
flow elsewhere” the enclave argument is combatted by studies of mining regions
which show that wages and domestic expenditures have a significant multiplier
effect on the local economy and that mining often does promote domestic
industrialization through the promotion of downstream and upstream linkages in
the supply chain (Ahammad and Clements, 1999; Aroca, 2001; Clements and
Johnson, 2000; Clements and Greig, 1994; Stilwell et al., 2000; and de Ferranti et
al., 2002 as cited in Davis and Tilton, 2005:239).
Rent distribution aside, mining has a number of environmental
ramifications that are not so easily combatted once committed. For instance,
extraction sites, and very often the areas surrounding them, reveal the intensity of
land, water and air exploitation. It is not uncommon to find persistent
environmental degradation. There are socio-economic problems attendant to
livelihoods based on non-renewable resources. Many times high-unemployment,
low-education or even ghost towns are the forms of social degradation associated
with natural resource extraction. Because mining projects “…necessarily deplete
the mineral deposits they extract” (Power, 2002:6), the jobs established last for an
economically determined period of time and are especially unstable. Indeed, the
efficiency of extractive technology has, “steadily reduced the labor requirements
per unit of output” (Power, 2002:6), therein reducing local opportunities for
mining-related occupation. These issues are further intensified when mining takes
place in institutionally vulnerable locations such as the global south. In this
37
context, “the non-renewable resource wealth tends to be squandered, the level of
social conflict increases, and nearly irreparable damage is inflicted on the
environment…[potentially] leaving a developing nation permanently poorer”
(Power, 2002:6) brackets added. Ultimately mining is part of a complex pattern
of institutional, technological, and corporate development (Power, 2002:32).
Sociologist Andrew Schrank27, takes an intriguing perspective on the
historic basis of the nature of mining being the values and mores of extractive
innovations. He finds that “Factor endowments are not destiny. Social-property
relations are” (Schrank, unpublished paper:30). Differentiating between capitalist
property relations and pre-capitalist property relations, Schrank claims that
capitalist property relations i.e. private ownership, lent itself innovation and
economic growth on pain of bankruptcy, dispossession, and the perils of
unemployment while property held in common held no such risk for one
individual. The ‘resource curse’, is one of the most contentious and immediately
relevant paradigm shifts in development economics since the abolition of chattel
slavery. The spread of capitalist property relations requires some form of singular
ownership, which historically leads to asymmetric power relations. Schrank
further explains that the deep poverty associated with the myriad forms of peasant
proprietorship, such as slavery, feudalism, and sharecropping are only able to
foster the perpetuation of underdevelopment as poor societies export resources to
ameliorate poverty in the short-run rather than consume those resources
27
Schrank, Andrew. “Reconsidering the “Resource Curse”: Sociological Analysis versus Ecological
Determinism”. University of New Mexico. Dept. of Sociology. (unpublished paper).
36
Wenar, Leif. “Property Rights and the Resource Curse”. Philosophy & Public Affairs. Vol. 36. No.1.
(2008). Pp. 2-32.
38
establishing industrial sectors in the long-run. Short-run thinking encourages the
export of natural resources but not development and this leads to “nothing more
than extensive growth” (Schrank, unpublished paper:3). Leif Wenar28 also
discusses the ‘resource curse’ in terms of property relations. He posits that the
authoritarian graft of a people’s natural resources is a failure of international
property law enforcement. While this may be true, the power-concentrating forces
of globalization greatly affect the development and exercise of international law
for the benefit of the world and the international community.
Many of the issues involving the nature of mining in third world
environments fall under the categories of regime dynamics and institutional
quality with implications for, and very often culminating, in civil war.
39
2.6a Sub-Corpus III: Political Economy I
Regime Dynamics and Institutional Quality
“Help[ing] countries develop and
reduce poverty” is the goal of the
international community who not only
recognize that “…mineral wealth
provides developing countries with
opportunities” but also that “good
policy can foster the conditions
needed…” (Davis and Tilton, April
2005:32) Brackets added.
While the corpus on the resource curse has been expanded from a largely
econometric topic of study to include several political economy interests such as:
regime type (Wentcheckon, 1999; Ross, 2001a pg32); institutional quality
(Rodrik et al., 2002; Mehlum, et al., 2006; Andersen and Aslaksen, 2008;
Kolstad, 2007; Bakwena, et al., 2009), corruption (Leite and Widerman, 1999);
and civil war (Collier and Hoeffler: 1998, 2002; and Ballentine, 2003), the
evolution in scholarship leading to these investigations arose through the
acceptance of the resource curse, and a search for its causal mechanisms.
Eventually a consensus emerged among analysts that, “various political and social
variables mediate the relationship between natural resource wealth and
development outcomes” (Rosser, 2006a:7). This consensus further encouraged a
targeted search for those variables specifically.
The sub-literature encompassing regime dynamics and institutional quality
suggests that when it comes to commerce and natural resources, and therefore the
acquisition and distribution of the fruits of resource-based commerce, a
geographically and legally secure environment is a developmental imperative, in
40
other words, “institutions trump everything else” (Rodrik et al., 2002; Mehlum, et
al., 2006; Andersen and Aslaksen, 2006; Caselli, 2006; Kolstad, 2007; Caselli and
Cunningham, 2009; and Bakwena, et al., 2009) 29.
Commonly used proxies for institutional quality are the International
Country Risk Guide's (ICRG)30 political risk indicator and the Journal of Foreign
Policy’s Failed States Index (FSI) but McNiesh (2010:17) highlights that these
indicators, “rely on subjective expert interpretation of country risk components
and have not been designed for comparative research purposes”. In fact, ICRG is
designed “to meet the needs of clients for an in-depth and exhaustively researched
analysis of the potential risks to international business operations” and is “used by
institutional investors, banks, multinational corporations, importers, exporters,
foreign exchange traders, shipping concerns, and a multitude of others”.
Additionally, Fund for Peace (FFP), the producers of the Failed States Index31,
cite as part of their methodological rationale, the challenge to the international
community that the crises of weak and failing states pose in generally creating a
‘complex humanitarian emergency’, be it ethnic conflict, civil war,
revolution, “all of these conflicts stem from social, economic, and political
pressures that have not been managed by professional, legitimate, and
representative state institutions”.
The expansion of democratic ideology throughout the third world seeks to
secure property rights and rule of law as the unshakable tenets that have helped to
29
Advised reading on institutional quality and economic integration. Rodrik, D., Arvind Subramanian, and
Francesco Trebbi. “Institutions Rule: The Primacy of Institutions Over Geography and Integration in
Economic Development”. NBER Working Paper Series. No. 9305. October 2002.
30
http://www.prsgroup.com/ICRG_methodology.aspx
31
http://ffp.statesindex.org/methodology
41
establish the level of wealth experienced by first world nations. Veritably,
economic development includes the development of political and social
institutions, cultural values, public infrastructure, and human capital, as well as
the effective protection of the environment (Power, 32). But while sustainability
and environmental protection, in terms of renewable and non-renewable resources
are of reportable concern to the international community32, such notions may fall
short of immediate relevance on the pressing to-do list of a developing nation. As
McNiesh (2010:17) points out,
The distinction between renewable and nonrenewable resources is demonstrated to be at
once relevant as an abstract scientific
categorisation and irrelevant to the way in
which people on an everyday basis view natural
resources. Whilst macroeconomic stability and
transparent institutions might be widely seen as
desirable outcomes, the desperation and poverty
of the everyday may mean that as goals they are
correctly prioritized by responsible governments
in the global south below immediate goals of
emancipation and immediate forms of
assistance.
“Rethinking Resource Conflict” as World
Development Report 2011 for CMI Norway
(McNeish, 2010:17).
Like Power, McNiesh still does advocate an interdisciplinary approach to natural
resource-related issues such as governance and social wellbeing explaining that,
Whilst the questions of renewability remain
important for sustainable governance, recognition of
this ontological holism makes it also self-evident
that when considering policy initiatives and
mechanisms for resource governance there should
be some level of cross fertilization between what
32
http://hdr.undp.org/en/reports/global/hdr2011/summary/
42
have until now been held separate fields of study.
Questions of revenue flows and corporate
responsibility are just as important to the issue of
illegal logging, as participation and rights are to the
governance of hydrocarbon and mining rents.
“Rethinking Resource Conflict” as World
Development Report 2011 for CMI Norway
(McNeish, 2010:17).
For these reasons researchers are finding that research on regime dynamics and
institutional quality must move beyond the economy, and the normative
formalities of what a state ought to look like or how it ought to be run, to the
relationships that exist between these structures and the population. The histories
of economic and social development reveal that as a result of incomplete
processes of colonial government and the fluctuating influence of globalization,
notions of state, market and law can frequently be distant and distinct to those of
European ideals (McNeish, 2010:18). That is to say independence movements
disrupted full institutional colonialization leaving behind broken but ‘free’ former
territories stuck between what they once knew, what they have become
accustomed to, and grappling with what now to do. Doubtless, a complex
position that can hardly be understood from only a bird’s eye view as the
econometric approaches so well address. Instead a socialized approach, rather
than a quantitative macroeconomic one, is more likely to reveal the “differing,
and often contrasting languages of stateness and legality that compete and interact
over long periods of time to define the state through dialectics of cultural
struggle” (McNeish, 2010:18).
43
2.6b Sub-Corpus IV: Political Economy II
Conflict and Civil War
Although at times naturally occurring, civil war is generally a great agitator,
particularly to African cooperation on all scales, from province to continent.
Ultimately the mediating relations between regime dynamics, institutional quality,
and civil wars are highly interconnected. At least two inter-relational dynamics
are plausible: [1] Regimes are co-opted or created by civil war combatants,
foreign and domestic, who affect institutional quality either in its absence or its
support of their interests, and [2] pre-existing civil wars are agitated by the
discovery of natural resources in sites where there may have previously been
lesser interests in the area, if any, by the actors the resources attract. This
attraction leads to an examination of the current political regimes that they may
institutionally support emergent economic interests. Humphreys (2005:535) sheds
light on the matter stating, “outside actors are prone to one-sided engagement in
natural resource conflicts, directly or indirectly, and sometimes inducing regime
change and producing deadly effects” and such dynamics create ‘the enabling
environment for the economy of war’ McNeish (2010:7). Explanations for the
causes of civil war often cite either greed or grievance.
Greed is the most popular of the views with Collier (1999:8) arguing that
“the true causes of much civil war are not the loud discourses of grievance but the
silent force of greed” and that this is found in understanding the underlying
economic agenda, which is concealed33 out of necessity. In fact, Humphreys
(2005) aptly points out and elaborates upon the 6 families of mechanisms linking
33
Refer to: Humphreys, M. “Natural Resources, Conflict, and Conflict Resolution: Uncovering the
Mechanisms”. Journal of Conflict Resolution. 49(3). August 2005.
44
natural resource and war onset, and 7 families of mechanisms linking natural
resources and war duration. Clearly, with even a minimum level of
recombination the causes of resource-associated civil wars make for a complex
assignment. Although Collier’s findings underlying the greed thesis are widely
cited, Ballentine and Nitzchke (2005:4) suggest the thesis is limited in that [I]
inferring from statistical correlations whether individuals are motivated by greed
or grievance is risky because incentives are subject to change as the bearings of
conflict alter course over time; [II] that theories of rebellion often focus
disproportionately on rebels and less on the equal role of the institution and stateactor in causing or prolonging conflict therein presenting fewer dimensions of
conflict onset; [III] that insurgencies which are in actuality about entrepreneurship
i.e. criminal enterprises, should be differentiated from political grievances in
order to preserve opportunities for diplomatic recourse; [IV] that governance
failures mediate opportunity for rebellion by creating conditions conducive to the
onset of rebellion; and [V] comprehensive approaches focusing on a wide range
of political and economic interactions should be more readily applied in the
search for conflict drivers (Ballentine and Nitzschke, 2005:5).
Limits two (state as an actor and an institution…) and four (governance
failures mediating opportunity) are associated in that the instigative role of
government needs to be further investigated, while limits 1 (incentives subject to
change, non-viable basis of statistical correlation), two (overly rebel-centric
theories of rebellion), and four share commonality in that they are point critiques
of the greed thesis overall.
45
Of course there are other alternatives to greed and grievance, for instance,
with the advent of the ‘New War Argument’34 it is acknowledged in the literature
that civil war has taken on a distinctively economic character since the end of the
Second World War. According to McNeish (2010:7), the “new wars theory” holds
that more than generalized greed or grievance or even foreign intervention and
sales of future exploitation rights more specifically, the reasons for this economic
turn are a result of practices subsumed under the heading of “globalization”,
including: the reduction or end of superpower financing of opposing civil war
belligerents; the further liberalization of world trade; the growing demand and
enhanced competition for certain materials in the wake of the rise of China, India
and other regional powers35.
Beyond the bounds of ‘ceteris paribus’ economics36, research on war and
war economies is becoming increasingly interdisciplinary. The goal is to increase
economic stability in understanding the contours of change toward full
cooperation in conflict zones, which tend to be areas where resource deposits are
discovered. Ballentine and Nitzschke (2005:2) speaking to the issue of economic
stability, point out that weak states in the developing world allow combatants to
benefit from, “… business deals with criminal networks, arms traffickers, and
scrupulous corporate entities, reaching well beyond the war zones to the world’s
34
Kaldor, M. (1999). New Wars: Organized Violence in a Global Era. Cambridge: Polity Press.
For more on this in particular refer to: Klare, T. (2008). Rising Powers, Shrinking Planet: The New
Geopolitics of Energy. New York: Metropolitan Books.
36
An assumptive principle and positive practice in economics suggesting that the effect of one economic
variable on another can be ascertained by holding constant all other factors or influences that may affect the
response variable. The concept of ‘ceteris paribus’ has been scrutinized as tending toward oversimplification,
showing “…itself most markedly perhaps in excessive ‘abstraction’ which manifests itself: in restriction to
too small a number of variables taken into account as important; in too few objectives being recognized as
properly operative; and in the movement from premises to conclusions by procedures whose only
justification often is that they are time-saving and thought-economizing” (Viner, 1952:2). Verbatim,
"Holding other things constant" or "all other things being equal".
35
46
commodity markets and major financial centres”. As resource wars are becoming
a new type of armed conflict, McNeish’s summary on the militarization of
economies becomes even more salient, “…war economies can only be
transformed into less militarized economies if the armed groups’ sources of
finance are dealt with in an integrated manner, beyond natural resources and
beyond the war zone” (2010:11).
Research regarding the onset, duration, intensity, and type of civil war
speak mechanistically to the function of civil war in its relation to natural resource
abundance. Some mechanisms put forth by Ross (2004b as cited in Rosser,
2006a:18) are the ‘foreign intervention, ‘booty futures’, and ‘separatist’
mechanisms whereby (1) the probability of civil war increases the probability of
foreign intervention to support rebel movements which aid in securing resource
wealth, (2) the probability of civil war is increased in that it enables rebel groups
to sell future exploitation rights to minerals they hope to capture, and, (3) natural
resource related grievances cause separatist civil wars. In addition to mechanism,
the type of resource in question is important as well.
2.6b(i) Reviewing Civil War by Analytical Perspective
According to Auty (2004 as cited in Rosser, 2006a) point-source resources are
more connected to conflict than diffuse resources and lootable resources are more
connected to conflict than the non-lootable. If the resource is point-source
lootable, that is, concentrated in a specific area and accessible without advanced
technology, it is more likely to fund existing civil war. This relation articulates
with the behavioral perspective in that the existing civil wars are caused by
47
grievances over wealth inequality, limited political rights, or tribalism. If the
resource is non-lootable and geographically dispersed it can still create civil war
as groups fight for political control in order to access the rents. This relation
articulates to the rational actor perspective in that it “assumes rebellions are
caused by greed” (Rosser, 2006a:17).
The duration of civil war is more likely to be a combination of both of
greed and grievance; while the onset of civil war may initially be caused by greed
or grievance or a recombination of both and still not exclude any number of other
factors. The statist perspective puts forth that civil wars are caused by state
weaknesses lending them to predatory behavior, which then becomes the downfall
of the economy while the radical perspectivists, or the developmental theorists,
put forth the ‘resource scarcity’ idea. That is, the conflict in resource abundant
developing nations is contextualized in terms of contests between rich states over
scarce resources, a concept effectively similar to the earlier explained ‘foreignintervention’ mechanism.
The role of regime type plays into government behavior and subsequent
governance policies i.e. institutional quality. Though democracy is the preferred
regime type, by scholars and practitioners alike, there are hindrances to the
development of democracy as currently discussed among four main explanations,
deriving largely from the link between natural resource abundance and regime
type, i.e. ‘rentier state’ theory. Analysts suggest that [1] the wealth from natural
resources is used in government spending and low taxation to reduce pressure to
become a democracy, and [2] the wealth also enables governments or political
48
elites to spend more on internal security i.e. militarization, and with such capacity
maintain support and consolidate their power. This is especially concerning in
authoritarian environments where such power would lead to an increased
resistance to “democratic change” though such is a concern for “oil states in
general” (Rosser, 2006a: 20). It is also argued that stronger internal security
would also enable governments to “limit the scope for political opponents to
organise and challenge them” (as cited in Rosser, 2006a: 20) presumably via
insurgency. A rational actor analysis explains the proliferation of civil war in that
[3] natural resource wealth consolidates agreeable regimes in power37 therein
rationalizing war by antagonists, potentially resulting in a dictatorship by
contender, incumbent or opposition. Finally, a broadly applied historicostructuralist perspective suggests that resource wealth inhibits production factors
such as increasing education levels and labor specialization thereby preventing
“social and cultural changes that facilitate democratization” (Rosser, 2006a: 20)
and decreasing modernization. This consequence of resource wealth has been
referred to as the ‘failed modernization’ effect. One suspects that Viner vis-à-vis
the traditional perspective discussed earlier would assume differently that
resource wealth inhibits such social production factors. This captures the
intellectual shift from ‘resources are good’ to ‘resources are bad’. While these
perspectives offer guidelines, none are evaluative panaceas and there are
deficiencies mainly relating to scope.
37
The phrase used is “particular regimes in power” but consolidation indicates agreement.
49
2.7 Analytical Discrepancies
It is assumed that in general, policy elites enjoy a high degree of autonomy from
the masses due to financial independence provided by a combination of resource
wealth and non-taxation. Since the masses do not fund the government they make
few demands of it. As Rosser (2006a) explains, the assumptions of statist and
behaviorist perspectives are inadequate in that they do not give enough attention
to the nature of the social contexts that lead to violence proneness, poor economic
performance, and a lack of democratic adherence. Natural resources, particularly
oil, “enters into an ongoing process of development and into a constellation of
identities” (Okruhlik, 1999 as cited in Rosser, 2006a), now inherent in state
institutions, forged by the social forces of corporate groups in power prior to the
resource discovery. Statist and behaviorist perspectives fail to allow for the subtle
persistence of the previous colonial influence.
The assumption of a rational actor perspective is that the societies of
resource abundant countries are composed of disconnected rational utility
maximizing individuals who only join together into organized groups to advance
common economic interests. This assumption lacks the resolution to inform the
socio-structural characteristics of such states. For instance, how are groups
defined? Class? Ethnic? Religious? What is the relationship between these
elements? The same assumption deficiency holds for the social capital approach
as well.
The historico-structuralist approach is understood to “provide the most
sophisticated analysis of the role of social forces in shaping developmental
50
outcomes in resource abundant countries” in that it is able to address colonial
influences. Still, a drawback of the approach is that it tends to be class-centric,
lacking the resolution to address the ethnic and religious terms of social group
engagement. This is particularly important in resource abundant countries
because they are more often defined by ethnic and religious backgrounds. This
means that economic development is impacted by the affect that resource wealth
has on the social structure of these countries.
Approaches from dependency theorists tend to take all of the previously
mentioned deficiencies into account, “giving consistent attention to the role of
external factors in mediating the relationship between natural resource wealth and
developmental outcomes” (Rosser, 2006a:22). When the dependency approach is
juxtaposed against the convention, which is to regard developmental outcomes as
solely a product of domestic political factors, the convention is regarded as overly
simplistic. The dependency view is strongly represented in the Wallersteinian
world-system perspective, whereby periphery countries, such as those exporting
raw materials, are functionally maintained to serve the core industrialized nations.
Any upset to this functioning lends rationale to corrective action by the core.
Cores monopolize the capital-intensive production restricting the rest of the world
to providing labor and raw resources. The resulting inequality then reinforces
asymmetric development. The ‘resource curse’ provides an explanation of this
asymmetric development in terms of natural resource assets and amenable labor
terms, in toto, available to the ongoing world-system. Still, Rosser claims the
fault of the dependency theorists’ view on developmental outcomes is that
51
theorists are “wrong to imply that incorporation into the global capitalist system
always has negative developmental consequences” (2006a:22). Summarily, he
suggests that developmental outcomes are more complex in the sense that the geopolitical and geo-economic environment of a developing country are also
important factors acting on the resource wealth-economic development
relationship but that they are understudied in the current literature. One would
think world-systems analysis could contribute to this gap, for instance the work of
Bonini (2012) who studied the development implication for raw materials
producers in the broader context of complementary versus competitive regimes of
accumulation by economic hegemon. Bonini’s work will be reviewed in detail in
a later chapter.
Still, another weakness of the literature remains the strongly recurrent
observation that a firm historical foundation for the analysis is lacking in that an
analysis without reference to historical dynamics suffers a lessened potential to
serve critical issues of institutional change. As McNeish has reinforced,
“parsimonious explanations that ignore time and historical context are unlikely to
capture the dynamics of potentially more than one combination of a set of
variables that can induce positive institutional change”. Authors such as Omeje
(2008), and Stevens & Dietsche (2007) collectively argue for a comprehensive
study of rentier politics in extractive economies across historical backgrounds and
across regions, which would detail the mechanisms and driving behaviors of key
actors in their role within structures of domestic and international political
economy. Further Omeje (2008) argues that indeed it seems this largely
52
unexplored or overlooked aspect of politics in extractive economies may have the
most decisive implications for the presence or absence of dysfunctional conflict in
different countries and regions of the global south (McNeish 2010:17).
Ultimately, the oft-institutionalized mechanisms and driving behaviors of
key actors within the international political economy, is what the study of global
governance addresses. Subjective as such inputs would be, critics of the resource
curse thesis also recognize that it is ideological perspectives, more so than
scientific knowledge, which founds assessments of what good institutions are
(McNeish, 2010:18).
2.8 ‘Red Herrings’ and Other Doubts of the Resource Curse
Even though the literature provides considerable evidence that natural resource
abundance is associated with various negative development effects, it is not
statistically conclusive (Rosser 2006a) and a number of analysts now question
whether the whole discourse of a resource curse is a “red herring”
(Brunnschweiler & Brundt, 2007; Wright & Czelusta, 2004). As research into the
resource curse continues there is increasing recognition that serious gaps exist in
the kind and quality of the data on which the Sachs-Warner formalized theory of
the resource curse is built. Endogeneity issues, i.e. when factors being compared
are endogenous to structures not explicitly being compared and when a factor not
under consideration potentially determines those that are, and omitted variable or
selection bias, i.e. the inconsistent selection or omission of data set variables
across regressions, persist (Menaldo, 2010; Manning, 2004; van der Ploeg and
53
Poelhekke, 2010). Also cited is “weakness of the instruments, violation of
exclusion requirements, and misspecification error” as “unfortunate data mishaps”
that when corrected provide no evidence for the resource curse (van der Ploeg and
Poelhekke, 2010). Similar to this is Davis (2012) who, in differentiating between
pure, statistical, and scientific replication, found the Sachs-Warner data
exceedingly difficult to replicate on a pure basis (though possible) and riddled
with unsettling bias concerns. Davis’s work will be reviewed in detail in a later
chapter as well.
Brunnschweiler & Brundt (2007) found that the statistically significant
relationship between resource dependence and institutional quality reflects the
lack of industrialization that would spread dependence among multiple sectors.
Menaldo (2010) found that rather than a rentier state effect, the data supporting
the resource curse is better explained by a weak state capacity effect in that states
with weak institutional capacity are more likely to encourage exploration out of
revenue-starved desperation. There is an implication that desperation invites
challenges to ruler’s political authority and induces concessions to oil firms that a
stronger state may not make. As Obeng-Odum puts it, “the status quo implies that
oil companies, which typically wield considerable economic power, may have
their way, while the state only has its say” (2012:19). Indeed, it would take a
strong state capacity to buck such a convention.
Across the board researchers are calling for finer-scale data attributable to
case-based research and a greater emphasis on the political economy of individual
resource environments. Wright & Czelusta (2004) suggest that beyond resource
54
abundance as a stock, it is actually the perception of the stock taken by
policymakers and businesses that determine management, and thus developmental
outcome. When mineral abundance is considered a ‘windfall’ the issue becomes
one of “splitting up the bounty” and not about self-sustaining wealth creation or
development. Di John (2011) suggests that the nature of the state and the structure
of ownership in the export sector largely determine whether mineral and fuel
abundance generate developmental outcomes.
While van der Ploeg and Poelhekke (2010) found no evidence supporting
either a resource curse or blessing they were able to suggest that state capacity to
handle volatility is at once a key factor. They found that rents stimulate growth in
stable states, but increase volatility in volatile states, indirectly worsening growth
prospects. The researchers also found that there is a correlation between resource
dependence and economic growth. The correlation is negative in highly volatile
states and positive in stable states “so that the quintessence of the resource curse
appears to be the notorious volatility of commodity prices” (van der Ploeg and
Poelhekke, 2010:20). Here the Prebisch-Singer thesis conflates with van der
Ploeg and Poelhekke’s assessment that a country undergoing a regime type
transformation and dependent on resources by way of resource rents, will likely
experience a negative impact on growth as a result of the volatility inherent in
regime change. It would seem that this conflation points to the compression of
state capacity by both internal and external volatility pressures.
Similarly, Obeng-Odum (2012) suggests that the resource curse-blessing
dichotomy is insufficient and that uncertainty i.e. volatility and Dutch disease-
55
effect is neither a curse nor blessing. Obeng-Odum (14) notes that the use of oil
revenues determines whether the Dutch disease-effect will present and therefore
categorizes it as uncertain. He notes that resources can be a blessing in that they
do, indirectly, create some jobs derived through demand but not through
immediate petro-employment. Also, corporate social responsibility (CSR) can
bring, in his reviewed case of Ghana, medical services (valued at 150,000 dollars)
and water wells. One would insert that this is a pittance on CSR compared to the
millions in environmental and other damages. Obeng-Odum (2012) notes that
there are many potentially positive multiplier effects of oil including a 38 million
dollar World Bank credit to the Ghanaian government to implement an ‘Oil and
Gas Capacity Building Project’ and a 2 million dollar grant for grassroots and
community empowerment. Already, the government has offered half a million
dollars to its premier university to build capacity. There is warning already as
Obeng-Odum points out that 11.90% of the annual budget funding amount
(ABFA) goes to expenditure and amortization of loans for oil and gas
infrastructure, 79.82% of ABFA is for road infrastructure which undoubtedly
support a great amount of industrial traffic, and only 0.45% of ABFA is for
capacity building including oil and gas, which then includes the 38 million dollar
WB credit. With less than 1% of ABFA spent on capacity building the implication
is typical, to speak conservatively.
Further, uncertainties encompass the Dutch disease, as something that
could or could not happen depending on how rents are spent in practice and
uncertainty is inherent in price volatility. The real curse, though, turns out to be
56
“the environmental aspect of oil windfall” (Obeng-Odum, 2012). There are
countless issues operating each with attendant consequences if a state lacks the
administrative capacity to prepare for the risks of oil exploration, the management
capacity to handle spills, or regulatory infrastructure and wherewithal to hold
firms accountable. Locally more disruption is found in that prices for land and
rents increase as investors purchase near the drilling site thus displacing lowerincome tenants and the social matter is aggravated in that the marginalized of the
local population tend to live at these sites.
2.9 Policy Recommendations
Whether associated with blessings or uncertainties, the ‘resource curse’ is
accepted in practice, as a fact supported by international backers holding interests
in management policies. But there still, there is no real agreement at either the
international or domestic level on what the causes or best steps to take are in
relieving the resource curse as the preeminent manifestation of the links between
natural resources and conflict.
Researchers have made several reform recommendations to help affected
countries overcome it, the most significant of which involve: [I] changes to
economic and investment policy, [II] transforming political and social
environments, [III] inducing direct rent distribution schemes, [IV] privatizing
resource sectors, and [V] utilizing transnational development organizations to
close loopholes and reduce opportunities for income associated with price
volatility. Even with these efforts, political feasibility remains one of the main
57
difficulties. Natural resource dependence makes the execution of these changes so
tenuous that only in continuing to research the “dynamics underpinning the
variation in resource abundant countries’ development performance, [… are we]
likely to uncover potential levers that might be employed to trigger the required
policy, behavioral, institutional or social changes” (Rosser 2006a:26). As Rosser
also notes, the current uptick in aid flows, particularly to sub-Saharan Africa,
means such political feasibility may prove possible in a shorter time frame than
expected. Rosser makes reference to how quickly the Kimberly Process for
diamond certification was put together, “a couple of years”, suggesting that
achieving change at the international level may be less prohibitive than at the
domestic level. This means there is room to increase structural adjustment
conditions in “any attempt to create new international financial mechanisms for
helping poor countries cope with international commodity price instability” and
“it may, therefore, be more profitable for those concerned about the ‘resource
curse’ to focus on promoting change at the international level” (Rosser 2006a:26).
Additionally, analysts are calling for better regulation of petroleum-related
aid as part and parcel of a sort of ‘anti-corruption tool-kit’ (Kolstad, Wiig &
Williams 2008). Petroleum-related aid can be defined as activities aiming to
improve the development climate and impact of petroleum resources (McNeish,
2010). Currently the focus on revenue, resource, and environmental management
is highly supported by the international community but researchers are claiming
that such focus is too limited to address the core of the ‘resource curse’ being the
overarching problems of accountability and unfavorable incentives (McNeish,
58
2010:15). These overarching problems not only slow positive institutional change,
but also according to Kolstad, Wiig & Williams (2008) neither “does capacity
building and technical assistance per se” lead to the desired result. Fiscal
transparency, rather than capacity building and technical assistance, is posited as
being able to facilitate an enhanced “accountability of the regime and of their own
business partners towards the citizenry, and thus strengthen state-society relations
and societal trust deemed crucial for state and peace-making”. A recommendation
put forth to address possible resistance against transparency is for the
international community to “make the disclosure of revenues from natural
resources by governments and/or companies a pre-condition for development aid,
investment and credit” (McNeish, 2010:12). Along the lines of the ‘New War’
theory, there are also concerns that calls for transparency operate to manage the
ever tenuous hegemon-client relationship and justify foreign intervention as is
exemplified by the recent (July 18, 2013) U.S. House Committee on Foreign
Affairs Sub-committee hearing: Is There an African Resource Curse? and its
companion hearing, Emerging Threat of Resource Wars (July 25, 2013).
2.10 Beyond Policy: People and ‘Resource Sovereignty’
The policies recommended to ameliorate the ‘resource curse’ are often targeted
toward institutions and the elite who populate them, but in fact both parties,
international donors and national governments alike, seem to disregard the larger
constituency and how its members are impacted by state and international level
‘gang wars’ over resources. If it can be said that the nature of a state reflects the
relationship of its people among each other and that the nature of governance
59
reflects the relationship of those people with their leadership, willingly selected or
other wise, then these relationships are the growth culture colonized by
development. From this perspective, developmental pathways are personal and
the mechanisms that open or close these pathways induce personal responses. As
McNeish (2010:19) underlines, “…resource wealth brings to the fore issues of
political and social identity under the State and ultimately the ideological
orientation and identity of the State itself”.
In a recent text, Flammable Societies, McNeish and Logan (2012)
question the political and scientific basis of international policy which aims to
address resource management but uses standard western models of economic
governance, institution building, and national sovereignty. Demonstrating the
ways in which the “…clashing understandings of ownership and different
epistemologies of nature, law and participation emerging from local societies call
into question the limits set for state policy on natural resource management”
(2010:19), McNeish and Logan advocate the use of the term ‘resource
sovereignties’ in an effort to embody the essential grain of a social relationship to
natural resources. That is, the “…the attribution of value by social groupings to
attributes and capacities that provide functional (economic development) and/or
symbolic utilities (social identification, membership, and ownership)” (2010:19).
What this means is that people’s potential opportunities and range of
potential opportunities change with the onset of natural resource income. These
potential opportunities bring forth questions of socio-cultural identity,
participation, ownership, and rights. Often times each of these issues prove
60
contentious; without the presence of a game changer like natural resources. In
this way the idea of ‘resource sovereignties’ attempts to capture the social affect
of potential opportunity, not only particularly in areas where such potential rarely
appears and real opportunities are seemingly few but also where a potential
opportunity for local enrichment is inherently connected to a very real global
sourcing opportunity.
2.11 Quality and Quantity: A Call for Research Depth
Most research on the relationships between natural resources, economic
development, and conflict have been macroeconomic but across the board more
researchers are calling for alternative approaches to understanding these issues;
approaches that are more interdisciplinary and inclusive of a wider social
geography and political economy (Rosser, 2006a; McNeish, 2010; Heinrich,
2011). Repeatedly researchers note the necessity of fine scale data from casebased research, especially in aid-recipient countries. Of special interest are the
dynamics of greed in politics and war, the complexities of grievances in resource
rich countries in the global south, and the everyday operation of class divisions in
resource distribution (McNeish, 2010). While the ‘resource curse’ is based on a
correlation between resource abundance and economic development, and today
there is some evidence of a link between natural resources and conflict, both
correlations remain causally inconclusive. Therefore the, “ “resource curse” […]
needs to be interrogated as to what extent it represents a relevant discourse”
(McNeish, 2010:20), a significant point made by Davis (2012) as well, though
61
more strongly and empirically evinced.
This suggests that the ‘resource curse’ maybe more of an obscuring
umbrella than a tangible problem in its own right. Instead, more insight is needed
regarding the issues that seem to surround natural resources or are otherwise
exacerbated by them. Issues such as how institutional (state) contexts act as
catalysts for conflict; how the socio-historical, ideological, and political dynamics
and legitimacy of decisions affect the use of, and access to rents and resources;
and instead of behavioral theories of greed or rational actors, more research is
needed as to the role of historical grievances and complications of resource
sovereignties i.e. religion, class, ethnicity, identity, and ideology. In other words,
what does development really mean on the ground? What about everyday life
changes as a result of development? Other questions under the ‘resource curse’
umbrella, which are ripe but still understudied, concern the apparent interrelationships that seem to exist between extraction, campaigns for selfdetermination, corruption, organized crime, and the informal economy.
A key to understanding larger conflicts is to track the ‘pre-symptomatic’
and pre-existing conflicts at the regional and sub-regional level, that is, smaller
conflicts that can then be further provoked by market commodity specific
interests. For instance, in 2011 oil was discovered in Turkana County, Kenya,
East Africa. Though former President Kibaki, on his way out, was thrilled, the
people of Lake Turkana have already been in conflict with each other over water
and cattle as the lake was said to be drying up. I that was not enough to
complicate matters in the larger sourcing context, it was large amounts of water
62
was discovered in the very same region. Since petro business is notoriously
degrading to the surrounding environment especially, how will the discovery and
drilling affect this area environmentally and how has it already changes the preexisting conflict? Will it come down to a decision of water or oil in Turkana
County? It is uncertain how the circumstance will shape up but Kenya is a
country to watch for more reasons than one.
2.12 Quality Control: The Resource-Opportunity Complex
Rosser makes a major contribution to this review with his observation that [1] that
most of the analytical perspectives for framing the ‘resource curse’ are highly
deterministic and generalizing to the extent that the level and quality of economic
performance, political regimes, and violent propensities are largely
undifferentiated among resource abundant countries; and that, [2] negative
development outcomes are the products of the resource endowment itself. To this
effect, most noticeably to point 1, Rosser focuses on the fact that there is
considerable variation in developmental outcomes experienced by the countries
on an individual basis and in the “various political pathologies that are seen as
mediating the relationship between natural resource abundance and development
performance” (Rosser, 2006a:22). Not all countries experience poor economic
performance, descend into violence or develop authoritarian regimes and not all
countries have developed fractional or ‘rentier’ states, or suffered from corruption
or rent-seeking. Botswana, above all others, is held as the exceptional model to
this extent. For this reason, Rosser suggests that work on uncovering which
variables are most significant in mediating the resource abundance-economic
63
development relationship holds the most promise for “producing the desired
understanding of the causes of poor economic performance […] as well as the
conditions that have enabled some countries to escape” (2006a:24) the ‘resource
curse’.
Rosser’s second point, that the negative development outcomes are seen as
the products of the resource endowment itself, though less addressed in his paper,
will be shown as among other things, highly significant to this work in particular,
and as Wright and Czelusta (2004:36) point out, to the resource curse (rentseeking and corruption) in general. The discourse related to the ‘resource curse’
reflects a variety of conceptions, recommendations, and operating frameworks
with which the larger issue of natural resources and conflict is contextualized.
Taken from the economic perspective of scarcity, the evolution of the idea of the
‘resource curse’ stands out as requiring multiple methods and interdisciplinary
research techniques in order to fully investigate its internal mechanisms but also
its scholarly function, war-time practicality and even its degree of legitimacy. I
propose that a critical discourse analysis, an interdisciplinary qualitative research
method, in combination with a world-systems analysis can contribute significantly
to the unpacking of the ‘resource curse’ by looking more closely at how the
rhetorical concept interacts with its political context, but also how the ‘resource
curse’ is a political context.
2.13 The Craft of Scholarship: Exemplifying Conflict Rhetoric
The craft of scholarship does not take place in a vacuum. While the dialogue of
64
the resource curse has an intellectual heritage in development economics,
dialogue in the area of development economics is part of a larger conversation
about economic growth and security, which itself is a component of every news
broadcast. Where growth and security is a public issue it follows that resources
and conflict have a place in the public understanding. To this extent, even the
mainstream information consumer is somewhat aware of the context surrounding
resources and conflict, the general arena of the ‘resource curse’.
For instance, that the public is bathed in information is evidenced by former
President George W. Bush’s, 2003 State of the Union address wherein he stated
that, “throughout the 20th century small groups of men seized control of great
nations, built armies and arsenals, and set out to dominate the weak and intimidate
the world”. The former president proceeded to associate those small groups of
men with limitless “ambitions of cruelty and murder”, and still further to
equivocate such ambitions with those of “Hitlerism, militarism, and communism”.
He concluded triumphantly by saying that in each case those ambitions were
defeated by “…the strength of great alliances and by the might of the United
States of America”38.
That the public discerns how the information they receive conveys their
acquiescence to the U.S. role in global politics to secure resources and stability on
their behalf; is part of the purpose of this thesis. While “Hitlerism, militarism, and
communism” are all functionally tied by the goal of concentrating power and
exerting it via paternalism with the divisive tools of racism and classism, in 2003,
the description of “the strength of great alliances and by the might of the United
38
http://www.cnn.com/2003/ALLPOLITICS/01/28/sotu.transcript.7/index.html
65
States of America” correlated with the support of the Global North as guided by
the leadership of the United States of America, as it does today in 2013. Returning
to the “20th century small groups of men”, the wealth disparity in the U.S. being
well known39 with 1 percent of the population owning nearly 40 percent of the
country’s wealth, is felt by all who cannot count themselves among the minority,
that is to say that ‘these small groups of men’ is a reality understood by the many.
What may be less understood is the insidiousness of language and public media
networks that skew knowledge and influence voting. Often it is such votes, so
conditioned at casting, which release the public funds to build those armies and
arsenals and ultimately permit those who “set out to dominate the weak and
intimidate the world” to do so.
And so the loop closes with the Global North and the U.S. fighting fire
with fire and claiming victory amid the flames. It is all justified by the
inflammatory phrase40, "it's not our fault God put our oil under other people's
countries", paraphrased, derived, and misattributed to Donald Rumsfeld from a
statement made by Dick Cheney41 in 2002 as he explains, "the problem is that the
good Lord didn't see fit to put oil and gas reserves where there are democratically
elected regimes friendly to the interests of the United States".
From this summation the discourse of the ‘resource curse’ can then largely
be understood as a conversation between weak resource-haves, represented by
39
Wolff, Edward N. “Recent Trends in Household Wealth in the United States: Rising Debt and the Middle
Class Squeeze: An Update to 2007. The Levy Economics Institute Working Paper Collection. Working Paper
589. March 2010. http://www.levyinstitute.org/pubs/wp_589.pdf;
http://www2.ucsc.edu/whorulesamerica/power/wealth.html .
40
41
Galloway, George. “Roots of Terrorism”. Alternative Radio. September 19, 2005. No pun intended.
http://www.huffingtonpost.com/charlie-cray/the-plan-to-steal-iraqs-o_b_11793.html
66
national governments, and strong resource-have nots, represented by international
donors. The Global North obviously does not lack a distribution of natural
resources, the contiguous United States is incredibly diverse in the resources it
has disposed of already, but in the sense that these advanced nations continually
need to secure more resources to persist at the leading economic edge, one could
understand ongoing resource-based conflict between the North and the South.
Further, given the historical relations and the various stages of resolution, one
could indeed expect it.
According to McNeish (2010:18), the “resource curse” as a concept, along
with the proxy use of risk indicators, was “originally formed as a means of
identifying countries that because of internal weakness needed assistance”. Over
time the original concept has come to foster generalizations that “often fail to take
account of different state forms and have been all too easily manipulated by
politicised efforts to discredit and therefore exclude countries undergoing regime
change” (2010:18). While identifying countries for aid is hardly an apolitical
process, the “discourse on the resource curse and fragile states are, therefore, at
times related powerful ideological weapons that are drawn upon by rulers to
legitimise policies and by opponents to criticise rulers” (2010:1842).
By this measure, scholars of world politics are essentially engaging a
study of the proverbial “gangster’s paradise” where the ‘resource curse’ seems to
be but a tranche of the academic arm in the gangster’s toolbox, albeit with a
complex origination. After all, conquerors are old news, and while it is a
42
More
specifically
from
Eriksen, S (2008) ‘State Failure’ in Theory and Practice: Extraversion,
Domestication and the Idea of the State. Unpublished paper presented at Failed States Workshop. Chr.
Michelsens Institute. Bergen.
67
historical process, conquering, is in no way past tense. In fact, political science
literature covering dynamics at the nexus of conflict and natural resources
acknowledges43 the existence of “rational entrepreneurs of violence” (Thies,
2009:475). It is unsurprising then, that “such ideological manipulation of
concepts, ideas and numbers might be an unavoidable outcome of international
politics” and it potentially explains why researchers continue to find that a “search
for a clearer understanding of the relationship between natural resources and
conflict, more rigorous and testable criteria for “best practices” as well as
“fragility” appear necessary (McNeish, 2010:18).
The research on the ‘resource curse’ speaks to three broad and interacting
categories, all of which are key security concerns: economics and human
resources (people); global politics, international relations, decision-making
authority (power); and natural resources and ownership (property) or money.
Returning to the earlier mentioned concept of the ‘resource war’, the diagnosis of
a ‘resource curse’ affliction can be thusly seen as an implement of scholarly
weaponry, a specialized product of the knowledge-based economy (KBE) and
ultimately a self-serving double standard. The relationship between natural
resources, economic development and the KBE is further discussed by Wright and
Czelusta (2005), while Martens (2004) discusses the role of knowledge, the KBE,
and economic development in his text, The Cognitive Mechanics of Economic
Development and Institutional Change. Additionally, Bret Gustafson writes on
Fossil Knowledge Networks, in his contribution to McNeish and Logan (2012) of
43
Thies, G. Cameron. “Conflict, Geography, and Natural Resources: The State Political Economy of State
Predation in Africa”. Polity. Vol. 41. No. 4. October 2009. (465-488).
68
chapter 13.
2.14 Conclusion
The broader historical context of the Resource Curse Thesis has given way to a
multi-channel political economy of the ‘resource curse’ where the interests of
development, modernization, and conflict, are interacting and coevolving each
other, all while states are still trying to decide upon their chosen form of
government. McNeish (2010:18) describes this in saying, “despite common
reference to variables of legitimacy and capability and “risk” indexes there is no
agreement between donor institutions and national governments in the north or
south on the desired institutional or political design of resource rich states”.
Many states in the Global South, more specifically sub-Saharan Africa, are in
some form of regime transition and this adds to the many factors involved in the
‘resource curse’, what might be better termed as the resource-opportunity
complex where conflict is inherent given the context of development,
modernization, and global political power.
Academic knowledge and science is used both as a weapon and as a
beacon of objectivity, truth, and integrity while public opinion is used as a ‘beatstick’ upon science and academic thought which might prove offensive to public
sensibilities i.e. the vision of itself. Science as ideology44, is a dual process
described by R.C. Lewontin as “… the social influence and control of what
scientists do and say [on the one hand], and on the other hand, the use of what
44
Lewontin, R.C. “Biology as Ideology: The Doctrine of DNA”. 1991. Anansi Press. Concord, Ontario.
69
scientists do and say to further support the institutions of society”(1991:preface
viii). Because the two spheres feed each other, there is no real separation, in terms
of influence, between academic and public discourse, beyond that of public access
to the academic context for public rhetoric. Both spheres are tightly controlled,
highly systematic and for better or worse, highly responsive distributed
information networks. The ‘resource curse’ is an example of this relationship.
Beginning initially as an academic observation of the consequences stemming
from a small part of a broad quest, it has as of 200345, peaked into the public
awareness and is becoming more widespread in non-academic areas. The rapidly
evolving literature on the political economy of the ‘resource curse’ in support of
the Resource Curse Thesis endeavors to capture a “multi-dimensional
phenomenon, involving not simply poor economic performance but also civil war
and authoritarianism” (Rosser, 2006a:8), that is, the resource-based tension
between economic prosperity and conflict.
While McNeish (2010:18) advocates the necessity of a deeper qualitative
social and historical analysis of resource management in the relationship between
resources and conflict, he also elucidates that “such an extension of study […]
requires not only the utilisation of other methodologies but also a paradigmatic
45
The earliest popular press reference I have found dates to an article in the Financial Times in 1998;
http://money.cnn.com/magazines/fortune/fortune_archive/2003/02/03/336434/ ;
<http://www.time.com/time/magazine/article/0,9171,1997460,00.html >;
http://www.guardian.co.uk/global-development-professionals-network/2013/mar/20/uganda-oil-governanceresource-curse;
http://www.newyorker.com/online/blogs/johncassidy/2013/03/venezuela-resource-curse-willoutlive-hugo-chavez.html;
http://opinionator.blogs.nytimes.com/2013/02/13/avoiding-the-curse-of-the-oilrich-nations/;
http://green.blogs.nytimes.com/2012/12/10/fighting-the-resource-curse-part-2/;
http://www.forbes.com/sites/richardlevick/2011/12/02/the-resource-curse-ugandas-upcoming-oil-wealth-is-aglobal-challenge-on-multiple-fronts/;
http://edition.cnn.com/2011/BUSINESS/09/05/libya.oil.resource.curse/index.html;
http://www.guardian.co.uk/global-development/2012/oct/25/natural-resources-blessing-curse-developingcountries; http://www.newschool.edu/ucc/courseDetail.aspx?id=NINT5411;
70
shift and for some an ideological shift in thinking about society and state in the
global south”. In focusing on an influential set of papers by Sachs and Warner,
this thesis seeks further insight into the power of ideas, the rhetoric of the
resource curse formulation and its political consequences.
2.15 Growth Medicine: The Development of the ‘Resource Curse’
That natural resource-led development was the development pathway of
the wealthy global north is common knowledge and cannot be historically altered.
For this reason the assertion that natural resources are bad for development is
treated in this thesis as a rhetorical statement to which I pose the questions: When
did natural resources become ‘bad’ and why? These questions guide a close
reading of a subset of Sachs-Warner papers that embody the key rhetorical
structures of the ‘natural resources are bad’ argument, known in this work as the
Sachs-Warnerian narrative.. The next chapter asserts that the Sachs-Warnerian
narrative begins not with the oft-cited Natural Resource Abundance and
Economic Growth (1995/1997R) but with the highly cited, though lessermentioned Economic Reform and the Process of Global Integration (1995a).
Indeed, a Google Scholar search determined that Economic Reform has been cited
4,634 times since 1995 while Natural Resource Abundance has been mentioned
only 3,054 times, combining the 1995b and 1997R versions. It appears that while
researchers are discussing the earlier paper, Economic Reform, it is in the greater
context of globalization, rather than as a key driver of the formalized resource
curse theory. The resource curse is the object of this thesis the single quotes will
be omitted except when included as part of an excerpt.
71
2.15a The Sachs-Warner Set
As explained in the introduction, the thesis analyzes the rhetoric of the ‘resource
curse’ as canonized through a sub-set of papers by Sachs and Warner.
Intellectually, the two most significant papers of the set are Economic Reform and
the Process of Global Integration (1995a) and The Big Push, Natural Resource
Booms and Growth (1999), so that contrary to citation value of Big Push (Google
Scholar: 622), Natural Resource Abundance and Economic Growth (1995b/1997)
and, even at citation value 1,845, The Curse of Natural Resources (2001) are
minor papers. Economic Reform couches the earlier observations of Richard Auty
and Alan Gelb on the relationship between policy choices and economic
performance in a larger tripartite context. This paper also redirects a historical
dialogue about global economic development to suggest the Weltanschauung of
capitalism as the natural economic order. Economic Reform contextualizes
movements in economic sovereignty, closely related to post-colonial
independence movements, as abberrations in modern human history that would
become a zeitgeist marking a system-wide loss of control.
One of the most popular anti-cyclical movements was State-led
Industralization (SLI), after the resource-based ascension of American and
European powers. The development strategy of SLI was intellectually justified by
Rosenstein-Rodan’s theory of the ‘big push’ and by Prebisch’s treatise for Latin
72
America based on his observation, corroborated by Singer, on the secular decline
in the terms of trade of raw materials exporters. Sachs and Warner’s The Big Push
efforts to dismantle these troubling and persistent premises for comparative
advantage-led industrialization. While Economic Reform takes the lead on
Prebisch’s premises, The Big Push, as indicated by the title, focuses on
Rosenstein-Rodan’s strategy. Where Natural Resource Abundance is an
econometric extension of Economic Reform concentrating on the demonstration
of the impact of natural resources on the economic performance of the world’s
remaining resource wealthy countries. Where the premise of ‘Dutch Disease’ is
acts as a portent for the growth of the global industrial centers, requiring
immediate attention. The authors model in The Big Push, formally demonstrates
the mechanism and the urgency after an analysis of Latin American countries by
which Sachs and Warner effort to show that while a big push may catalyze
growth, more often than not that growth is not sustained. The Curse of Natural
Resources reviews the strides made in asserting the theory of the resource curse,
as well as reinforcing the ‘Dutch Disease’ premise. Largely the authors are resting
on their authority garnered over seven years of intellectual stewardship for the
development of the resource curse theory, as reflected in the length of the
document relative to the other elements of the Set.
A paper that also considers a subset of Sachs-Warner papers is the work of
Lederman and Maloney for the Central Bank of Chile, Open Questions About the
Link Between Natural Resources and Economic Growth: Sachs and Warner
Revisited (2002). Lederman and Maloney observe that what “…makes the work of
73
Sachs and Warner (1995a, 1997a, 1997b, 1999) distinct from previous pessimistic
arguments about the growth potential of natural resources is their reliance on
econometric analysis” (Lederman and Maloney, 2002:Abstract). They argue that
“…the work by Sachs and Warner needs to be assessed fairly by replicating their
analysis as close as possible but also by placing it in the context of the state of
knowledge at the time when the authors were doing their research” (Lederman and
Maloney, 2002:2). In this case, context is set as “…what was known about the
empirics of economic growth at that time” (Lederman and Maloney, 2001:2). More
specifically, Lederman and Maloney’s research addresses the issues raised by two
“…types of Endogeneity problems presented by the SW specification namely, the
Endogeneity-by-construction of the initial level of income per capita and the
reverse-causation problem affecting several explanatory variables such as the
investment rate” (Lederman and Maloney, 2001:4).
This work contextualizes the ‘resource curse’ in a broader socio-political
economic setting that further qualifies a historical narrative and takes advantage of
the clear, contemporaneous discourse regarding the biases, and assortment of other
issues, that continue to be asserted throughout the resource curse literature as
indicated by Menaldo, 2010; Manning, 2004; van der Ploeg and Poelhekke, 2010;
Brunnschweiler & Brundt, 2007; Wright & Czelusta, 2004; and Lederman and
Maloney, 2001.
The upcoming chapter 3 distills from Economic Reform the foundational
drive behind the resource curse while chapter 4 reviews the tripartite history as laid
out in this initial text. The remaining chapters analyze the rest of the Set;
74
contextualizes it within a world-systems perspective; and finally synthesizes the Set
as the canonizing of the Sachs-Warnerian narrative of the resource curse.
75
Chapter III
Foundational Theory: Economic Reform and the Process of Global Integration
“…very few economists would now offer grand
hypotheses about why poor countries are poor, or
what they can do about it”.
Paul Krugman
Development, Geography, and Economic Theory
(1995:7)
In Economic Reform and the Process of Global Integration, the authors aptly
invoke the concept of the short 20th century46 as the historical baseline for their
assertion that trade liberalization in particular, as part of an overall reform
program, is the fulcrum of economic growth, the rate of which is a direct result of
“…economic management” (Sachs and Warner, 1995:63). By drawing a
comparison between the contemporary period of globalization from 1970 through
1995 to, arguably, the first period of internationalization from 1850 to 1914 the
authors settle their thesis on the role of economic management as embodied in
trade policy, as the determining condition behind a country’s successful
integration into the world economy or ultimately its failure. In reviewing this
initial paper of the Sachs-Warner Set, this chapter shows how focusing on
46
The assertion that the economic development of the 20th century was abbreviated as a result of two world
wars and a global depression; and that this series of unfortunate events had a profound effect on the pace of
global economic integration as was underway prior to 1914.
76
successful integration provides the broader context for their theory of the Curse of
Natural Resources.
The paper Economic Reform and the Process of Global Integration
outlines the tripartite context that has given way to unequal levels of
modernization (money, education, and innovation) that mark the difference in
living standards between the global north and south. Sachs and Warner assert that
this unequal state of affairs is the consequence of unwise policy choices. Most
importantly in their view, being closed to international trade has been most
detrimental to the goal of reducing poverty through convergence.
Sachs and Warner make the case that since developing economies are the
source of non-convergence, and thus the source of poverty, then the way to
eradicate poverty is not only to reform the problem in general, but through the
strength of international organizations such as the IMF and the Bank, induce
problem areas into compliance with structural adjustments and other economic
reforms. These reforms are generally quite upsetting leading to not only popular
revolts, insurgencies, coups and all other manner of contention, often lethal, but
much more insidiously, a systemic devastation of accumulated wealth within the
first one to three years of reformation after which the country is judged a success
by how quickly it can regain the losses under the newly imposed free-market
paradigm.
Since many of the problematic, non-converging countries also happen to
be incredibly wealthy in terms of natural resource abundance, which allow post-
77
colonial nations to pursue self-sufficiency as a way to strengthen their bargaining
position when engaged in international trade, Sachs and Warner have seemingly
uncovered that such wealth is in fact punitive, not to the developed nations but to
the developing nations themselves, since it activates poor characteristics, such as
sloth, corruptibility, femininity, and cowardice inherent in those of tropical
regions, where the “…soil is fat and fertile” (Jean Bodin as cited in Sachs and
Warner, 1995b:4) and where most often today, strategic resources are found.
Sachs and Warner on Convergence
While one of the key goals of Sachs and Warner’s paper on Economic Reform
was to “help answer several debates concerning cross-country growth patterns”,
the most important task was to “help to resolve the widely discussed conundrum
concerning economic convergence in the world economy” (SW, 1995a:1- authors’
italics). The authors agree that “there has been no overall tendency for the poorer
countries to catch up, or converge, with the richer countries” (SW, 1995a:3) but
have endeavored to “show that this problem is readily explained by the trade
regime” (SW, 1995a:3), a fact uncovered by their quantitative analysis that asserts
“open economies tend to converge, but closed economies do not” (SW, 1995a:3).
The hypothesis behind the economic theory of convergence47 is that output per
capita converges across time such that income disparities per capita across
economies will narrow overtime, thus per capita merging economies to the same
standards. Sachs and Warner point out that they are not the only researchers to
47
See: Rassekh, 1998. “The Convergence Hypothesis: History, Theory, and Evidence”. Open Economies
Review. Vol. 9. Pp. 95-105
78
have expressed disagreement, based on the data, with the overall assertion that
convergence is currently ongoing. To investigate convergence at a finer scale and
elaborate upon their effective assertion of a restricted, or conditional, convergence
in more detail the authors plotted GDP data on an x-y axis and assessed the
relational pattern with an eye toward whether or not convergence predominated in
the data.
With data for level of per capita GDP for 1970 plotted on the x-axis
against the growth of per capita GDP for 1970-89 on the y-axis the authors
graphically narrate that growth for the following 19-year period was dependent
upon initial conditions and had those economies closed in 1970 been open they,
too, would have been able to share in the long-run prosperity experienced by the
those economies initially open during their closure. The authors argue that if
there was such a predomination of convergence in the data then “there would be a
negative relationship between initial income in 1970 and subsequent growth
between 1970 and 1989” (SW, 1995a:38) such that countries beginning the period
with higher per-capita GDP would grow more slowly relative to countries with
poorer initial conditions. By the authors’ data, Botswana is the only standout subSaharan African nation to make this sort of case for convergence48 and it is
otherwise joined only by Yemen, and the Asian Tigers/Cubs. Still, outside of
these spectacular cases Sachs and Warner maintain that in the overall world
economy “…no such tendency is found” and that in reality “…many poor
48
The island nation of Mauritius, off the coast of Madagascar, is the second sub-Saharan nation in this group
at around 3.5 percent less growth for the period than Botswana but both countries are the subjects of many
articles investigating their successes.
79
countries, particularly those in sub-Saharan Africa, not only fail to grow faster
than the rich countries; they in fact experience negative per capita growth49, so
that the gap between these countries and the rich countries widens significantly”
(SW, 1995a:38).
Referring to the work of Paul Romer on non-convergence in his pathbreaking 1986 analysis on Increasing Returns and Long-Run Growth, SW
highlight that Romer suggested this non-convergence was “…due to the
fundamental nature of economic growth” (SW, 1995a:38) meaning that standard
production processes are subject to knowledge spillovers so that the whole
economy can become more efficient by adopting out-of-sector developed
production methods. If rich countries already have established pathways for
recruiting, retaining, and training workers as well as educational institutions for
advanced training, the initial conditions in these countries are reasonably expected
to be much higher. Because innovation always moves forward, these countries
are poised to stay ahead of poorer economies struggling with relatively undereducated and thus non-competitive workforces. To this end, Romer asserts that in
fact “ rich countries could continue to stay ahead of the poor countries, since their
higher income would reflect higher levels of learning or human skills, which in
turn would raise the future productivity of capital” (SW, 1995a:39).
While Sachs and Warner find Romer’s radical assertion “intriguing” they
point out that his interpretation “seems to be contradicted by other data” which it
49
Here the authors refer to the countries of Mozambique, Central African Republic, Chad, Angola, Niger,
Sierra Leone, Benin, Ethiopia, and Gabon as those sub-Saharan African nations that have actually
experienced negative growth.
80
turn supports their own assertions of “convergence within restricted subsamples
of economies” (SW, 1995a:39). Sachs and Warner enlist the work50 of Steve
Dowrick and Duc-Tho Nguyen who show that the advanced OECD economies
“displayed strong tendencies of convergence in the post-war period” (SW,
1995a:39) and that among that class of countries, “the relatively poor OECD
economies tend[ed] to grow more rapidly than the richer economies, thereby
closing the proportionate income gap” (SW, 1995a:39). The authors note that
Dowrick and Nguyen are not alone in their assessments and that similarly
Williamson and associates, Robert Barro and Xavier Sala-i-Martin, and Dan BenDavid have all established “evidence for convergence among the leading
economies” (SW, 1995a:39) including the “U.S. states, […] Japanese prefectures
[…], and members of the European Community and the European Free Trade
Area” presumably all of which experienced a “…dispersion of income falling as
trade liberalization proceeded” (SW, 1995a:39). The equally intriguing yet
contrasting evidence has given rise, as explained by Sachs and Warner, to two
related hypotheses namely the convergence club hypothesis51 and the conditional
convergence hypothesis52.
50
From authors see: Dowrick and Nguyen, 1989. “OECD Comparative Economic Growth 1950-1985: Catchup and Convergence”. American Economic Review. 79(5):1010-30; Williamson, 1992. “The Evolution of
Global Labor Markets in the First and Second World Since 1830: Background Evidence and Hypotheses”
Working Paper on Historical Factors and Long Run Growth 36. Cambridge, Mass.: National Bureau of
Economic Research (February); Barro and Sala-i-Martin, 1991. “Convergence Across States and Regions”,
BPEA. 1:1991. Pp.107-58; Ben-David, 1993. “Equalizing Exchange: Trade Liberalization and Income
Convergence”. Quarterly Journal of Economics. 108(3):653-79.
51
From authors see: Baumol, Nelson, and Wolff, 1994. “Convergence of Productivity: Cross-National
Studies and Historical Evidence”. New York: Oxford University Press.
52
From authors see: Barro, 1991. Economic Growth in a Cross Section of Countries”. Quarterly Journal of
Economics. 106(2):407-43; Barro and Sala-i-Martin, 1991. “Convergence Across States and Regions”,
BPEA. 1:1991; and Barro and Sala-i-Martin, 1992. “Convergence”. Journal of Political Economy. 100
(2):223-51.
81
The authors explain that William Baumol and other analysts have
suggested the convergence club as the emergence of “…a subset of countries for
which convergence applies, while countries outside of the club would not
necessarily experience convergence relative to those within it” (SW, 1995a:39),
such as those countries that both fought together and fought each other in the
World Wars. By including Baumol’s own words the authors draw attention to his
intention to be transparent in his assertion of class-based convergence as he neatly
states, “It also seems clear that convergence does not apply to the poorest of the
world economies, though the line separating those eligible for membership in the
convergence club and those foreclosed from membership has not been determined
definitively” (Baumol, 1994:82 as cited in Sachs and Warner,1995:39). Though
this line of demarcation for membership may still be definitively undetermined it
is certainly animated by the behavior of Sachs and Warner’s rhetoric on
democracy and experienced world leaders.
Weaving a thread similar in focus to Romer’s thesis, Baumol is also of the
mind that initial levels of human capital, i.e. the recruiting, training, education,
scalable capacity, and creative mobility of the workforce, is instrumental in the
ability to take advantage of knowledge and knowledge spillovers. The authors
forward Baumol’s suggestion “that only countries with an adequate initial level of
human capital endowments can take advantage of modern technology to enjoy
convergent growth” (SW, 1995a:39) and posits that “…he therefore speaks of the
“advantages of moderate backwardness” ” (SW, 1995a:39, authors’ quotation and
italics).
82
Moderate backwardness refers to nations that, while certainly not
advanced, are far enough along on the trajectory of modernization to have
acquired some capacity to integrate with advanced nations along the lines of
procuring and executing limited industrial-technological production processes
with an acceptable level of efficiency given their lower level condition relative to
the advanced nation loaning the expertise. The advantages of moderate
backwardness, as conveyed by Sachs and Warner, is an argument positing “that
middle-income developing countries can take advantage of their lag in technology
to borrow from abroad” (SW, 1995a:40). According to Sachs and Warner,
Baumol suggests that the poorest countries “are unable to bridge the gap in
technology and knowledge” (SW, 1995a:40).
Contemporaneous with the convergence club hypothesis, but anchored
more heavily in the vein of the quantitative economic sciences rather than the
political economics of culture, is the hypothesis of conditional convergence.
According to Sachs and Warner this related notion was introduced, presumably
to, the economic development community by Barro and Sala-i-Martin and is
understood as a theory “in which countries differ in their long-run per capita
income levels, with each country tending to grow more rapidly the greater the gap
between its initial per capita income level and its own long-run per capita income
level” (SW, 1995a:40-authors’ italics). Whereas the convergence club hypothesis
seems to relate classes of countries to each other, conditional convergence
hypothesis seems behaviorally introverted in that it relates the long-run
performance potential of nation’s economy to its own initial level of per capita
83
income. By accepting that each country will have its own trajectory for per capita
income and that these trajectories, and therefore their outcomes, or steady states,
will be different, the crux of the hypothesis is that the further a country has to go
from its initial level of per capita income to its projected highest level, or its longterm equilibrium level53, the faster its economy will grow to reach that point. This
is to mean the more “space” an economy has to grow e.g. “…the rate of growth is
assumed to be an increasing function of the gap between the long-run per capita
income level and the initial per capita income level” (SW, 1995a:40). Here it can
now be understood that another point of relation between Baumol’s assertion of
the convergence club hypothesis and Barro’s assertion of conditional convergence
hypothesis is that both acknowledge limitations on growth given skill and
capacity.
Though the assumption is maintained, the authors do acknowledge, later in
their paper, that the long-term equilibrium level, and therefore the long-run per
capita income level, “may itself be a function of the specific factor endowments
of the country, for example the ratio of labor to land and other natural resources,
as well as the long-term structure of trade policy itself” (SW, 1995a:53- authors’
italics). In other words, at a greater scale, there are many other influences that
affect an economy’s potential income level and the pull on the data of structural
variables, such as those noted above, being typically problematic, are normally
granted. Therefore the integrity of the basic tenor of the assertions rest unaltered.
53
The phrase ‘projected highest level or per capita income’ is semiotically equivalent to “…long-term
potential income” (SW, 1995a:41) which itself is semiotically equivalent to “…long-term equilibrium level”
(SW, 1995a:53).
84
Intuitively it seems as though Romer’s thesis could mechanistically
explain, at least in part, Baumol’s suggestion of a convergence club. Since “the
poorest countries are unable to bridge the gap in technology and knowledge”
(SW, 1995a:40) and “since their higher income would reflect higher levels of
learning or human skills, which in turn would raise the future productivity of
capital” (SW, 1995a:39) such would be functionally monotonic leading to a case
in which “the rich countries could continue to stay ahead of the poor countries”
(SW, 1995a:39). By this cascade, divergence among the world’s economies and
convergence among the wealthy economies would be effectuated. Though
according to the authors the evidence may be contrasting, it does not seem that the
convergence club and conditional convergence theses need be mutually exclusive
as the convergence club would seem to explain Global North-South disparities
while conditional convergence would seem to explain intra-class growth patterns.
In tandem both theories would seem to explain the micro- and macro-level
consequences of conflict-led development strategies over time.
Sachs and Warner report that in estimating a regression equation, which
encompassed the initial level of human capital, Barro and Sala-i-Martin “…tend
to find a negative and significant coefficient for initial income and significant
coefficients on several of the structural variables” (SW, 1995a:340). According
to the authors these findings support Baumol’s like sentiment to Barro’s54
conclusion that “ a poor country tends to grow faster than a rich country, but only
for a given quantity of human capital; that is, only if the poor countries human
54
Barro, 1991. Economic Growth in a Cross Section of Countries”. Quarterly Journal of Economics.
106(2):407-43.
85
capital exceeds the amount that typically accompanies the low level of per capita
income” (Barro, 1991:409 as cited in Sachs and Warner, 1995:40). This
empirical nexus aside, Sachs and Warner note that “Robert Barro, Gregory
Mankiw, and Xavier Sala-i-Martin state that the “ the substantially different
steady states…can reflect the effects of disparities in preferences and government
policies on the savings rate, fertility, and the available production technology”55
(SW, 1995a:40), all considered as structural variables which are proxies for the
long-run per capita income level.
In sum, Sachs and Warner observed that their own finding of a widening
gap between poor countries “…particularly those in sub-Saharan Africa” (SW,
1995a:38) and, even more specifically, the large cluster of sub-Saharan Africa
nations that have experienced “negative per capita growth” (SW, 1995a:38) is
explained by a corpus on non-convergence which is dominated by three related
explanations on growth empirics: the convergence club hypothesis, and βconvergence or conditional convergence. The authors assert that because “they
suggest that the poorer countries will be unable to close the gap with the richer
countries” (SW, 1995a:41), the interpretations of the convergence club and
conditional convergence overall “would be profoundly pessimistic though
conditional convergence is ambiguous on this fundamental point” (SW,
1995a:41).
55
From authors see: Barro, Mankiw, and Sala-i-Martin, 1995:103. “Capital Mobility in Neoclassical Models
of Growth”. American Economic Review. 85(1):103-15.
86
Implications of Conditional Convergence
It is important to keep the operating interpretations in mind here, the first
is that since “productive technology is intrinsically kind to the technological
leader: the rich tend to grow richer”, the second is that “convergence is a fact of
life, but only among countries with a sound human capital base for using modern
technology” (SW, 1995a:41), and the third is the assertion that those countries
currently poor already “have a low long-term potential income level”, though this
may be overcome if such destitute economies instead become optimally poor, this
is to lower the poverty floor thus widening the gap between where they are
(current state) and the limit of where they could be (their long-run economic
ceiling). Limits are erected by skill level, political-technological capacity, and to
this Sachs and Warner include policy preferences.
Such an action would require a policy change and to this extent, Sachs and
Warner reiterate that “countries do tend to grow faster the greater is the gap
between their current income and their own long-run potential” (SW, 1995a:41)
leading eventually to convergence proper (absolute). The authors further advocate
that “if the low long-term potential income is due to bad policies, then
convergence could still be achieved by policy changes” (SW, 1995a:41) and
suggest that “the most parsimonious reading of the evidence is that convergence
can be achieved by all countries, even those with low initial levels of skills, as
long as they are open and integrated in the world economy.
Here it is clear that Sachs and Warner advocate their approach to
conditional convergence that would beneficially bypass the highly noticeable,
87
errant symptom of asymmetric gross wealth accumulation captured by the
convergence club phenomena. In fact, the very noticeability of the convergence
club phenomena can be utilized as evidence that, fact of life or not, something
must be done about world poverty. By fashioning policy mechanisms in a
constrained political economic environment that assimilates rogue states and
regulates global integration this can appear to be accomplished since some
improvement, characterized as growth, will eventually occur.
With that, and to the extent of formally presenting the thesis of Economic
Reform and the Process of Global Integration, Sachs and Warner “argue that the
apparent differences in long-term income levels are not differences due to
fundamental tastes and technologies, but rather to policies regarding economic
integration” (SW, 1995a:41). This is to say that the authors are not counter to βconvergence but accept it to be a transition phase toward absolute convergence,
which they assume to be the natural equilibrium. SW hold that those institutions
and countries with the most successful experiences should not only take the lead
in bringing this steady state into fruition but also should also be held responsible
for sustaining such a state once it has been reached.
A subscription to their interpretation of global economic leadership
entails that “the convergence club is the club of economies linked together by
international trade, [and as noted earlier, by shared trench-experiences for and
against each other]: thus the OECD, the European Community, the late-nineteenth
century economies, the U.S. states and the Japanese prefectures” (SW, 1995a:41).
Sachs and Warner’s interpretation also entails that the expertise of these time88
tested natural leaders exemplify “the spread of capitalism” (SW, 1995a:64) to the
rest of the world. To this ultimate end, the authors advise that the “consolidation
of the emerging global arrangements will require the wisdom and leadership of
the leading democracies” (SW, 1995a:64).
With the understanding of why Sachs and Warner would pursue as fact the
a rhetorical statement such as natural resources are bad for development, the
following sections ‘Method and Message’ sections embody how their rhetoric was
methodized.
One may find it helpful to read the following sections with a copy of Economic
Reform along side.
III.A. The Method and the Message I:
Convergence through Openness and Growth
The authors made the point that in the post-war period some groups of countries
liberalized earlier than other groups of countries along ideological lines. Those
who liberalized earlier more commonly became part of a class of developed
nations while those late liberalizers generally struggled and fell into the class of
developing countries. To accommodate this political economic reality the authors
searched for an association between openness and growth among a group of
developing and a group of developed countries. Sachs and Warner identified a
strong association within both groups and ran a Chi-square test for independence,
in which the null hypothesis was that there would be no difference in growth rates
89
between the closed and open economies (SW, 1995a:36). The tug and pull of a
global transition between capitalist and socialist modernization strategies is
indicated by the observation that among the developed and developing classes
there were both open and closed economies.
They reported finding evidence of convergence and were able to reject the
null hypothesis with a high degree of certainty at p<0.000. The authors reported
their ability to show that the open economies within the developing group grew
faster (4.49 percent per year) than the open economies within the developed group
(2.29 percent per year). Also, the closed economies among the developing class
grew at a slower rate (0.69 percent per year) than the closed economies of the
developed class at 0.74 per cent per year (SW, 1995a:36). More in support of their
position is the fact that the growth rates among closed economies between the
developed and developing classes were very close (0.74 to 0.69) while on the
other hand the open economies in the developing group grew over fifty percent
faster than their counterparts among the developed class (4.49 to 2.29).
This growth-focused classification of the data “…suggests that within the
group of open economies, both developing and developed, we should tend to
observe economic convergence” (SW, 1995a:36). The authors explain this in yet
another way in their Table 10 (p.36) when they show that of 15 countries which
were always open, eleven countries had an average growth rate greater than three
percent while seventy of those countries, classified as not always open, had an
90
average growth rate of less than three percent56. By such evidence the authors
confidently report that open economies fair far better than closed economies in the
long run and have especially highlighted the point as much in their statement that,
“eleven of the fifteen open economies grew at more than 3 percent per year, while
only four of seventy-four closed economies achieved such growth” (SW,
1995a:36)57.
In an additional layer of scrutiny, the authors add a total of six years to the
curve, five years to the beginning of the period (from 1970 to 1965) and one year
to the end of the period (from 1989 to 1990) thereby drawing in more data to the
overall mean. While in doing this, the numbers of always open and not always
open countries is reduced, but the pattern remains the same. For the period 1965
to 1990 the authors compare the annual growth rates of a group of forty alwaysclosed developing economies and a group of always-open developing economies
(SW, 1995a:36) to reinforce that the “…always-open economies outperformed the
always-closed economies in every year” (SW, 1995a:37). Ultimately, Sachs and
Warner allege that open economies are more resilient than closed economies, and
56
It should be noted that from the same table the authors show that the 4 countries which were always open
of the 15 temporary liberalizers (presumably taken from a 72 country sample of developing countries found
in Table 8, on page 34) had an average growth rate of less than 3 percent while 4 countries that were
conversely not always open had an average growth rate greater than three percent. Though it is beyond the
present scope and I would need to review the raw data set since these 8 countries were not identified, it would
still be an interesting course of study to examine the socio-economic histories of these outlier countries for
whatever insights could be gleaned about the cases for which success is met outside of normal conditions.
57
In their research for Economic Reform and the Process of Global Integration the authors are ultimately
manipulating a data set of 122 countries (see appendix for elaborations), and through a series of
classifications that I must admit remain unclear to me (not unfounded as seasoned economic scholar had an
exceedingly difficult time replicating Sachs-Warner regressions even with access to the data), are able to
derive a list of 15 developing countries that have always been open relative to the 1970-89 period (and thus
separate from the list of 8 developing economies that have always been open in Table 1-p22). This same
classification and reclassification logic allows for the 74 Not always open countries noted in Table 10
covering Growth and Openness in the Developing Countries for 1970-89.
91
in fact convey that the lack of resilience among poor countries is responsible for
the absence of convergence scaled world-wide.
In demonstrating this, the authors explain that while “the open economies
were clearly more susceptible to the external shocks of the first half of the 1970s”,
they nevertheless “bounced back” whereas the closed economies evidence a longterm slowdown in growth when comparing their average per capita growth rate of
around 0 percent per year in the late 1980s in contrast with that of the open
economies sitting around 5 or 6 percent per year at the end of the 1980s (SW,
1995a:37). The argument for open economies as more resilient is especially clear
in that prior to the upsets in the first half of the 1970s, “the breakdown of Bretton
Woods, worldwide inflation, and the OPEC oil price increases” (SW, 1995a:37),
the open economies not only enjoyed an average per capita growth rate during the
second half of the 1960s that was around 5 or 6 percent per year but also a return
to stability. By the late 1980s that growth rate was reestablished after having
dropped as low as 2 percent in around 1973-74.
For these reasons the authors assert that the “data suggest that the absence
of overall convergence in the world economy during the past few decades might
well result from the closed trading regimes of most of the poorer countries” (SW,
1995a:37). While overall convergence appeared absent what the authors did find
was that the proportional income gaps found within restricted subsamples was
indicative of convergent behavior among classes of countries; leaving a wide
swath of disparity class to class.
92
Establishing Results :
The Evidence for Convergence-Driven Leadership
Sachs and Warner present the evidence for their iteration of conditional
convergence in a series of tables whereby they disaggregate the initial income by
growth (Fig. 3:38) data into groups of open and closed economies to give figures
4 and 5 (pgs. 42-43). They show that “the open countries display a strong
tendency toward economic convergence” (SW, 1995a:41-italics), and that among
these countries those having “initially low per capita income levels grow more
rapidly than the richer countries” (SW, 1995a:41) thus exhibiting β-convergence,
and that “the closed economies in figure 5 do not display any tendency toward
convergence”. Referring back to the aggregate depiction in figure 3, the authors
remark that the closed economies in figure 5 “are clearly the source of the failure
of convergence noted [overall] in figure 3” (SW, 1995a:42). The tight clustering
of predominately Latin-American and African countries depicted in figure 5,
which is apart of a much larger sample, in concert with the assertion that these
source economies58 exemplify the problem of non-convergence, lend an
exceptionally clear spatial conceptualization of the systemic socio-cultural and
geopolitical histories of these regions as carefully laid out by Sachs and Warner59.
58
Those represented by name are the nations of: Sierra Leone, Angola, Niger, Chad, Central African
Republic, Benin, Ethiopia, Guinea, Rwanda, Burkina Faso, Cameroon, Burundi, China, Botswana, Sri Lanka,
Tunisia, Mozambique, Madagascar, Nicaragua, Ghana, Gambia, Haiti, Congo, Egypt, Algeria, Jamaica,
Panama, Chile, Costa Rica, Brazil, Iran, Argentina, Iraq, Gabon, South Africa, Mexico, Hungary, Israel,
Trinidad & Tobago, Venezuela, and New Zealand.
59
These particular histories and economic trouble spots are covered under the Macroeconomic Dimensions of
Socio-politics and Socio-cultural Dimensions of Geopolitics sections in the second part of the Economic
Reform analysis.
93
Still the authors assert that “economic reforms take time to work, so that some
countries that adopted outward oriented-market reforms in the late 1980s or early
1990s might not yet be enjoying high growth rates as a result” (SW, 1995a:44) of
inferior policy decisions clearly evident as now “sufficient time has passed for us
to see the effects of this fundamental policy choice on growth” (SW, 1995a:45).
Additively, the authors convey that the early bird gets the worm and urges the
benefits of rapid installation of their policy preferences as they enthusiastically
persist that “even more striking, there is not a single country in our sample (which
covers 111 countries and approximately 98 percent of the non-communist world
in 1970) which pursued open trade policies during the entire period 1970-89 and
yet had per capita growth of less than 1.2 percent per year” and further still, “and
not a single open developing country grew at less than 2 percent per year […]!”
(SW, 1995a:42). In making the case that a policy of free trade is the driver of
growth Sachs and Warner highlight the East Asian economies as prime examples
of growth sustained by an outward-orientation.
Sachs and Warner on the Trade-Driven Economic Success of the East Asian
Economies
At the time of Economic Reform and the Process of Global Integration in 1995,
there was a very fresh and vibrant dialogue among the international
macroeconomic community regarding the East Asian Tigers60. Complementary to
60
These are the economies of Hong Kong, Singapore, S. Korea, and Taiwan, which so shocked economic
society with their miraculously expedient transition from developing to advanced developed nations resulting
from a free-trade orientation. East Asian neighboring countries which acted to follow in these footsteps are
94
this ongoing discussion Sachs and Warner note that, “…[s]ome of the first closed
economies open to trade were three East Asian countries: Taiwan (1963), South
Korea (1968), and Indonesia (1970)” (SW, 1995a:26). Fully engaging this
discussion the authors remark that, “…[i]t has become fashionable to argue that
East Asian countries are not really open or market-oriented, and that, in fact they
systematically “got the prices wrong” to spur industrial growth” (SW,
1995a:32)61. In capitalizing upon the ripe opportunity to make their very point the
authors retort, “[I]t is surely true that Korea, Taiwan, and Indonesia are not laissez
faire, but they and their neighbors in Southeast Asia, Thailand and Malaysia, have
been more open to trade than other developing countries based on objective
indicators of trade policy” (SW, 1995a:32), referring to data classifications
provided by UNCTAD. Sachs and Warner agree with assertions that trade policy
decisions are the reason for the Asian successes. In supporting this position the
authors again refer to the UNCTAD data noting “…[a]ll of the East Asian
economies have low or zero BMPs [black market premium]; all but Thailand have
low tariff rates; and all but Taiwan have low NTB [non-tariff barriers] coverage.
Moreover, the Thai tariffs and the Taiwanese NTBs are moderate, not extreme”
(SW, 1995a:32).
known as the Tiger Cub economies or the newly industrializing economies (NIEs), namely: Indonesia,
Malaysia, Phillipines, and Thailand. There are many reasons, beyond rigid adherence to Smithian doctrine,
postulated for such success including low or no external debt at the start of managing their open economies
and significant investment in human capital (primary and secondary education). See: Page, John. “The East
Asian Miracle: Four Lessons for Development Policy”. NBER Macroeconomics Annual 1994, Volume 9.
MIT Press. January 1994. (219-282). <http://www.nber.org/chapters/c11011.pdf >. Accessed 9 October
2013.
61
The authors refer their readers to Wade (1990) with regard to Hong Kong, S. Korea, Singapore, and
Taiwan, and Amsden (1989) particularly with regard to S. Korea. I: Wade, Robert. Governing the Market:
Economic Theory and the Role of Government in East Asian Industrialization. Princeton, N.J.: Princeton
University Press. 1990. II: Amsden, Alice H. Asia’s Next Giant: South Korea and Late Industrialization.
New York.: Oxford University Press. 1989.
95
Sachs and Warner on China’s Success
In 1978 with “…three quarters of the labor force in peasant farming” China was a
“…very poor economy” but, as Sachs and Warner go on to assert, China
experienced “…a remarkable export boom, based heavily on labor-intensive
operations”, though no one could make the authors’ own case better than ShangJin Wei62; whose concluding remark, an excerpt warranting a full quotation as a
footnote in SW’s text, presented “…clear evidence that trade liberalization played
an important role in China’s growth” (SW, 1995a:46):
“ I have found some clear evidence that during
1980-90 more exports as positively associated
with higher growth rates across Chinese cities. In
the late 1980s, the contribution to growth comes
mainly from foreign investment. Furthermore, the
contribution of foreign investment comes in the
form of technological and managerial spillovers
across firms as opposed to an infusion of new
capital. Finally, the superb growth rates of coastal
areas relative to the national average can be
entirely explained by their effective use of exports
and foreign investment.”
(Wei, 1995, p.74. as quoted in Sachs and
Warner, 1995:46)63.
62
From authors see: Wei, 1995. “The Open Door Policy and China’s Rapid Growth: Evidence from CityLevel Data”. In Growth Theories in Light of the East Asian Experience, edited by Takatoshi Ito and Anne O.
Krueger. Chicago. University of Chicago Press.
63
It should be noted that Wei’s commentary corroborates Naomi Klein’s assertion that the China’s
Tiananmen Square incident of 1989 opened the door and, as a measure of enforcing Friedman-consulted freemarket installations, was held as necessary to development by the Xiaoping government, since “…[i]n the
three years after the bloodbath, China was cracked open to foreign investment, with special export zones
96
The authors convey that within the development community it is well known that
China enviably executed an unorthodox “two-track approach” which consisted of
“…decontrol of the peasant sector and continued control of the state sector” (SW,
1995a:46) which, according to Wei, Sachs, and Warner, is clearly a success
however imperfect it maybe64. After all, not only did China’s “…currency
remained inconvertible and many state enterprises remain subject to rationing of
imports” (SW, 1995a:46), but it also met Sachs and Warner’s own criteria for
classifying a closed economy e.g. “…high black market premiums in the yuan,
extensive reliance on trade quotas, and a socialist ownership structure” (SW,
1995a:46). Additionally, the export boom “…did not solve the many problems in
the poor performance of the state-owned sector” (SW, 1995a:46), presumably
referring in part to the fact “…that many state enterprises remain subject to
rationing of imports” (SW, 1995a:46) as the authors had already pointed out.
Nevertheless, Sachs and Warner “…believe that China’s success is strongly related
to its particular economic structure at the onset of its market reforms at the end of
the 1970s” (SW, 1995a:46). Given China’s socialist ownership structure the authors
explain that the “…essence of Deng Xiaoping’s reforms at the end of the 1970s was
to free the peasant economy from state controls, even while maintaining the state’s
constructed throughout the economy” (Klein, 2007:239). “The Shock Doctrine: The Rise of Disaster
Capitalism”. Picador. New York, New York.
64
The authors explain that “…[s]ome analysts have also argued that its boom is fragile and could still be
stopped by the macroeconomic instability characteristic of many economies part way between planning and a
market economy” (SW, 1995a:46-re: Sachs and Woo, 1994), that is as a “developing third world” (SW,
1995a:1). Nevertheless, Sachs and Warner’s primary assertion that trade liberalization played an important
part in China’s growth, and by extension, the East Asian successes, is otherwise robust. From authors see:
Sachs and Woo, 1994. “Structural Factors in the Economic Reforms of China, Eastern Europe, and the
Former Soviet Union”. Economic Policy. (April):102-45.
97
grip on the non-peasant, state owned sector (which covered just 18 percent of the
labor force)” (SW, 1995a:46)65.
Essentially, the authors appear to convey that the Chinese governmental
elites66 made available land rights, decreasing peasant farming communes to the
end of liberating the country’s labor force for increased industrial production67,
which remained controlled by the state that then entered into joint ventures with
foreign firms offering MNCs especially unparalleled labor force but also
competitive forward linkages, i.e. production finishing, and transportation
capacity. The application bearing on international trade was that “…the economy
was essentially liberalized for nonstate firms, especially those operating in the
Special Economic Zones (SEZ) in the coastal areas” (SW, 1995a:46). Presumably
Hong Kong, which at the time was British Commonwealth having only been
relinquished to China in 1997, and according to Klein, was held up by Friedman
an exemplar “…zone of pure capitalism that [he] long admired for its “dynamic,
innovative character that has been produced by personal liberty, free trade, low
taxes, and minimal government intervention”” (2007:233). Wei particularly
praised these zones exclaiming that, “…[t]he superb growth rates of coastal areas
relative to the national average can be entirely explained by their effective use of
65
It is well known among those in the neo-liberal development community that Deng Xiaoping was so
“…enthusiastically committed to converting to a corporate-based economy” that “…his government invited
Milton Friedman to come to China and tutor hundreds of top-level civil servants, professors, and party
economists in the fundamentals of free-market theory” (Klein, 2007:231).
66
A class Naomi Klein refers to as the “Chinese Politburo” (2007:233), of which the uppermost of the elite
where known as the “princelings” (2007:240), who “…wanted to open the economy to private ownership and
consumerism while maintain its own grip on power—a plan that assured that once the assets of the state were
auctioned off, party officials and their relatives would snap up the best deals and be first in line for the
biggest profits” (2007:233).
67
China is now one of the world’s largest import markets for foodstuffs and holds numerous land leases in
Africa specifically for agricultural production.
98
exports and foreign investment.” (Wei, 1995, p.74. as quoted in Sachs and
Warner, 1995a:46). The authors explain that the benefit of these zones was that
“…nonstate enterprises (including joint ventures and foreign firms) were
generally able to import their inputs nearly duty free, and to export processed
goods to world markets” (SW, 1995a:46), effectively making them pure free-trade
zones. At liberty to be more forward, Klein directly assesses that “…[n]o country
offered more lucrative conditions than China: low taxes and tariffs, corruptible
officials and , most of all, a plentiful low-wage workforce” (2007:239).
Sachs and Warner on the Botswanan, Hungarian, and Tunisian Exceptions
While these three countries, like China, also had per capita growth of over 3
percent per year during the studied period the authors convey that short of
Botswana, their exceptionality is more technical than extraordinary.
For instance, in terms of the black market premium (a proxy measure for
exchange control), Botswana barely qualified having “…failed to qualify […] for
the 1970s, but did qualify for the 1980s” (SW, 1995a:45)68. The Hungarian and
Tunisian exceptions are even more technical than Botswana since “…their
successful growth is more apparent than real” allowing for a “…relatively
68
It should be said that, Botswana’s failure to qualify for the 1970s due to meeting the black market
premium, a criteria which evinces “…the rationing of foreign exchange” (Sachs and Warner, 1995:25), is less
likely to be about import control, unlike in the case of China, than related to the fact that “…until the 1970s,
international aid […] dominated the government budget and was the main source of foreign exchange”
(Lewin, 2011:81), which is inherently rationed prior to delivery and is expected to be so post-acceptance.
Lewin also points out that the diamond element of the mineral sector “…began to take off and soon became
the dominant sector” at that time, with “…[i]ncome growth and the growth of the mining sector [having]
accelerated in tandem from about 1974/75 until recently” Lewin, 2011. “Botswana’s Success: Good
Governance, Good Policies, Good Luck”.
99
straightforward” accounting of their marginal status as an exception. Very simply,
“…[b]oth countries pursued statist development strategies that produced growth
in the 1970s and financial crises in the 1980s and 1990s” (SW, 1995a:45). As
these financial shocks destabilized the governments, both countries experienced
“…a serious downturn in growth at the end of the 1980s”. Thus ultimately, given
a “…slightly longer time period, these countries would not look like successes”
(SW, 1995a:45) but instead the products of an inferior approach to development.
The authors convey that Botswana is much more of a legitimate exception
since “…[o]verall, […] the policies have been relatively open, especially in the
1980s” (SW, 1995a:45) and for the remainder of the period “[i]t passed all other
criteria” (SW, 1995a:45). Additionally the research team points out that “…since
around 80 percent of Botswana’s exports are diamonds, and remarkably a small
proportion (less than 5 percent) of the labor force is in agriculture, Botswana
avoided the anti-agricultural biases that affected most of sub-Saharan Africa”
(SW, 1995a:45)69. Particularly on Botswana, it is important return to Sachs and
Warner’s earlier inclusion of Rogowski’s work examining relative factor
intensities. There are many reasons the success of Botswana is remarkable but the
authors’ assertion that a small proportion of the labor force is in agriculture will
be more fully treated since in the first place “…Botswana is a sparsely populated
country” (Lewin, 2011:81) with an exceptional colonial history that lends an
69
Indeed, Botswana is emblematic of a sub-Saharan African nation that has avoided the ‘resource curse’.
100
uncomplicated explanation to how Botswana avoided the anti-agricultural biases70
dissimilarly from many others on the continent.
According to the Sachs and Warner, Rogowski, namely, found that in
“…Latin America and in Africa, where labor is scarce and land is abundant […]
land owners are on the side of free trade (to raise the price of foodstuffs), and
urban workers should be interested in protection (against the import of labor
intensive goods and the export of foodstuffs)” (SW, 1995a:20). Botswana is
different in that, similar to Hong Kong, it too was a British protectorate,
established in 1885 as the Bechuanaland Protectorate to serve as an impediment to
German imperial expansion71. While British expenditures on the Bechuanaland
acquisition was mainly for defense, little else was done in the way of management
and effectively a low-impact policy, termed “benign neglect” by historians, was
assumed in hopes of sparing the British colonial empire’s already stretched
budget (Beaulier, 2003:229). Over time, this lead to a cultural infusion that
translated into a post-independence regime, Britain officially recognized
Botswana’s independence in the spring of 1965 (Beaulier, 2003:230), which
“…respected the law and property and was dedicated to development” (Lewin,
2010:85). Because Britain did not settle its Bechuanaland Protectorate, there was
no need to establish institutions that would have operated under mechanisms to
eventually have been incredulously usurped and revived in the post-independent
70
Anti-agricultural biases refer to Sachs and Warner’s earlier statement that, “…wartime controls on
agriculture became postwar mechanisms of a profound anti-export bias” (SW, 1995a:19) where antiagricultural and anti-export represent the same bias as it was cocoa, ground nuts, oil palm being exported in
support of the Allies, “particularly, the United Kingdom” (ibid.).
71
Beaulier, 2003. “Explaining Botswana’s Success: The Critical Role of Post Colonial Policy”. Cato
Journal. 23(2). (Fall). Pp. 227-240.
101
state, as Sachs and Warner would have the matter understood. There were no
“…wartime controls on agriculture” (SW, 1995a:19), as Britain took no
resources, for which the “…original intentions were subverted” (SW, 1995a:19).
Case in two points, firstly, in 1965 beef was “…the country’s main export
and largest sector” contributing almost 40 percent of GDP (Lewin, 2010:81).
Since “…many of the tribal leaders who helped usher in modern government were
also large cattle owners” (Lewin, 2010:85) it is reasonable, and indeed historically
expected, that “…the government established respect for property rights and the
rule of law” (Lewin, 2010:82) even before the discovery of diamonds. Therefore
in regard to Rogowski, the government was already effectively on the side of free
trade. Secondly, in Botswana “…government remains the largest employer”
mainly in the production of non-traded goods (Lewin, 2010:87). It therefore
intuitively seems that urban workers in Botswana would less likely be interested
in protection given the government is appreciative of free-trade. If this can be
said to be true, Rogowski may not hold for Botswana72. While Lewin credits
Khama’s decision with “…limiting the possibility of conflict” (Lewin, 2010:85),
it is a very likely a factor that Botswana’s relatively homogeneous population can
be also be credited for having reductive effect on potential tensions, from the
perspective of ethnic polarization, since many such conflicts in the developing
world often include ethnic strife as well as class struggle.
72
In addition to Beaulier (2003), AJR in fact authored the seminal narrative on Botswana’s success against
which Beaulier (2003) provides cross-examination. As cited by Beaulier refer to: Acemoglu, Johnson, and
Robinson, (2003). “An African Success Story: Botswana” In D. Rodrik (ed.) In Search of Prosperity:
Analytic Narratives on Economic Growth, 80-119. Princeton, N.J.: Princeton University Press. (80-119).
102
Additionally, it is generally agreed that Botswana’s first president Seretse
Khama, was forward thinking because “…even before independence, Khama’s
party […] wrote into its platform its intention to assert the state’s rights to all
mineral resources” (Lewin, 2010:85). And, as Lewin aptly points out, “[a]lthough
the largest diamond deposits were discovered in Khama’s own district […] he
chose the country over his tribal land” (Lewin, 2010:85). Thus it may be that
“…[s]ocial science cannot rigorously assess the relative importance or
contribution of leadership in the evolution of successful institutions” (Lewin,
2010:85) still, on the aspect of leadership thesis asserts that leaders, held to
account or not, make and accept suggestions for economic policies, therefore the
consequences are the products of decision makers not immeasurable miasmas;
though the complexities of society can certainly, and still do rival the confounding
nature of miasma as it was in its accepted time.
Sachs and Warner’s Regression Analysis and Convergence
Through a regression analysis quantifying the “…relationship between initial
income in 1970 and subsequent growth between 1970 and 1989” (SW, 1995a:46),
the authors made several findings regarding openness and growth trends as
regarding convergence. The first three interpretations summarized above were
related to the contemporary exceptions and technicalities of the openness-equalsgrowth school. The remaining outcomes are summarized and relate specifically to
each of the formal regressions.
103
Fundamentally, the authors found that for the entire sample of 117
countries there was an “…absence of convergence” (SW, 1995a:46) which is
consistent with the claim that “…in recent decades, there have been no overall
tendency for the poorer countries to catch up, or converge, with richer countries”
(SW, 1995a:3). Consistent with the convergence club thesis, wherein Baumol
suggests that poorest economies are unable to converge with the wealthier
economies and are thus left out of the convergence that is occurring among the
wealthy economies, Sachs and Warner reported that they were able to “…confirm
the absence of convergence among the non-qualifying countries” (SW, 1995a:47),
that is the closed countries. The authors do find “…strong evidence of
convergence within the set of open countries” (SW, 1995a:47) which is consistent
with established claims of conditional convergence (beta), whereby it is a given
that countries within a class (open/closed, rich/poor) differ in their potential per
capita income levels over the long-run but that the greater the gap between a
country’s initial per capita income level and its potential per capita income level
over the long-run, the more rapid its growth. To this end the data suggested that
“…each percentage point rise in per capita income in 1970 reduces subsequent
annual growth by 0.014 percentage points” while “each doubling of 1970 income
reduces annual growth by 0.95 percentage points” (SW, 1995a:47). Taken
together this evidence would support an intuitive understanding as explained on
page 31 about the self-reinforcing dynamic of the convergence club and
conditional convergence theses.
104
In focusing on the “…importance of openness for growth” (SW,
1995a:47) the authors tested the robustness of openness against “several other
possible explanatory variables” (SW, 1995a:47) as embedded in “…Barro’s
growth regression, since it is particularly well known” (SW, 1995a:47)73. Sachs
and Warner twice replicated the “…Barro regression on cross-country growth”,
firstly replicated with adaptations for their sample and time period, then iterated
again to include “…a dummy variable for openness [OPEN…]” (SW, 1995a:47).
The authors found that the first replication performed as expected
“…showing conditional convergence […], positive (although not significant)
effects of educational attainment, positive effects of investment-to-GDP ratio, and
negative effects of measures of political instability” (SW, 1995a:47). This would
suggest that rich countries are getting richer, higher levels of educational
attainment as well some appropriate level of investment do contribute to the
‘club’-creating positive feedback loop, and that political stability is a factor of
sustained growth. The second iteration showed that when OPEN was added the
open economies grew “…on average, by 2.45 percentage point more than closed
economies, with a highly statistically significant effect” (SW, 1995a:47). When
openness is taken into account “…the effect of investment declines and the initial
education levels are even less significant” (SW, 1995a:47). This would indicate
that superstructure, that is, the operating economic environment and the ideology
that guides it (policy), is far more important than not only the mechanisms
operating within it (quality and quantity of human capital) but also the ideologies
73
From authors see: Barro, 1991. “Economic Growth in a Cross Section of Countries”. Quarterly Journal of
Economics. 106(2):407-43.
105
induced in response to the governing mechanism overall. As Sachs and Warner
point out, “…[t]his is consistent with our view that the growth rate over this
period was determined less by initial human capital levels than by policy
changes” (SW, 1995a:47).
While the authors never underestimate the role of policy [openness vs.
self-sufficient] in growth decisions, they do acknowledge that other researchers,
namely “…Surgit Bhalla, J. Bradford DeLong and Lawrence Summers, David
Dollar, and Ross Levine and David Renelt” (SW, 1995a:47)74, produced earlier
work consistent with the assertion that policy is more important than stock. Even
though, more specifically, DeLong and Summers, and Levine and Renelt
respectively used “…several measures of outward orientation and price
distortions” (SW, 1995a:47) and availed themselves of data calling for “…the
black market premium, the number of revolutions and coups, a socialist dummy, a
civil liberties index, and measures of openness based on Leamer (1988)” (SW,
1995a:47) for their marginal contribution to the rate of growth, Sachs and Warner
point out that “none used these variables to sort countries into groups and
examine the groups separately” (SW, 1995a:47). The authors recognize this as a
keystone finding since to their knowledge “…no earlier studies have pointed out
that convergence applies to the worldwide subset of open economies” (SW,
1995a:50, authors’ italics) in addition to the fact that they found “…no evidence
74
From authors see: Bhalla (1994). “Freedom and Economic Growth: A Virtuous Cycle”. Paper prepared for
the Nobel Symposium on Democracies, Victory, and Crises. Uppsala University, Sweden, August 27-30; De
Long and Summers (1991). “Equipment Investment and Economic Growth”. Quarterly Journal of
Economics. 106 (2):445-502; Dollar (1992). “Outward-Oriented Developing Economies Really Do Grow
More Rapidly: Evidence from 95 LDCs, 1976-1985”. Economic Development and Cultural Change.
40(3):523-544; Levine and Renelt (1992). “A Sensitivity Analysis of Cross-Country Growth Regressions”.
American Economic Review. 82(4):942-63; Leamer (1988). “Measures of Openness”. In Trade Policy Issues
and Empirical Analysis, edited by Robert E. Baldwin. Chicago: University of Chicago Press.
106
of significant interactions between the openness variable and the other regressors
that would diminish the explanatory power of openness” (SW, 1995a:50). The
authors convey that while the earlier studies did use a “…Barro-style crosscountry growth equation” (SW, 1995a:47) these researchers did not explicitly test
openness as a causal factor as they did in their “…construction of a single
indicator measure of openness” (SW, 1995a:50); an approach that differentiates
their own treatment of the data from prior research. Additionally, the fact that by
effectively prioritizing openness as having a relationship to growth causatively,
they were able to examine “growth performance within a subset of open
economies, as well as between closed and open economies” (SW, 1995a:50authors’ italics).
It is this point, particularly, that establishes Sachs and Warner’s assertion
that openness leads to growth. That is, since openness leads to inclusion in the
convergence club, after which access to growth follows, the policy choice of
exempting ones country from inclusion would then be detrimental to growth, and
such a choice is ultimately the mark of inferior economic leadership in need of
appropriate guidance. Therefore one can observe that regressions 4 and 5 appear
to establish a case for political-academic intervention. It is important here to
recall the findings of regressions 4 and 5 respectively. The first was to show that
Barro’s regression on cross-county growth, taking into account established growth
factors such as conditional convergence, educational attainment, investment, and
political stability, was replicable and performed with expected results. The second
regression was to show that when Sachs and Warner’s singular indicator of
107
openness was added to the basic Barro regression the other indicators of growth
were relatively less important than openness for growth.
The current thesis posits that these regressions and their underlying factors
contribute to the empirical-ideological backbone of Sachs and Warner’s seminal
contributions to the ‘resource curse’ theory as they “…regard the issue of
appropriate growth-oriented policies for resource-abundant countries to be an
open and important topic for further analysis” (SW, 1995b:23), Otherwise lending
justification for political-academic intervention.
In a dovetailing return to summarizing Sachs and Warner’s regression
analysis with the political constraints of resource-abundant countries, the abovementioned rationale for intervention is further supported by the authors’ sixth
regression which included a dummy variable “…POL, to account for extreme
political conditions detrimental to long-term investment” (SW, 1995a:50). More
particularly these conditions are characterized as “…extreme political repression
and unrest” (SW, 1995a:49) associated with “…a socialist economic structure
[…], revolutions, coups, chronic civil unrest, or a prolonged war with a foreign
country that is fought on domestic territory […], and extreme deprivation of civil
and political rights according to the Freedom House index” (SW, 1995a:50)75.
The authors reported that “…the POL variable is statistically significant at the 10
percent level (t-1.986), suggesting that property rights, freedom, and safety from
violence are additional determinants of growth” (SW, 1995a:50). Again this
75
The Freedom House index is reported by McMillan, Rausser, and Johnson (1994). From authors see:
“Economic Growth, Political Civil Liberties”. Occasional Paper 53. San Francisco: International Center for
Economic Growth.
108
information is consistent with “…Barro, Bhalla, and Jakob Svensson” (SW,
1995a:50)76. The authors note that, “…in other regressions, not reported here, we
have experimented with the three individual items in the POL index, and have
found that each one plays a role in the growth process” (SW, 1995a:50).
In fact these regressions are reported in Sachs and Warner’s Natural
Resource Abundance and Economic Growth (1995b) and the representative
concerns are operationalized in the variables REVCOUP, ASSASSP, RL82, and
DTT7189 covering the “…average number of revolutions and coups over the
period 1970-1985, […] the average number of assassinations per million persons
over the period 1970-1985, […] the rule of law index in 1982” (SW, 1995b:31)
and “change in the log of external terms of trade between 1971 and 1989” (SW,
1995b:43) where the last variable relates to Prebisch’s77 self-sufficiency premise,
declining terms of trade, and thus presumes a characterization of socialism. The
items of the POL index, and the concerns operationalized therein, relate only to
the closed economies as the authors note that “…the set of countries with POL=1
is a subset of the closed economies. Therefore the use of the POL variable as an
additional criterion to classify countries would give the same set of countries as
using the OPEN variable alone” (SW,1995a:50- authors’ italics). Meaning as a
tool of classification between open and closed economies the POL variable would
just as accurately delimit closed countries, including those in some form of
transition as marked by “…annual inflation rates above 100 percent for any year
76
From authors see: Svensson, 1994. “Investment, Property Rights, and Political Instability: Theory and
Evidence”. Seminar Paper 574. Stockholm: University of Stockholm, Institute for International Economic
Studies (July). Also from authors see: Alesina, et al., 1992. “Political Instability and Economic Growth”.
Working Paper 4173. Cambridge, Mass.: National Bureau of Economic Research (September).
77
And Singer, but the authors focus on Prebisch namely.
109
between 1970 and 1989” (SW, 1995a:50), as the OPEN variable would. The
major definitional difference between the POL index and Sachs and Warner’s
criteria for qualifying closed economies is the scale at which they influentially
operate the most.
Going back to the understanding of a guiding superstructure and its
subordinate operational mechanisms as a catalyst for the long-run micro- and
macro-level consequences of conflict-led development strategies mentioned
earlier, the POL index explains the subordinate operational mechanisms that lead
to micro-level (domestic, nation-level) consequences while the qualification
criteria isolate the club-countries as those for which the closed trade criteria
(nontariff barriers (NTBs) covering 40 percent or more of trade, average tariff
rates of 40 percent or more, a black market exchange rate that is depreciated by 20
percent or more relative to the official exchange rate, on average, during the
1970s and 1980s, a socialist economic system, and a state monopoly on major
exports) have the greatest effect on their sustained growth. As the authors point
out, "…since the value of trade liberalization generally depends on the openness
of potential trade partners" (SW, 1995a:14) the more countries determined, for
any reason, to liberate themselves first economically through a closure policy, and
secondly with an aim to then do business, after having obtained some measure of
economic or trade partner parity, under these conditions it is clarified how the
value of the concept of trade liberalization may be highly dependent upon timing,
which is the assertion Sachs and Warner make.
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Timing is then an imperative factor which would make the costs of forced
entry, however conceived and implemented, both reasonable to the goal-oriented
and ultimately warranted. Thus operating through the channel of replicability,
extracting value from the concept of trade liberalization is tangibly worth
substantially more than the warrant and the transaction costs of forced entry.
Further if new markets are unavailable because of trade closure policies than the
concept of free trade would suddenly be highly and necessarily undervalued. This
appeared to be the risk as “…various forces produced an overwhelming turn
toward socialism or SLI in the developing world during the 1940s and 1950s,
which was only gradually reversed over the next forty years” (SW, 1995a:21).
Taking into account the importance of timing, the authors appear to grasp these
risks in their remark which underlines their sub-section header, The Classification
and Timing of Trade Policies, “according to our classifications, […], seventyeight developing countries outside of the Soviet bloc chose some form of inwardlooking development strategy in the postwar period” (SW, 1995a:21), this is a
significant closure of the world market.
Recalling the discussion from page 23, and in the context of the results
summarized on page 24 of this text, Sachs and Warner via Ronald Rogowski
(1989), author of Commerce and Coalitions: How Trade Affects Domestic
Political Alignments, assert that “…the labor-to-land ratio has been a determinant
of the timing of liberalization among developing countries” (SW, 1995a:51), as
the authors found “...statistical evidence that a high population-to-land ratio raised
the probability of an early trade liberalization” (SW, 1995a:33). In the seventh
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regression, rather than testing the ratio to see if it was a determinant of the timing
of liberalization among developing countries as they did earlier, the authors
included the ratio to test whether openness was acting as a proxy for the influence
of other factors or acting as a possible “independent determinate of growth” (SW,
1995a:51) and found that the ratio was insignificant, though “…the openness
variable maintains its magnitude and statistical significance” (SW, 1995a:51).
That is to say Sachs and Warner found Rogowski’s labor-to-land ratio to be a
determinate of early trade liberalization but not an independent determinate of
growth. As this data indicates, an affirmative causal relationship can not be
established between a high labor-to-land ratio, growth, and early trade
liberalization nor can one be established between a high land-to-labor ratio, low
or inverse growth, and late trade liberalization, therefore no claims of geographic
predisposition can be made without a forceful air of bias as exemplified by SW’s
inclusion of Bodin’s sentiment that “...men of fat and fertile soil, are most
commonly effeminate an cowards, whereas contrariwise a barren country makes
men temperate by necessity, and by consequence careful, vigilant, and
industrious” (as cited in SW, 1995b:4). After the inclusion of this single sentence,
the authors move on to an extended discussion of the indirect adverse growth
effects associated with poor policies, i.e. protectionist, having caused slow capital
accumulation. In effectively harkening back to, as well as reinforcing this
assertion, SW note in relation to Natural Resource Abundance and Economic
Growth, that “[a] recent and fascinating paper by Berge et. al. (1994) is similar in
motivation and spirit to this paper, and also points to the adverse role of natural
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resource endowments (measured mainly by land and population density) on
growth and manufacturing exports” (1995b:3)78. Still indirectly related, the
authors add that they have found “…strong evidence that protectionist trade
policies reduce overall growth when controlling for the other variables” (SW,
1995a:51)79.
The assertion of the importance of the labor-to-land ratio is that a high
labor-to-land ratio is more likely to lead to faster liberalization, since “…workers
would tend to favor free trade” (SW, 1995a:20), while the converse is also true,
that a high land-to-labor ratio is more likely to lead to prolonged attempts at selfsufficiency since “urban workers should be interested in protection” (SW,
1995a:20). The assertion supports Sachs and Warner’s own contention that
“…[p]ostwar governments have tended to respond more to labor interests than
land interests” (SW, 1995a:21).
It is important here to note the authors’ linguistic treatment of the Asian
countries, characterized as having a high labor-to-land ratio, to additionally being
held in high esteem, in contrast to the Latin American/African blocs,
characterized as having a high land-to-labor ratio, to additionally being held as
inferior due to their development choices80. When discussing what are effectively
the Asian countries, Sachs and Warner refer to “workers” but when discussing
78
See: Berge, K. et. al. “Trade and Development Strategy Options for the Poorest Countries: A Preliminary
Investigation”. Institute of Development Studies Working Paper 12. December, 1994.
79
I would ask whether slow growth is actually reduced growth. Where slow growth still implies growth,
negative growth on the other hand, implies reduced growth.
80
The authors especially draw this comparison forth in Natural Resource Abundance and Economic Growth
(1995b:23), when noting that “…there are benefits from good policies regarding natural resource
exploitation. Compare, for example, the experiences of the primary producers in Asia, namely Malaysia,
Indonesia, and Thailand with those in Africa (see Romer, 1994)”.
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what are effectively the Latin American/African countries the Sachs and Warner
refer to “urban workers”. As noted earlier the word “urban” as a noun, according
to the context of the development literature overall, indicates where the central
governing body is located but as an adjective, is associated with corruption.
Therefore “urban workers […] interested in protection” infers corrupt government
or bureaucracy.
This point is made more clearly by the authors’ remark “…[i]n many parts
of the developing world, especially Latin America and Africa, political power has
been disproportionately concentrated in urban areas” (SW, 1995a:21). Sachs and
Warner make no such association or inference of the Asian country’s economic
leadership. Because, as Sachs and Warner assert, “…[p]ostwar governments have
tended to respond more to labor interests than land interests” (SW, 1995a:21),
what is ultimately conveyed is that the Asian countries acted responsibly and
employed their constituents while the Latin American/African, in the larger scope
of the ‘resource curse’ mainly African, countries acted irresponsibly and only
took care of themselves. Though corruption in among the Tiger-Cubs is well
known given China’s Xiaoping and princelings, Indonesia’s Suharto, Marcos of
the Philippines or even more recently than he, Joseph Estrada. At this point it
would appear a sacrilege to mention the corrupt leaders in the Eastern European
bloc, as most certainly the Sachs and Warner neglect to do so.
Here one can observe the anticipation of African countries as a model of
corruption and rent-seeking behaviors, one of the key pillars in the quest to solve
the ‘resource curse’. This thesis does not assert that corruption or rent-seeking is
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not a problem, especially among African nations, only that African nations are not
especially guilty of taking advantage of the behavioral incentives that would
appear to be inherent in the system and mechanisms of capital mobility and
speculative capital. Very few nations that have taken steps toward free-market
capitalism, for whatever reason, failed to take advantage of these highly enriching
opportunities81.
While convergence, openness, and political conditions are understood to
have direct growth effects, Sachs and Warner also argue that “…indirect adverse
growth effects”, as a result of slower human and physical capital, is expected
since “…poor trade policies might also affect the rates of investment relative to
GDP and the rates of human capital accumulation”(SW, 1995a:51). In
regressions 8-10 the authors checked whether “…open and closed economies
differed systematically in the rates of capital accumulation” (SW, 1995a:51) after
controlling for initial income. Overall SW found that, regarding regression eight,
openness leads to increased investment as indicated by “significantly higher
investment-to-GDP ratios” and an investment ratio increase of “an average of 5.4
percentage points” (SW, 1995a:51), in addition to the fact that “interestingly,
there is also some evidence that richer countries have higher investment rates than
poorer countries” (SW, 1995a:52).
81
The world has sooner seen upright leaders assassinated. Indeed entire nations have been built on morally
reprehensible but profitable behavior. In a system based on competition, getting ahead is what matters, as
monotonic functions will kick-in and virtually assure the player stays ahead.
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With regard to regressions 9 and 10, the authors hypothesized as to
whether “the increase in educational attainment between 1970 and 1985 was
different for the two subsets of countries” (SW, 1995a:52). In effect, they were
unable to evince that the closed economies, generally poor, did not do better at
acquiring education and accumulating human capital, i.e. were less likely to attain
education, relative to the open economies, generally rich. But only because of the
“significant negative sign on initial income in both regressions” (SW, 1995a:52)
were they are able to say that “it is clear though, that the more developed
economies had less improvement in educational coverage than did the poorer
countries” (SW, 1995a:52). In their words, “we find no evidence that the closed
economies had less improvement in the coverage of primary and secondary
education than did the open economies” (SW, 1995a:52).
This intuitively makes sense since wealthy countries with some of the
highest levels of educational attainment would have far less additional room to
improve as compared to a poor country at the lowest levels of educational
attainment, which would have plenty of space to reach those higher levels. This is
consistent with the conditional convergence hypothesis in that, as stated earlier
“the crux of the hypothesis is that the further a country has to go from its initial
level of per capita income to its projected highest level, the faster its economy
will grow to reach that point. This is to mean the more “space” an economy has to
grow e.g. “the rate of growth is assumed to be an increasing function of the gap
between the long-run per capita income level and the initial per capita income
level” (Sachs and Warner, 1995a:40 as cited in Marnia, 2013).
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However the construction of the finding is highly evasive linguistically in
that finding no evidence that the closed economies had less improvement in the
educational attainment relative to open economies does nothing in conveying the
overall level of educational attainment for both groups therein contextualizing
what an improvement or lack thereof actually means. The United Nations Human
Indicator Indices show that wealthier countries are generally better educated
relative to poorer countries, therefore the semiotic relevance of wealthy countries
improving less, differs tangibly, in terms of social welfare, as opposed to the
meaning of poorer countries improving less, since the floors, that is the initial
conditions, between the two groups are asymmetric in the first place.
Recalling that “another point of relation between Baumol’s assertion of
the convergence club hypothesis and Barro’s assertion of conditional convergence
hypothesis is that both acknowledge limitations on growth given skill and
capacity” (Marnia, 2013), one can observe that though Baumol’s assertion of the
convergence club thesis suggests “…that only countries with an adequate initial
level of human capital endowments can take advantage of modern technology to
enjoy convergent growth” and conditional convergence thesis accepts
convergence, or the aggregating behavior, as “…a fact of life” (SW, 1995a:41),
Sachs and Warner nevertheless persist that in spite of convergence being a fact of
life, that is inequality, “poor trade policies” (SW, 1995a:51) lead to slower
accumulation of human and physical capital more so than do preferential trade
relations based on ideological affinity and the behavioral symbiosis of the agents.
In the authors’ Natural Resource Abundance and Economic Growth (1995b) the
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variables DTT7189 (abbreviated from difference in terms of trade for the period
1971-1989) and TTSD (abbreviated from terms of trade secular decline) reflect
these highly influential counter-market pressures.
Conclusively the authors make four major findings from their analysis to assess
the impact of postwar global integration on economic performance for the period
from 1970 to 1989; as taken directly from the text, page 52:
I. There is strong evidence of unconditional convergence for open countries, and
no evidence of unconditional convergence for closed countries.
II. Closed countries systematically grow more slowly than do open countries,
showing that “good” policies matter.
III. The role of trade policy continues after controlling for other growth factors,
as in the standard Barro cross-country growth equation.
IV. Poor trade policies seem to affect growth directly, controlling for other
factors, and to affect the rate of accumulation of physical capital.
Given the strength of the evidence for convergence, the authors note that among
open economies, “convergence is conditional on policies, not on structural
variables (for example, initial income, or level of education)” (SW, 1995a:52), in
addition to the general notion of convergence, being that poorer countries should
get richer over time and thus converge with the wealthy countries, Sachs and
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Warner clearly assert that poor countries must be open to trade in order to be
eligible for convergence. Their logic forwards that since inclusion confers some
measure of increased prosperity relative to current levels, it is therefore
imperative that the policy environment of poor countries support free-trade. Even
though positive feedback loops have been associated with the overall economic
growth process, it is hotly contested whether these development traps can or
cannot be over come. Sachs and Warner “argue against the notion of a lowincome “development trap”, since open trade policies (and correlated market
policies) are available to even the poorest countries” (SW, 1995a:52) and convey
that such policies need only be utilized as soon as possible and enforced
thoroughly in order to re-set countries formerly closed on the path of prosperity.
Later in the article the authors show that those ‘strong reformers’ who fully
embraced Sachs and Warner’s growth medicine “…seem to outperform weak
reformers both in terms of a smaller decline in GDP between 1990 and 1994, and
in terms of earlier resumption of economic growth” (SW, 1995a:4). In
strengthening their evidence the authors also show that, rather than per capita
growth rates, per worker growth rates are a more precise term to measure
convergence. In figure 6 the authors rescaled the figure 4 data for the initial
income by growth for open economies (period 1970-89) to present the Log of
1970 GDP per worker against annual growth per worker on the y-axis to find that
the “…negative relation between growth and initial income is more clearly
evident in this figure than in figure 4” (SW, 1995a:43). Because per worker
growth rates “often rely on less frequent census data” (SW, 1995a:44) the
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abscissa only covers the period from 1970 to 1985. In response to potential
criticism the authors elaborate that “if growth per worker were available for the
full time period, we would expect it to strengthen our conclusions regarding
convergence” (SW, 1995a:44). The authors acknowledge that given this partial
data the minimum growth rate of the open group is Barbados at 1.2 percent (SW,
1995a:44), while with full information the minimum would decrease to “about 0
percent” (SW, 1995a:44). This is likely due to the fact that the “open economies
also exhibit convergence in the sense of having a declining dispersion of GDP
over time (sigma-convergence in Barro and Sala-i-Martin’s terminology)” (SW,
1995a:42). Being another form of convergence, σ-convergence “…speaks directly
as to whether the distribution of income across economies is becoming more
equitable” (Young, Higgins, and Levy, 2004:3). Since Sachs and Warner have
already indicated that among open economies the distribution of income is
becoming more inequitable, one could reasonably maintain inequality parallels
openness, which is a principle complaint of the international anti-globalization
movement.
This is very important since this article addresses three types of convergence:
absolute, β, and σ, where absolute convergence is when all countries accrete to the
same standard of living, β-convergence is when poor countries grow faster than
rich countries, and, σ-convergence is when the distribution of wealth declines,
conversely where the concentration of wealth is high. That β-convergence is
followed by σ-convergence is indicated as absolute convergence is said not to
exist due to due poor trade policies, yet β-convergence is exhibited among the
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wealthy class, and σ-convergence is exhibited among the wealthiest of that class.
Even if absolute convergence were to be achieved, there may never be absolute
equality as wealth would transfer upward through the β- and σ-convergence
levels, effectively exhibiting the divergence already apparent within the
convergent club; essentially the pattern of convergence and divergence would be
fractal. Such an outcome would reinforce the systemic nature of policy
implications. The authors are clearly invested in maintenance of the current
fractal pattern as is evidenced by their discussion of the growth effects of recent
reforms.
Trade Policy and Changes in the Export Structure
The premise of the short-twentieth century is a view postulating that globalization
as, the sum of institutional harmonization and economic integration, was
truncated by two World Wars and the Great Depression. In subscribing to this
premise and basing their assertion that free trade is not only the basis of this union
but that poverty will be eradicated in course, the authors are asserting that the
marriage between democracy and capitalism is, and in modern times was always,
the foundation of natural economic order. Sachs and Warner argue in Economic
Reform and the Process of Global Integration that the interruption of this natural
arrangement, perfectly foretold by economic forefathers such as Adam Smith,
David Ricardo, Alexander Hamilton and even foreseen by contemporary
theoretical opponents such as Marx and Engels, and even Keynes himself,
resulted in a nearly world-wide socialist zeitgeist based in opposing the presumed
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cause of so much destruction and inequity; capitalist-centered development.
Import Substitution Industrialization (ISI) was an alternative development
program posited in 1950 by Prebisch and Singer after, in addition to many other
realizations, observing that over time producers of primary commodities, or
extractive economies, experienced a decline in the terms of trade as increasing
returns flowed up the supply chain toward finishing and away from primary
production.
As Sachs and Warner explain, “…Prebisch and other economists worried
that raw materials exporters that maintained free trade would be unable to
industrialize, and would therefore be vulnerable to long-term adverse movements
in the terms of trade between primary and manufactured goods” therefore it was
argued that “import substitution […] would give more time for domestic industry
to develop and to improve productivity and, perhaps sufficient enough to generate
manufactured exports in the distant future” (SW, 1995a:52).
A casual reading of the literature conveys that Prebisch in particular was
highly influential in proliferating the radical development approach because of his
position with the United Nations as director of the Economic Commission on
Latin America and the Caribbean (UNECLAC). In his UN paper, The Economic
Development of Latin America and its Principal Problems (1950), Prebisch
asserted that something needed to be done about Latin America’s dependence on
European and American trade as these economies suffered hugely as a result of
war, depression, and the still immature status of the United States as the new and
adjusting incumbent economic hegemon. Because Latin America’s own
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economic security was tied to the economic health of these nations, when they
faltered so was to follow Latin America. While the United States was stock piling
gold acquired in exchange for the convertibility of US dollars, necessary not only
for domestic functions in Latin America but in international trade transactions
with European agents, whose currency was essentially defunct for a time, the
Latin American economies only became more troubled due to a lack of economic
autonomy and a secular decline in the terms of trade. With regard to the former,
Prebisch recognized Latin America needed to industrialize but he also recognized
that its standing as a primary commodities producer economically dependent on
external conditions that may only worsen over time, Latin America also needed
protect its economies from international shocks felt by such political-economic
interdependency, thus import substitution industrialization (import protection as
export promotion) was suggested.
This decline in the terms of trade over time is the basis of the highly
controversial, 60+ year old argument that rich countries were getting richer as
producers of finished goods and poor countries were getting poor as being merely
the provider of raw materials, relatively cheap in bulk and providing no external
economies, unless state-owned, and thus no increasing returns to scale that would
establish sectoral diversity and thus a resilient, growing economy.
Essentially without these long-run equilibria, free trade was little more
than civilized captivity as the means of institutionalizing the natural capital i.e.
industrializing, thus what would have been an opportunity to mobilize political
and economic capital for the benefit of the nation’s people was essentially cut off
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at the foot. Purely from a physical capital perspective, the richest countries such
as the United States with steel and oil, and the Great Britain with coal, had
endogenous natural resources and the downstream production capacity for
domestic refining allowing the internalization of returns to scale and an increased
capital investment capacity, this being especially so with monopolies,
monopsonies, and vertically integrated conglomerates82.
Sachs and Warner on Examining the Merit of Worry:
Is ISI justified?
The authors convey that while it seemed reasonable enough to respond to
concerning phenomena, any solution should be appropriately tested. Since, as
Sachs and Warner follow, the theory of import protection as export promotion
accords that “…a primary exporter that is evolving toward being a manufacturing
exporter will experience a faster transition to manufacturing exports with a
protective trade policy” (SW, 1995a:53-authors’ italics), the authors used their
own classification of trade policy in concert with UNCTAD’s classification of
trade structure in order to examine what would then be hybridized outcomes of
the “…two related propositions that open trade condemns raw materials exporters
to nonindustrialization, and that nonclosed trade promotes industrial exports in the
long term” (SW, 1995a: 53). Here relying upon the UNCTAD classifications, the
authors measure how the rate at which the share of total merchandise exports
82
It is well known that these countries also had their own periods of protectionism, which provided a safe
haven for their infant industries-turned behemoths.
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consisting only of primary products (agriculture, minerals, fuels, and metals)
changed over the period 1971-1989 as a function of trade policy. The authors
were able to interpret a relational dynamic between timing and trade policy with
regard to whether a protected growth strategy would actually lead to growth in the
long-run. Essentially the authors asked and examined two questions:
Does open trade prohibit extractive economies from industrializing?
Does closed trade promote trade-based growth in the long-run?
III.B. The Method and the Message II:
Attaining Long-run Potential through Timely Liberalization
Sachs and Warner operationalize these questions by modeling an equation with
the embedded assumption that the share of primary exports in GDP will gradually
adjust to a long-term equilibrium level, that is, the long-term potential income
level, where “…the degree of openness, in turn, may effect the speed of
adjustment” (SW, 1995a:53), meaning, the rate of transition from an economy’s
current income state to its long-term potential income level, i.e. long-term
equilibrium level. The equation is the basis of a regression varied four times to
address specific concerns, which are described in turn below as taken directly
from the text:
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Regression I. Assumes that X, the long-term level of share of primary exports in
GDP, is the same for all economies, and that the export structure gradually adjusts
to that common long-run value (SW, 1995a:53).
Regression II. Investigates whether the land-to-labor ratio and the trade policy
affect the long-term levels of X, the long-term level of share of primary exports in
GDP (SW, 1995a:54).
Regression III. Assumes that X, the long-term level of share of primary exports
in GDP, is a negative function of the endowment or population (POP) relative to
land area (L) (SW, 1995a:54).
Regression IV. While regressions 1-3 were of the developing/transition
economies, the fourth regression performs as a robustness check to “…show that
these conclusions also hold when the regression is estimated with the developed
countries added to the sample” (SW, 1995a:55). The authors do acknowledge that
the long-term equilibrium level is subject to confounding factors in that it “…may
itself be a function of the specific factor endowments of the country, for example
the ratio of labor to land and other natural resources, as well as the long-term
structure of trade policy itself” (SW, 1995a:53-authors’ italics).
The Results
Earlier, the authors conveyed that according to their equation, for each country
there is a projected limit of how much of its economy’s total GDP will be directly
associated with its exportation of primary products, where this limit is termed the
long-term equilibrium level and the share of primary products in GDP adjusts to
this level over time. There are reasons why, potentially, not all countries would
adjust to their limit, or would not do so in an acceptable time frame, as the authors
point out that “this long-term level may itself be a function of specific factor
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endowments of the country” such as “the ratio of labor-to-land and other natural
resources, as well as the long term structure of the trade policy itself” (SW,
1995a:53). The first regression made two assumptions i.) that the long-term level
of share of primary exports in GDP is the same for all economies, and ii.) that the
export structure gradually adjusts to that common long-run value (SW, 1995a:53).
Regarding the first assumption, the authors found that the potential share
of primary exports as component of GDP decreased over time to near zero, that is
“not significantly different from zero” (SW, 1995a:53), such that in the long-run
there would be “…no exports of primary goods” (SW, 1995a:53). So while in the
long-term the level of share of primary exports in GDP is the same for all
economies, it is so in as much as it means that no proportion of any economy’s
GDP would be derived of primary product exportation at the point of
convergence.
With regard to the second assumption, that the export structure gradually
adjusts to that common long-run value, the authors found that while the closed
economies “…have a partial adjustment coefficient of only 0.049” (SW,
1995a:53), where the partial adjustment coefficient is the conditional convergence
coefficient, the open economies had a value of 0.36683. Sachs and Warner
interpret this coefficient to evince that “…open economies tend to adjust more
rapidly from being primary-intensive to manufactures-intensive exporters (SW,
1995a:53). With regard to the rate of adjustment the authors found that the
83
This value is equal to the conditional convergence (beta) coefficient for the closed economies (0.049) plus
a positive gamma parameter of 0.317. See equation 4 on page 53 and Table 13 on page 54. Recall that a
positive gamma parameter means that “…open economies adjust more rapidly to their long-term
equilibrium” (SW, 1995a:53).
127
“difference in speed of adjustment is statistically significant” (SW, 1995a:53) to
the extent that …[w]hile many countries adopted the model of import protection
as export promotion (of manufactures), it was the open economies that did best in
promoting the export of manufactures” (SW, 1995a:53). This is very likely due to
an established endogenous down-stream industrial capacity among openeconomies, whereas the purpose of ISI was to establish an endogenous downstream industrial capacity. Therefore the authors’ statement is much akin to
saying, “open economies did better at doing what they could do compared to
closed economies who simply did what they could”; not only is it splitting hairs, it
just isn’t saying much. Given the historical initial conditions, not the experimental
assumption of equality, the authors are effectively making a placebo comparison.
The second iteration was run to investigate “…whether the land-to-labor
ratio […] affect the long-term levels of X [the share of primary products in
GDP]” (SW, 1995a:54-italics:MM), and held the assumption that the share of
primary products in GDP “is a negative function of the endowment of population
relative to land area” (SW, 1995a:54). Recall the assertion of Rogowski, tested as
affirmative by Sachs and Warner, that a high population-to-land ratio is more
likely to lead to faster liberalization, since “workers would tend to favor free
trade” (SW, 1995a:20) and that Sachs and Warner expected that economies “with
a high population-to-land area ratio […] to have a low-value” (SW, 1995a:54) for
the share of primary products in GDP. The third iteration was run to investigate
“…whether the trade policy affect[s] the long-term levels of X [the share of
primary products in GDP]” (SW, 1995a:54-italics:MM). Its operating assumption
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was that, where the openness status is marked by either 1, open or 0, closed, the
“measure of trade policy during 1970-90 […] is also a measure of long-run trade
policy (or the market’s expectation of a long-run policy), and is therefore a
determinate of the long-run value of X [the share of primary products in GDP]”
(SW, 1995a:54). Iterations two and three are connected in that the authors were
evaluating whether “…the ratio of population to land area or openness is a
statistically significant determinant of the long-run proportion of primary exports”
(SW, 1995a:54).
Sachs and Warner found that neither variable was “…a statistically significant
determinant” and that in fact, the estimated long-term share of primary products
in GDP was “…virtually unaffected by the inclusion of the other variables” (SW,
1995a:54). So while Sachs and Warner found that neither trade policy
(openness/self-sufficiency) nor the population-to-land ratio (a proxy for timing of
liberalization) was determinative in relation to resource abundance-related growth
(the potential proportion of primary products in GDP), they nevertheless assert
that the “…important result is that the speed of adjustment is still different in
closed and open economies” where “[o]pen economies continue to display much
greater dynamism in changing their export structure from primary commodities to
manufactures” (SW, 1995a:54). To this end the authors emphasize the fact that
“closed economies display almost no change at all in export structure during the
nearly-twenty-year interval examined since the estimate of β is always
insignificant” (SW, 1995a:55). Here it should be said that, the period 1970-1990
is the range of time that the nations pursuing self-sufficiency policies were under
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attack in a shock-doctrine based siege of economic and ideological warfare,
militarily supported. The authors themselves refer to this when the note that “…it
was the Pinochet dictatorship in Chile after 1973 which ended decades of
protectionism” (SW, 1995a:21).
Since “one of the original arguments for SLI was the promotion of
manufacturing exports” (SW, 1995a:52), and while the purpose of this analytical
exercise was to “show that the “importance of trade policy is demonstrated in
several cross country growth equations in which we hold constant other
determinants of growth” (SW, 1995a:4), the authors tested the premises of import
substitution industrialization by quantifying the questions: Does open trade
prohibit extractive economies from industrializing? and Does closed trade
promote trade-based growth in the long-run? Conclusively Sachs and Warner
found that no proportion of any economy’s GDP would be derived of primary
product exportation at the point of convergence, the potential proportion of
primary products in GDP is not determined by either trade policy (openness/selfsufficiency) or the population-to-land ratio, and open economies became
manufactures-intensive exporters more quickly than closed economies with a
statistically significant result indicating that the difference in speed of adjustment
matters. When the authors introduce the data of the developed countries in the
fourth iteration they found that these conclusions held and ultimately support their
assertions that the “open economies that did best in promoting the export of
manufactures” (SW, 1995a:53) and that “open economies continue to display
130
much greater dynamism in changing their export structure from primary
commodities to manufactures” (SW, 1995a:54).
Trade Policy and Macroeconomic Crises
According to Sachs and Warner, beyond quickly accumulating wealth via a
comparatively more rapid transition to competitive, industrial capacity for
manufactures, another one of the many benefits to trade openness is an ability to
remain current on accounts owing. Often times in the process of becoming selfsufficient, closed economies require international loans to cover cash flow gaps
leading to so-called balance-of-payments crises when the economies are unable to
pay on the balance according to schedule. In 1985 Jeffrey Sachs argued that
“…the outward orientation of the East Asian economies had saved them from the
developing country debt crises that ravaged Latin America” (SW, 1995a:55). The
composition of this article provided an opportunity to take advantage of the tenyear difference and ask in 1995, “…[i]s there evidence that openness to trade
helped to avoid macroeconomic crises in the 1980s?” (SW, 1995a:55).
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III. C. The Method and the Message III:
Superior Policies Avert Macroeconomic Crises, Inferior Policies Court Them
Thusly posed (connect to ISI questions), the research question anticipates
the authors’ expectations that “closed economies will be more likely than open
economies, to fall in to one or more of these crises” (SW, 1995a:55). The authors
give three main reasons why this expectation is well-founded, beginning primarily
with the fact that “…closed economies often borrowed heavily from foreign
sources in order to overcome economic stagnation caused by the deeper problem
of poor economic policies” (SW, 1995a:55), further explaining that when
creditors withdrew support for further lending a debt crisis ensued. In the second
place Sachs and Warner assert that closed economies were unable to service their
debts because they lacked the “…foreign exchange earnings” (SW, 1995a:55) that
would have come from manufactures-related investment activity. Since
“…closed economies oriented investment toward non-traded goods” (SW,
1995a:55) their down fall was a lack of recurring income that would have been
afforded by servicing the markets. Yet even more importantly than heavy
borrowing and low investment is the authors assertion that the third major reason
for macroeconomic crises in closed economies was that “they tended to have a
higher level of state involvement in the economy, including the ownership of state
enterprises” (SW, 1995a:55). The authors’ highlight the ownership of state
enterprises particularly as “loss-making state enterprises added significantly to the
overall fiscal burden of many governments in the 1980s” (SW, 1995a:55) such
132
that these enterprises contributed to “the onset of high inflation and foreign debt
crises” (SW, 1995a:55). In tracking the rationale of these three points Sachs and
Warner define a severe macroeconomic crises as any one of the following three
occurrences:
I. A rescheduling of foreign debt in the Paris Club (official creditors) or the
London Club
(commercial bank creditors).
II. Arrears on external payments (including debt servicing), as reported by the
IMF.
III. An inflation rate in excess of 100 percent per year.
With these definitions in the service of answering whether there is indeed
evidence that openness to trade is an important factor in avoiding macroeconomic
crises particularly in the 1980s, The authors first classified “countries according to
their trade orientation in the 1970s and then examine whether the countries that
were open in the 1970s were less likely to experience a severe macroeconomic
crisis in the 1980s and 1990s” (SW, 1995a:55), then ran a chi-square test of
independence where the null hypothesis, “of independence between trade policy
in the 1970s and macroeconomic crises in the 1980s” (SW, 1995a:55). They
found independence was “rejected at the 0.000 level” (SW, 1995a:55).
133
The Results
From a total of 90 developing countries assessed, 17 had an open trade policy in
the 1970s and 73 held a closed trade policy. Of the 17 open countries, one,
namely Jordan, “succumbed to a macroeconomic crisis after opening” (SW,
1995a:56) associated with a “sharp cutback in foreign aid from the oil-rich states
of the region as a result of the collapse in world oil prices in 1986” (SW,
1995a:56). Since there were so many more closed countries that suffered
macroeconomic shocks as expected from the authors’ rationale, Sachs and Warner
expressed that it was “easier to assess the 14 [countries] that did not” (SW,
1995a:55) fall within the rationale, namely, “Bangladesh, Botswana, Burundi,
China, Columbia, Hungary, India, Iran, Nepal, Papua New Guinea, Rwanda, Sri
Lanka, Tunisia, and Zimbabwe” (SW, 1995a:56). Nine of these exceptions are
explained in turn below, as taken directly from the text:
Botswana: experienced no shocks in the 1980s because it had “…opened its
economy by
1979”.
Columbia: “…maintained very cautious policies both in trade and in finance”.
China: “Began the 1980s with very little debt because it had borrowed little
during the
Cultural Revolution of 1966-76”.
Hungary and India: “…in fact, flirted with a debt crisis which was narrowly
averted”.
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Bangladesh, Burundi, Nepal, and Rwanda: “Are among the world’s poorest
countries and have little, if any, access to loans on commercial terms, which has
probably saved them from generating a debt crises”.
In further qualifying the latter exceptions, the authors remind their readers that
“moreover, Rwanda and Burundi have been subject to extreme internal unrest”
(SW, 1995a:56). This relates to the results Sachs and Warner found earlier in
their paper on the role of extreme political conditions and growth, where the
statistical significance of the POL variable suggests that “property rights,
freedom, and safety from violence are additional determinants of growth” (SW,
1995a:50).
The authors convey two important pieces of information, one being that
commercial banks, or the London Club, played a role in the debt crises of the
1980s and 1990s as is asserted by Klein (2007), and secondly, that although
Rwanda and Burundi were among the countries that did not suffer
macroeconomic shocks, they had nothing of value that a.) would have attracted
commercial lenders and b.) if these countries did have something of value to the
international community the level of “extreme internal unrest” (SW, 1995a:55)
would have supported the kind of graft and mismanagement characteristic of subSaharan African nations even at that time, and much more so today.
135
The Hard Hand of Reforms: Recent Reforms and Economic Performance
III. D. The Method and the Message IV:
The New Ceteris Paribus: Not All Growth is Created Equal
By crafting a regression equation sensitive to “…a separate fixed effect on
growth” and “…a timing effect for intervals” (SW, 1995a:58) the authors were
able to formulate a model that would yield multiple equilibria in which each is
related to when the decision to adopt an open trade policy was made84. The
authors’ highly stylized model established four intervals among which the 37
countries could fall, self-correlating with “…higher or lower growth on average
after the onset of open trade” (SW, 1995a:58). The intervals, where T is the year
of trade liberalization, were I1: between T-10 and T-4, I2: T-3 and T-1, I3: T and
T+2, and I4: between T+3 and N, which is either the earliest of the available data,
T+10, or “…the latest year for which data are available (usually 1993)” (SW,
1995a:58). The recent past is formulaically defined as 1-3 years before the time of
liberalization, while the distant past is so defined as 4-10 years prior to
liberalization. It is inherently understood that that multiple outcomes would ensue
with a sensitive enough equation, the inclusion of an error term for randomness,
and careful selection of the data it is certainly reasonable that if for a subset of
countries, the authors take a ten-year period prior to reform, break it down into
84
Therefore one can safely presume that the inclusion of a timing effect allows the authors to infer statements
regarding post-installation growth trends since it is a matter of course that “…economic reforms take time to
work” (SW, 1995a:44).
136
two sub-periods labeled the distant and recent past, lay out a four-interval
interaction of growth trends with a time effect variable associated with each
interval to give a highly specified time relevance to a comparison of growth
trends between the distant and recent past as well as among the recent past subperiod relative to the sub-periods 1-3 years after liberalization, and 4 up to 10
years after liberalization. Ultimately, since the regression models three
propositions there are three expected equilibria.
The first is such that if “…trade liberalization raises growth relative to the
“distant past” (years [T-10] through [T-4])” (SW, 1995a:58), then the timing
effects, represented in a timing coefficient, for the post-reformation intervals, I3
and I4, “…should be positive” (SW, 1995a:58). That is, if the authors can show
increased growth, due to trade liberalization, between the distant past (I1), the
period 4-10 years prior to liberalization, and both the recent and distant future, the
periods from 1-3 years after liberalization (I3) and 4 up to 10 years after
liberalization (I4), then the timing coefficient should be positive.
Such a circumstance would allow the authors to compellingly argue a case
in which they convey that the difference in growth between the distant past (the
time of state-led industrialization efforts) and the recent future (relatively
immediate post-liberalization) is related specifically to trade reform even while
stressing that because “trade reform is almost always accompanied by a much
broader range of reforms […] our results cannot, therefore, distinguish between
the effects of trade policy per se, and the effects of other parts of the policy
package that accompany the trade measures” (SW, 1995a:57). Taking the content
137
of the authors’ paper as a whole, one can observe that Sachs and Warner
undermine this statement in that they disparage those other parts of the policy
package in a redirect that economic crises ensuing “after the start of full fledge
reforms […] seem to be related to financial market liberalization and exchange
rate mismanagement” (SW, 1995a:4), that is, not so much because of trade
reforms specifically. This is done in support of positing trade liberalization as the
key determinant of growth more so than other parts of a structural adjustment
package even so far as to leverage trade liberalization as “the sine qua non of the
overall reform process” (SW, 1995a:2) from a short-twentieth century
perspective.
The second of the equilibria is formulated such that if “…trade
liberalization raises growth relative to the “recent past” (years [T-3] through [T1])… [then the differential balances of the timing coefficients for the recent future
and the recent past and the distant future and the recent past] …will be positive”
(SW, 1995a:58). That is, the relationship between growth beginning with the
period 1-3 years after liberalization less the period 1-3 years prior (equal to zero),
and the period from 4 up to 10 years after liberalization less the period less 1-3
years prior to liberty will yield an affirming timing coefficient; allowing the
authors to again argue compellingly for trade related growth but also to account
for differences in growth based on proximity to the time of liberalization thereby
associating relatively poor growth in the earlier periods with poor policy choices
and increased growth with the later periods characterized by the onset of good
economic policies via economic reform overall.
138
The relationship between the first equilibria and the second is that the
authors would be mathematically enabled in asserting that the sooner reforms are
undertaken the better; if, at minimum, growth relative to the recent past outstrips
growth relative to the distant past, and especially if the relation between growth
relative to the recent past and the distant future, the period from 4 up to 10 years
into post-installation, outstrips, even on average, the relation between growth
relative to the recent past (1-3 years prior to liberalization) and the recent future,
I3 (1-3 years after liberalization). Note, especially so because this would indicate
that the patient-economy is stable and that the growth effects of reform have been
sustained for at least seven years.
Finally, upon the foundation of the first and second equilibria, the third
expression is the result of piece-wise formulation that yields two external
equilibria of its own specific to 36 countries that “…did not even achieve a
temporary liberalization during 1980-93” (SW, 1995a:57), since it is “...far more
common [the] case that developing countries started closed, performed poorly,
and then opened” (SW, 1995a:44). Here, if “…trade reform is initially
contractionary, and subsequently expansionary, we would find [the timing
coefficient for the recent future] is less than zero and [the timing coefficient for
the distant future] is greater than zero” (SW, 1995a:58); thereby the authors could
make an argument that trade reform both catalyzed, and is therefore related to,
sustained growth effects over a longer run.
Cumulatively, the reinforcing structure of the two main equilibria, and the
third expression having two external equilibria, conveys that for developing
139
countries which started out closed but then opened, which according to Sachs and
Warner’s classification is “…most developing countries” (SW, 1995a:45) and in
fact such countries are typified this way given Sachs and Warner’s assertion that
“…the typical country started out as a closed economy and liberalized later” (SW,
1995a:33), the function would indicate increased growth the longer reforms were
in place. This aligns with the observation in the greater literature on reform effects
which indicate that the first few years of reforms are generally marked by
revolutionary strife consistent with apoptotic behaviors such as the eradication of
social services and mass employment dissolutions having such devastatingly
systemic consequences of which Naomi Klein remarks, “…as is always the case
women and children suffered the worst of the crises” (Klein, 2007:344). For
example, in the case of the Asian crisis, she explains that many “…rural families
in the Philippines and South Korea sold their daughters to human traffickers who
took them to work in the sex trade in Australia, Europe, and North America”
(Klein, 2007:344). Indeed, Sachs and Warner did allude to the adjustment
difficulties in the early stage of reform implementation when they noted that
“…economic reform paid off after a few years in terms of accelerated growth in
GDP” (SW, 1995a:4). Such strife is inherent even in the function itself, which
formally presents that there is no change in growth between the recent past and
the recent present, and in fact indicates an expectation for negative growth,
characterized as a condition of extreme contraction i.e. negative expansion.
Additionally, the significance of the equilibria cumulatively is that, in
combination with a thick description analysis based on Klein’s extensive work85,
85
Which Joseph Stiglitz advocates as “…a rich description of the political machinations required to force
140
the self-reinforcing formulation evinces that the patient-constituents are
prescribed a placebo86 and are effectively forced to take it at gunpoint. The
mathematically expected outcomes are the social analogs of the reform- and
resistance-related states, of the 38 non-communist reformers, the 25 postcommunist transition economies of Eastern Europe and the former Soviet Union,
and those 36 liberalization failures that “…did not even achieve a temporary
liberalization during 1980-93” (SW, 1995a:57). It also appears that the outcomes
are development trajectories that, while sensitive to political economic initial
conditions87, are initiated by mono-cultural economic reforms and of those, as
Sachs and Warner argue, more strongly so by the trade liberalization element.
The Results
As stated above the authors tested three propositions:
I. If, due to trade liberalization, growth is greater in the recent and distant future
relative to the distant past then the timing coefficient for intervals 3 and 4 should
be positive.
II. If, due to trade liberalization, growth is greater in the distant future relative to
the recent past then there will be no change in growth in the recent future and the
distant future will be positive.
unsavory economic policies on resisting countries and of the human toll. She paints a disturbing portrait of
hubris, not only on the part of Friedman but also of those who adopted his doctrines, sometimes to pursue
more corporatist objectives”. From the back cover of Shock Doctrine: The Rise of Disaster Capitalism.
86
I am using the placebo trope somewhat loosely seeing as negative expansion is not equal to zero, which
would be the ceiling prior to growth. And still, resistance by the constituent-patient indicates that liberty
under any condition is not desired.
87
That is, the political and cultural differences between non-communist but closed nations, socialist post- and
quasi-post-independent nations, and post-communist nations.
141
III. If trade reform effectuates conditions that are initially contractionary, and
subsequently expansionary, a finding that the recent future is less than zero
[negative growth] and the distant future is greater than zero will be supported.
Sachs and Warner, relying upon the estimated values for the timing coefficients as
well as the t-statistics to which their results are accorded, find that “…economic
growth is indeed higher after trade liberalization than in the distant past, both in
the near term [T,T+2], by an average of 1.09 percentage points per year, and in
the more distant future [T+3, N], by an average of 1.33 percentage points per
year” (SW, 1995a:60). In explaining the significance of the results the authors
inform their readers that the “…near term gain is significant at (p = 0.10), while
the long-term gain is statistically significant at (p = 0.05)” (SW, 1995a:60)
suggesting, among other things, that over the long-run openness is significantly
related to growth. Further, the “…increase in average growth [between the nearterm and the distant future-MM] is larger when compared with the years
immediately preceding the trade liberalization since average growth rates are
lower in those years than in the years [T-10] through [T-3]”, that is, 3-10 years
prior to liberalization. As a matter of course, the authors add parenthetically,
“…by 0.88 percent per year on average” (SW, 1995a:60).
Essentially, Sachs and Warner report that the economic growth of their
sample of 36 developing nations was higher in the distant past during a period of
poor economic policies than in the 1-3 year period after the reformation and
establishment of good economic policies which led to, on average, an 88%
142
decrease in growth, comparatively, during that period. In other words the authors
make the statement that if one compared growth in the recent future with growth
in the distant past, less an additional year, then compared growth in the distant
future with growth in the distant past, the increase is even larger since growth is
lower in the recent future by 88%88. In this estimation, the destruction of another
country’s economy is strikingly similar in effect to the Hiroshima incident, though
the authors explain that, “…the very-short-term growth consequences of a trade
reform will depend importantly on the inherited structure of the economy” (SW,
1995a:57), but perhaps of greater consequence is that if effects characterize their
cause then “…trade reform has been part of the overall institutional
harmonization with advanced market economies” (SW, 1995a:57, authors’ italics)
and such devastation is in fact systemic as an inherent part of globalization.
An obvious question then is under such a condition, would not growth
attained in the distant future, that is, immediately after the three-year threshold for
the recent future, be artificial? Certainly the effects of growth would be tangible,
but is growth gained by nearly obliterating that which was slowly accumulated in
order to then reset the scale and draw attention to the growth acquired from
ground zero, truly growth? Why not build on the growth that was already
established? Creative destruction? While these questions are often held to be
outside the scope of work such as Sachs and Warner’s as myopic technocrats
88
The destruction of another country’s economy is strikingly similar in effect to the Hiroshima incident,
though the authors explain that, “…the very-short-term growth consequences of a trade reform will depend
importantly on the inherited structure of the economy” (SW, 1995a:57), but perhaps of greater consequence
is that if effects characterize their cause then “…trade reform has been part of the overall institutional
harmonization with advanced market economies” (SW, 1995a:57, authors’ italics) and such devastation is in
fact systemic as an inherent part of globalization.
143
would assert, their answers, nevertheless, are without a doubt antithetical to their
espoused philosophy, which is that among “…features of a healthy economy […]
a reliance on the private sector as the main engine of growth” (SW, 1995a:63) is
paramount. Still it is expected that SW’s line of inquiry would require a response
and as such the authors do anticipate one. But first, in regards to the additional
year, the period [T-10] through [T-3] was not one of the four established
thresholds and would appear to evince an a posteriori composite interval, of the
first element of I1 and in the terminal position, the first element of I2. Clearly
anticipating potential criticism, saying as much, the authors footnote a rebuttal.
While Sachs and Warner claim that they find “…little support for the idea that our
results might come from reverse causality or from sample selection bias” (SW,
1995a:44), James Duesenberry, one of the general discussants, noted that, “…two
kinds of bias might be affecting the paper’s results. First, since most countries
turned to openness following periods of severe crisis, the new policy was bound
to look good. Second, ignoring reforms that are not maintained until the end of the
sample period [the temporary liberalizers] means that trade reforms that that are
not working are omitted from the sample” (SW, 1995a:107). To which Andrew
Warner replied that “…to lessen the effect of the first bias they compared growth
after reform with growth in the distant past, rather than in the immediate past.
And as to the second, they failed to find hard evidence of a country that really had
liberalized (by their standards), and then did an about-face because of slow
growth” (SW, 1995a:107). Rather, Sachs and Warner assert “…political and
ideological shifts in each country” (SW, 1995a:35)
144
Given the gravity of the findings, in addition to the structural insights of the
formula, it is appropriate to reprint the full rebuttal here:
“It is worthwhile responding to two
possible criticisms of these results. First,
it could be objected that if growth
outcomes were purely random, and
countries reformed only when growth fell
below a critical threshold, then although
we would tend to observe higher growth
after reform, it would be incorrect to
attribute the higher growth to the reform. However, we stress that we are
comparing growth after the reforms with
growth in the distant rather than the
immediate past, and further, that our
period for the distant past spans seven
years.
Second, it is possible that countries may
have sorted themselves randomly as
reformers and nonreformers. If some
grew and others did not, and those that
did not closed up again and thus were
eliminated from our group of reformers,
we would be left with a biased sample of
reformers with high growth. But we have
found few examples of countries that
experienced slow growth after true
reform. For example, economies that
were temporarily open in the 1950s and
1960s and subsequently closed again,
tended to have high growth rates during
the liberal episode. We have also found
that certain countries that are some- times
cited as recent reformers, such as the
Dominican Republic in the early 1980s
and Nigeria between 1986 and 1992,
145
actually did not reform sufficiently (by
our criteria), while others that did reform
temporarily, such as Venezuela,
experienced rapid growth during the
episode of liberalization. Hence we find
few examples to suggest that sample
selection bias is an important issue when
examining the growth performance of
recent reformers”.
(Sachs and Warner, 1995a:60).
In evaluating whether or not those countries more committed to reform, that is,
began earlier and fully engaged all recommendations performed better than the
later and less stringent reformers, and to provide evidence that the extreme costs
in the short run are worth the long-run benefits, the authors took advantage of
“…a recent review of the reform experience conducted by the European Bank for
Reconstruction and Development (EBRD)” (SW, 1995a:61) of the countries of
Central and Eastern Europe and the former Soviet Union. While Sachs and
Warner realized that in 1995 it “…is obviously extremely premature to draw
strong conclusions regarding the effects of these reforms on the restoration of
growth” (SW, 1995a:60) they maintain that “…nonetheless, at least some
evidence can be adduced from the five or more years of reform experienced by
some parts of the region” (SW, 1995a:60).
In model structure similar to the one elaborated upon earlier which took a
more in depth look at the possibilities of timing, the authors ask two questions,
taken directly from the text (SW, 1995a:61):
146
I. Whether intensive reformers exhibit more or less decline in cumulative GDP
between 1989 and 1994; and
II. Whether intensive or early reformers enjoy a faster turnaround in economic
growth, and thereby achieve positive GDP growth by 1994.
SW categorized the countries firstly, by intensity of reform, and secondly, by
timing of onset, then tabulated the data to find “…all of the strong trade reformers
had achieved positive economic growth by 1994, while none of the other
countries had done so” (SW, 1995a:61). The authors add that even though
“…there is considerable variance in the data, on average, strong reformers also
experienced a smaller cumulative loss of GDP between 1989 and 1994” (SW,
1995a:61). Sachs and Warner note that, “…at the least we can highlight that the
data are consistent with the notion that strong trade reforms have produced a
faster turnaround in growth and a smaller cumulative decline” (SW, 1995a:61).
Even though Sachs and Warner maintain that, in this case, they cannot
“…distinguish adequately between the specific role of trade policy and the many
other differences (geography, politics, resource endowments) between the two
regions that might help to explain the differences in growth performance” (SW,
1995a:61) or that in the case of the earlier time series analysis of developing
nations, their results cannot “..distinguish between the effects of trade effects per
se, and the effects of other parts of the policy package that accompany the trade
measures” (SW, 1995a:57) and that in the grand scheme they are “…strongly
aware that trade policy represents just one element […] of an overall economic
147
policy” (SW, 1995a:63); the persuasive nature of the paper is neither missed nor
the implications changed as none of these disclaimers are consistent with the full
measure of the authors’ messaging. Though Sachs and Warner separate their
treatment of the transition economies Central and Eastern Europe and the former
Soviet Union from that of the developing economies of the Latin American,
African, Middle Eastern and Caribbean countries, it appears that with respect to
trade liberalization and growth in transition economies, the authors reiterated the
same rationale elaborated in the models describing the developing conditions.
Interpreting Prebisch
“In economics, ideologies tend either to lag
behind events or to outlive them”.
Raúl Prebisch
The Economic Development of Latin America and
its Principal Problems (1950:1)
A key intellectual obstacle to Sachs and Warner’s vision of the world is PrebischSinger’s finding of a secular decline in the terms of trade which, while taken to
justify a move toward disregarding natural resource production as a viable
development pathway, in reality, it meant only that there would be less natural
resources available to the global market place. And this circumstance was itself
forced upon the global south by the industrial powers. Prebisch explains the
changing tide and adaption of Latin America,
148
“The purpose of industrialization must be clearly
defined. If industrialization is considered to the
purpose of industrialization to be the means of
attaining an autarchic ideal in which economic
considerations are of secondary importance, any
industry that can produce substitutes for imports is
justifiable. If, however, the aim is to increase the
measureable well-being of the masses, the limits
beyond which a more intensive industrialization
might mean a decrease in productivity must be
borne in mind.
Formerly, before the great depression,
development in the Latin American countries was
stimulated from abroad by the constant increase of
exports. There is no reason to suppose, at least at
present, that this will again occur to the same
extent, except under very exceptional
circumstances. These countries not longer have an
alternative between vigorous growth along those
lines and internal expansion through
industrialization. Industrialization has become the
most important means of expansion.
This does not mean, however, that primary
exports must be sacrificed to further industrial
development. Exports not only provide the foreign
exchange with which to buy the imports necessary
for economic development […] If productivity in
agriculture can be increased by technical progress
and if, at the same time, real wages can be raised by
industrialization and adequate social legislation, the
disequilibrium between income at the centres and
the periphery can gradually be corrected with out
detriment to that essential economic activity”.
The Economic Development of Latin America
and its Principal Problems (Prebisch, 1950:6italics added)
149
The rhetorical disjuncture of the implication of PST from its very clearly intended
meaning indicates, as will be shown in the rhetorical and critical analysis of Big
Push (SW, 1999), that the global industrial centers were concerned about the
potential of being crowded-out by a rise of comparatively advantaged
manufactures, if every southern country decided to use their resource stock to
develop to their comparative advantage.
These were very serious times, from the 1960s through the 1980s and 90s, such
that if the global north had not retained the technological advantage, the
consequence of which is also held in Big Push (SW, 1999), then it would have
been a very possible reality that the industrial centers would have shifted south, so
that the northern order would have been significantly under-minded. A number of
ideological and political-economic interventions were waged in the north-south
direction, particularly in the 1980s. It is from this revolutionary environment that
the ‘resource curse’ extends, therefore in representing the interests of the global
north, Sachs and Warner debunk the merits of what was not an uninterrupted
exploration into import substitution industrialization.
Setting an Agenda for 2020:
Sachs and Warner on The Global Spread of Capitalism
“The world economy at the end of the twentieth century looks much like the
world economy at the end of the nineteenth century” (SW, 1995a:61), where
150
returning to the short-twentieth century premise, it is tempting, “at the end of the
twentieth century, to believe that the birth of a global capitalist economy is
inevitable” (SW, 1995a:63). After all, the authors have amassed evidence for
conditional convergence for those “countries that join the system”, in addition to
“evidence of accelerated growth in the countries that have recently undertaken
market reforms” (SW, 1995a:63). Sachs and Warner ascribe the health of an
economy to “a reliance on the private sector as the main engine of growth” and
from this ideological standpoint assert that since they have “used trade policy as
our measure of economic management” they are able to show that “to some extent
opening the economy has helped to promote governmental responsibility in other
areas” (SW, 1995a:63), such as “reduced rent-seeking” (SW, 1995a:57), and
therefore argue that “…trade policy should be viewed as the primary instrument
of reform” (SW, 1995a:63); even though to “…some degree, our measure of trade
policy serves as a proxy for an entire array of policy actions” (SW, 1995a:63).
Possibly in anticipating their paper on natural resource abundance and economic
growth the authors state “…[o]nly further cross-country analysis, with a more
detailed characterization of the entire policy regime, would allow us to distinguish
the growth effects of the various components of economic policy” (SW,
1995a:63), that is free-market economic policy.
Believing their analysis to be “…necessarily impressionistic and imprecise
at several crucial points” (SW, 1995a:63), one gets the sense of Sachs and
Warner’s urgency that economic reform cannot be understated, much less trade
reform more specifically, considering that “ [a] global capitalist system is taking
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shape, drawing almost all regions of the world into arrangements of open trade
and harmonized economic institutions” (SW, 1995a:61). It is no stretch then to
assert that the doctors’ order is to augment the “…wisdom and leadership of the
leading democracies” with a forward-thinking plan. After all, “[t]he spread of
capitalism in the twenty-five years since the start of the Brookings Panel is an
[sic.] historic event of great promise and significance, but whether we will be
celebrating the consolidation of a democratic and market-based world system at
its fiftieth anniversary will depend on our own foresight and good judgments in
the coming years” (SW, 1995a:63).
While it is clear from this summary, and thick analysis that Economic
Reform and the Process of Globalization is a superb example of the free-market
guild mentality and stands remarkably pregnant with bias, such is not necessarily
so unexpected from the equivalent of a keynote speech for the Brookings Panel on
Economic Activity, a community where researchers discuss and present analysis
relevant to economic policy. The Panel is part of the larger, highly influential
Brookings Institution, which aims to “…strengthen American democracy” and
“…secure a more open, safe, prosperous, and cooperative international system”89.
Appropriately, an issue of key focus in the Sachs-Warner address is that of
convergence. By showing that openness to trade is a prerequisite to entry in the
wealthy convergence club, and that those countries, which then join the system,
are more likely to be less impoverished than those who resist, Sachs and Warner
not only make the statement that convergence is the key to eradicating poverty,
but that there is no inevitable poverty trap. Point of fact, Anders Åslund
89
http://www.brookings.edu/about#research-programs/
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provisionally concurred such that “…[i]f we ignore racism and look upon all
factors of production as transferable, it is indeed difficult to accept that a poverty
trap is a given once and for all” (SW, 1995a:96)90 and thus trade reform is an
international imperative for the “...spread of international rule of law, largely
through institutions such as the World Trade Organization and the International
Monetary Fund” (SW, 1995a:63). Sachs and Warner thoroughly lay out a freeenterprise advocating agenda as the basis of an economic management plan
structured on command-control execution from the direction of international
regents to the global class of client states. As shown throughout, central to their
management plan is a policy of trade openness which they believe helps to
promote governmental responsibility and upon which point they argue for the old
stick of commercial interests as governing interests, that is, “…trade policy
should be viewed as the primary instrument of reform” (SW, 1995a:63).
A point that is very clear from SW’s ambiguity disclaimers is that trade
reform is only one part of a complete reform package but that it is intended to be a
proxy for the full range of such a package, i.e. “…an entire array of policy
actions” (SW, 1995a:63). If trade liberalization is to be a proxy for the full reform
90
Åslund also importantly pointed out “…migration and various forms of intervention” (SW, 1995a:96) as
other factors pressing on the consideration of an invincible poverty trap. An excellent mechanistic
illustration of the ravages of migration was provided by Beaulier in his discussion of Botswana’s Success
where he explains that Britain’s, relatively, “most severe policy was the hut tax” and elaborates on its
profound impact on Botswanan cultural and economic society during the country’s time as a protectorate.
Beaulier writes, “…[t]he effect of the tax was severe […] others responded by entering the formal labor
market […] there was a massive increase in male job-search activity […resulting in] massive emigration into
South Africa were Botswanans were guaranteed employment in Britain’s colonial mining operations […]
[w]ith up to one-half of Botswana’s male population gone, the physical, social, and economic infrastructure
was dealt a serious blow” in that beyond the strain on the “…fabric of civil society […] Botswana’s political
institutions were crippled, with up to half of the adult male population spending up to 11 months of each year
in South Africa. Beaulier notes that “…entrepreneurs were probably a significant fraction of the emigrating
population” (Beaulier, 2003:233). ”. Considering what is known today as ‘Brain Drain’, this was very likely a
serious problem, even at this time, as the skilled artisans and entrepreneurs, hindered by a lessened consumer
demand, emigrated to the mines of South Africa.
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package then it would follow that the entirety of economic reform is a control
measure. While this is certainly no surprise it does more fully support the
understanding of trade reform in its defense applications such that a criticism of
the role of trade liberalization as a key driver of growth is a criticism of economic
reform in its larger ability to maintain control. Conversely a defense of trade
liberalization is a defense of its prescribed control methods and a defense of the
agenda of economic reform. To better contextualize this assertion the following is
a close reading of the comments and discussion led by Anders Åslund and Stanley
Fischer on Sachs and Warner’s Economic Reform, which adds richly to both the
professional and policy contexts of the authors’ contribution to the conference.
Both of the primary commentators exalted the work as a “…splendidly
written tripartite paper” that is “broad and most stimulating”, in providing readers
with “…their Olympian view of world economic history over the last century”,
such that it runs “…the gamut from Marx and Engels to Pollyanna”, while
appropriately ending with a degree of caution, though such is “not consistent with
the rest of the paper” (SW, 1995a:96). Overall the reviewers found the paper
ambitious in its review and consistent with the ideological subscriptions of most
mainstream economists, though both men inquired as to the methodology since
the SW’s “…strict categorization” (SW, 1995a:96), which is the basis of their
claim to have demonstrated the “…basic proposition that open trade leads to
convergent rates of growth” (SW, 1995a:4), was the source of significant scrutiny.
Naturally one of the main sources of expressed discomfort was Sachs and
Warner’s semiotic handling of convergence. Anders Åslund claimed he “…felt
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uneasy with the word convergence, because it suggests that there is one ideal that
everyone can learn; that the leaders can do no wrong or unlearn this ideal, and that
their challengers can do no better” (SW, 1995a:96, italics-AA)91. In a measure
evoking Prebisch, Åslund pressed that he is “…firmly convinced that good
economic policies and institutions can be unlearned and abolished [considering]
Argentina is a country with a longer record of economic unlearning” (SW,
1995a:96). Still Åslund appears to agree with the notion of conditional
convergence when he adds that, “…We are considering very long periods and this
convergence maybe temporary, lasting only a few decades” (SW, 1995a:96).
Stanley Fischer expressed that he could not see any basis for the
conclusion that “…openness will lead to absolute rather than conditional
convergence” (SW, 1995a:104, italics-SF). Unlike Sachs and Warner, who argue
that “…convergence is a fact of life” (SW, 1995a:41), Fischer expounded that, in
actuality, the conditions of divergence are a fact of life, qualifying his point in
saying,
“There are reasons to think that steady-state per
capita income levels in different countries are
bound to differ, as a result of differences in
saving rates, different rates of investment in
human capital, and so forth. After all, income
levels differ among states in the United States,
they will always differ among individuals, and
they will likely always differ among countries.
Perhaps we can define convergence differently,
91
On the idea that certain countries are seemingly incapable of learning (the right way to do things) as cited
in Auty (1993), see: Lago (1990): The Illusion of Pursuing Redistribution through Macropolicy: Peru’s
Heterodox Experience (1985-90). Mimeo. World Bank. Washington, D.C.; and Paus (1991): “Adjustment
and Development in Latin America: A Failure of Peruvian Heterodoxy 1985-90”. World Development 19.
(411-34).
155
to say that countries have converged if all
individuals with the same amount of human
potential have the same earnings (or utility) in
whatever country they live—and perhaps by the
time such convergence becomes relevant we
will be able to measure human potential. In the
meantime, the claim of absolute convergence is
hard to accept”.
Stanley Fischer in Sachs and Warner, 1995a
(104).
While the concluding evidence in favor of convergence is largely attributed to
Sachs and Warner’s classification scheme, Åslund appears to appreciate the
straight-forward nature of the researchers experimental execution citing that,
“Sachs and Warner have simply defined their criteria for an open economy, found
the statistics for their categorization, and tested their hypotheses”, but also the
analytical construction as well as, citing “…[t]hey have included a large number
of countries and formulated a clear hypothesis which can be statistically tested,
thanks to a strict categorization” (SW, 1995a:96).
As exhibited by the excerpt above, Fischer clearly took issue with a substrata of SW’s finding of convergence, more specifically that, “…countries with
open economies will converge to the same level of income, although admittedly it
will take a long time” (SW, 1995a:103), italics-SF). Still he did agree that, we are
in a “…moment of ideological convergence” at the least, though he states there
are no assurances that such “…will last in economics” (SW, 1995a:105). Despite
his concurrence as to the ideological state of the profession, it was in other areas
of the classification system that Fischer acknowledged their categorization
presented problems and that it was “…nonetheless necessary to check the details
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of the argument” (SW, 1995a:103). Fischer appears to read an incredulous air
regarding several elements of the overall results despite the fact that in his official
role he “…should accept the conclusion and move on” since the result
“…provides so much comfort to the international agencies” (SW, 1995a:103).
Onward, Fischer very strikingly draws attention to the fact that “…by
starting in 1970, the authors stack the deck against the import-substituting
strategy” (SW, 1995a:103)92. Also, Fischer notes, given that the subject of the
influence of openness on growth has been studied before, in addition to the fact
that “…early result that openness contributes to growth finds increasing support
from recent work” (SW, 1995a:103), e.g. Ben-David (1993,1994)93, “…[t]he
strength of the Sachs-Warner results is surprising [as] no one has found such
extraordinarily categorical results” (SW, 1995a:103). Fischer observes that
“…whereas it is generally continuous in other papers” (SW, 1995a:103), Sachs
and Warner’s results depend on “…the noncontinuous nature of the openness
variable” (SW, 1995a:103), an apparently risky move as Fischer notes that it “…is
particularly surprising that this paper reaches stronger conclusions than the World
Bank’s famous 1987 World Development Report, which was so roundly criticized
92
He adds, “Whatever happened later, Latin American and African countries did quite well in the 1950s and
1960s, despite their perverse regimes. We should not be surprised that it took so long for them to open up”
(SW, 1995a:103). Another paper similarly assessing Sachs and Warner’s construal of the historical basis for
globalization is Bairoch and Kozul-Wright’s work Globalization Myths: Some Historical Reflections on
Integration, Industrialization, and Growth in the World Economy (1996).
93
Fischer notes that in his 1994 paper, Ben-David “…shows greater convergence among countries that trade
more with each other, a result that points in the same direction as Sachs and Warner, but is more qualified”
(SW, 1995a:103). Also Sachs and Warner cited his 1993 paper in which he shows “…strong convergence
among the members of the European Community and the European Free Trade Area, with the dispersion of
income falling as trade liberalization proceeded” (SW, 1995a:39). This would support Baumol’s convergence
club thesis as well as allude to the concentration of wealth as liberalization proceeded over time. As cited in
Sachs and Warner see: Ben-David, 1993. “Equalizing Exchange: Trade Liberalization and Income
Convergence”. Quarterly Journal of Economics. 108(3):653-79. As cited by Stanley Fischer, see: BenDavid, 1994. Trade Convergence Among Countries. Houston. Houston University Press.
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for overreaching” (SW, 1995a:104). For instance, explains Fischer, “…while it is
impossible to categorize countries perfectly […] I know for sure that Zimbabwe
was not a socialist country in 1970; I do not believe that Jordan has been
consistently open since 1970; Israel's trade reforms began in 1963, certainly not in
1985, and it did suffer from macroeconomic crises after opening; it is odd to have
both India and Hong Kong classified as open in 1995,when their degrees of
openness are so different; it is unclear why Lesotho and Swaziland are
categorized as open and South Africa as closed, when all three belong to a
customs union. Of course, any such summary scheme is bound to have
difficulties” (SW, 1995a:103).
In regards to the openness criteria Sachs “…conceded that the criteria used
in the paper is necessarily somewhat arbitrary and that it is difficult to pin down
just when a country becomes open” (SW, 1995a:106), though he argues that
“…the errors about timing are unlikely to be large when working with five-year
intervals” (SW, 1995a:106). Warner added that “…the timing of events supported
the causal interpretation of the paper” (SW, 1995a:105) and that “…the evidence
in the paper on openness and macroeconomic crises measures openness in the
1970s and crises in the 1980s” (SW, 1995a:105). Naturally this would support
the piece-wise structure of the analysis and results since it can be intuited that the
policy choice of trade or self-sufficiency in the 1970s would logically lead to
related consequences in the 1980s. Still, one could argue this to be an incredibly
holonic approach since it is known that the countries pursuing self-sufficiency
were quite literally under siege in economic warfare with the international
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environment as it was not only “…the globalization of capital flows” that tended
to “…punish bad policies and reward good policies” (SW, 1995a:104) that is,
electing not to trade elicited punitive consequences as well. Agreeably, Sachs
“…regarded trade reform as the single most powerful element of these programs,
both because of its direct effects and because open trade forces adoption of other
parts of the reform agenda” (SW, 1995a:106). He explains further that, “…[t]rade
exerts this influence by imposing more rigorous competition, altering the political
economy, constraining the government's macroeconomic policies and
manipulations in the economy, and subjecting institutions that want access to
international markets to the scrutiny and conditionality of the international
environment” (SW, 1995a:106). Also Sachs maintains that these “…more farreaching programs of reform” should be interpreted as approximated by “…trade
liberalization [which] alone would not be sufficient” (SW, 1995a:106).
Taking a milder issue with Sachs and Warner’s result that “…the land-tolabor ratio is the variable that determines the timing of trade liberalization” (SW,
1995a:104), Fischer found this nevertheless “surprising” (SW, 1995a:104).
Recall, Sachs and Warner hypothesized that “…since it is plausible that
governments will tend to be more responsive to the interests of labor over land
owners” (SW, 1995a:32) in economies with lower land-to-labor ratios, they would
expect faster liberalization under such conditions. Also recall their result was that
“…a high population-to-land ratio raised the probability of an early trade
liberalization” (SW, 1995a:33). Given this Fischer remarks that the “…argument
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seems to assume that the country is a democracy” (SW, 1995a:104)94. He then
makes the suggestion that “possibly the labor-to-land ratio is serving as a proxy
for the country’s size” (SW, 1995a:104), though Sachs and Warner are very clear
that “…the land-to-population ratio in 1960 [is acting] as a proxy for the land-tolabor ratio” (SW, 1995a:33). So by taking, alone, the crowdedness of a country
for its human potential, its no small wonder that as a factor of earlier liberalization
the authors were forced to acknowledge that, “surprisingly, size of population did
not prove to be significant” (SW, 1995a:33), a matter that would indeed prove
contentious for Viner who asserted that high quality, low quantity populations
would be better off.
Overall in the general discussion the correlation between openness and
growth via trade was the object of much commentary. For instance, T.N.
Srinivasan put forth that “…trade policy and growth are both endogenous
variables, making it hard to establish causality” (SW, 1995a:105), further, it was
reported that “… [h]e criticized growth regressions in general because of such
endogeneity and because of measurement errors” (SW, 1995a:106), additionally
referring to some unpublished papers by Marcel Dagenais, at the University of
Montreal, which show serious biases in such regressions due to measurement
errors (SW, 1995a:106). Also it was pointed out by Srinivasan that the
“…simplest version of neoclassical trade theory suggests that openness should
have only a level effect, not a long-run growth effect” (SW, 1995a:106) to which
94
Though, historically, the expectations and meaning of a democracy can be opaque as, depending on the
leadership, democracies can yield counterintuitive policy results. Sachs and Warner note that for example in
Latin America from the 1950s to the 1980s “…protectionism tended to be favored during democratic periods
[…] since workers could outvote landowners” (SW, 1995a:20).
160
Greg Mankiw, possibly sensing a need for balance, “…interjected that the level
effect predicted by the neoclassical model still takes time to fully work itself, and
so it appears to cause growth in time series” (SW, 1995a:106). Still, it appears
that Srinivasan persisted in his point saying that “…[m]aking trade into an engine
for growth required a resort to vague externalities” (SW, 1995a:106), such as
extracting “…indirect adverse growth effects as a result of slower accumulation
of capital, both physical and human” (SW, 1995a:51, authors’ italics), from the
assertion that protectionist trade policies reduce overall growth which might also
affect rates of investment relative to GDP and therefore the rates of human capital
accumulation (SW, 1995a:51).
The genius of Sachs and Warner, to the extent of this initial paper in the
set, is the construction of their quantitative analysis and attendant rationale
uncovering what they believe to be the centrality and crucial import of timing in
trade liberalization and how this timing effect lends primacy to the trade
liberalization facet of economic reform as a driver of global integration.
Antithetical to the internationalization coalescing prior to 1914, new era of state
building, part of the of post-independence movements in the developing world,
followed the hegemonic readjustment in the post-war period. Sachs and Warner
contend that a macroeconomic domino effect following the collapse of world
trading system lead to the popularity of SLI policies. Restrictive imperial
monetary policies rendered dependent currencies inconvertible and induced deep
macroeconomic instabilities in its minor economies. These instabilities incited a
pessimistic attitude toward exportation-based development and eventually
161
converged with the popularity of Marxism to support the socialist strategy of
State-led Industrialization. According to SW, the natural order of capitalism was
under siege in this macroeconomic and political economic environment; and the
following 40 years, from the 1950s through the 1990s, was in fact a painstaking
righting of the ship. Given this, SW base their argument that the popular
redirection to self-sufficiency, or autarky, was the result of ideological and
political factors rather than slow growth. To this end, Sachs and Warner assert
that ideological and popular upsets must be checked to prevent future
interruptions of the natural economic order. The following chapter reviews the
influence of the tripartite era on the historical political-economic conditions
surrounding the resource curse.
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Chapter IV
Historical Background:
A Review of Economic Reform and The Process of Global Integration
Introduction
In the midst of the Cold War tension between central planning and the relatively
laissez-faire mode of economic management, the systemically unstable, newly
and post-independent nations of the third world were sitting targets for
assimilation into a geo-political reality that could only be described as tripartitioned. As Sachs and Warner open their paper to explain, a tripartite
economic reality of the world was distinguishable by a combination of two
factors: 1.) The level of per capita GDP associated with the management of
industrial growth, and 2.) Whether that growth was precipitated by a.) State-run
industrialization as in the second world, b.) Private enterprise as in the first world
or c.) Some mix of both as in the third world (Sachs and Warner, 1995a:1).
Drawing particular emphasis to history post-1989, this period is described by
Sachs and Warner as one of the most dynamic times for “…institutional
harmonization and economic integration among nations in world history” (Sachs
and Warner, 1995a:1). The terms institutional harmonization and economic
integration are defined as “…not only market-based trade and financial flows, but
also institutional harmonization with regard to trade policy, legal codes, tax
systems, ownership patterns and other organizational arrangements”
(SW,1995a:2). The author’s expressed that the goal of their paper was to
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“…document the process of global integration and to assess its effects on
economic growth in the reforming countries” (SW,1995a:2).
The author’s outline that “…while economic integration was increasing
throughout the 1970s and 1980s, the extent of integration has come sharply into
focus only since the collapse of communism in 1989” (SW,1995a:1). They go on
to describe 1995 as the year by which the previous global structure had given way
to the emergence a single dominant economic system. Though capitalism is not
mentioned directly early on in their narrative, it is described as being associated
with a common set of institutions, as exemplified by the World Trade
Organization and the International Monetary Fund, which the authors explain as
having the respective responsibilities of codifying the “…basic principles
governing trade in goods and services” and to the “basic principles of currency
convertibility” (SW,1995a:1). Sachs and Warner continue on to explain that the
direct products of these institutions, commonly found in the developing world and
post-communist environments, are the programs of economic reform having
“…as their strategic aim the integration of the national economy with the world
economy” (SW,1995a:2), entitled by the knowledge that “…international norms
play a large and often decisive role in defining the terms of the reform policy”
(SW,1995a:2). To this end, Sachs and Warner note that China’s commercial nod
toward democratic principles as demonstrated by its leader’s commitments95 to
international property rights and trade policy are, along with Russia’s economic
reforms, examples of the role of international norms in exerting reform pressure.
95
Presumably under the leadership of former president Jiang Zemin, protégé of Deng Xiaoping, and former
premier Li Peng, both of the People’s Republic. http://www.infoplease.com/encyclopedia/people/dengxiaoping.html. Accessed 6 November 2013.
164
The authors make the case that trade liberalization, or the international
opening of the economy, not only allows for the consequence of reform pressure
but that it is the “…sine qua non of the overall reform process”, and making it for
several reasons, “… convenient and fairly accurate to gauge a country’s overall
reform program according to the progress of its trade liberalization96”
(SW,1995a:2-author’s italics). They explain that such an analysis, lends
important resolve to the idea of world economic convergence by providing insight
on the dynamics between cross-country growth trends, state-led industrialization,
and private enterprise. While economic modeling, as well as long-held notions of
the development process, suggests that poorer countries should be able to catch up
to wealthier countries and thus lead to a global convergence of living standards,
the theorized trend does not appear to hold true (SW,1995a:3). In theory, poorer
countries should experience faster growth rates than countries that are already rich
since they can import knowledge and technology from the richer nations and
therefore learn, less expensively, overall, from hard won advancements. But
Sachs and Warner posit that this is not the case and that it is the trade regime
which readily explains this theoretical failure, such that “open economies tend to
converge, but closed economies do not” (SW,1995a:3), in other words “ the lack
of convergence in recent decades results from the fact that the poorer countries
have been closed to the world” (SW,1995a:3). Sachs and Warner are far from
96
The authors acknowledge that while trade liberalization is but one part of a complete reform package
which “almost always includes price liberalization, budget restructuring, privatization, deregulation, and the
installation of a social safety net” (SW,1995a:2,) they argue that as part of an economic policy trade
liberalization remains “…the most important” (SW,1995a:63) because it “…not only establishes powerful
direct linkages between the economy and the world system, but also effectively forces the government to take
actions on the other parts of the reform program under the pressures of international competition”
(SW,1995a:63).
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alone in the idea that a closed economy would limit the opportunities for
advantageous exchange, and in fact the research team anchor the constancy of
their focus on the trade regime to the venerable tenets of Adam Smith who
supported “ the power of trade to promote economic convergence” (SW,1995a:3)
97
. It is from this vantage that Sachs and Warner argue that the theorized
tendencies toward convergence should ensue with the spread of trade
liberalization programs (SW,1995a:3), that is as trade liberalization affects an
increasing number of formerly resistant economies, an increase in the instances of
faster growth relative to richer countries should follow.
Their approach to documenting this process of global integration and
showing that the trade regime is the driving factor consisted of measuring each
country’s orientation to the world economy, meaning whether the country was
open or closed to international trade, using cross-country comparable indicators of
trade openness to answer questions about the role and implication of the timing of
trade liberalization on subsequent growth and whether or not timing measurably
affected the onset of economic crises or lent insight as to how such crises were
avoided (SW,1995a:2). In highlighting this approach, Sachs and Warner discuss
the patterns and chronology of trade policy reforms from the perspective of world
economic history since 1850 (SW,1995a:3), which include a period of openness
and internationalization prior to the economic closures of the post-war period. It is
before this historical backdrop that the authors claim to demonstrate “the basic
97
The authors point out that “…Smith’s followers have stressed for generations, trade promotes growth
though a myriad channels: increased specialization, efficient resource allocation according to comparative
advantage, diffusion of international knowledge through trade, and heightened domestic competition as a
result of international competition” (SW, 1995a:3).
166
proposition that open trade leads to convergent rates of growth” (SW,1995a:4).
The remainder of the paper supports this demonstration with evidence of the
success of trade liberalization programs in both the developing world and in the
post-communist countries of Eastern Europe and the former Soviet Union. The
authors aim to show that strong adherence to reform leads to greater economic
performance than does weak adherence but that overall, “economic reforms lead
to a renewal of economic growth” (SW,1995a:4).
Summarizing History:
Liberalization and Global Integration before 1970
Sachs and Warner’s (or SW, henceforth) rendition of liberalization and global
integration prior to 1970 begins by evoking the predictions of Marx and Engels
who, in their Communist Manifesto, painted a picture of a world hollowed of its
resources and refashioned in the likeness of Western Europe. The research team
credits Marx and Engels with correctly sensing the “…unprecedented efficiency
of the industrial capitalism” that was emerging in their time and “…the decisive
global implications of capitalism” (SW,1995a:5). The authors also acknowledge
the foresight of the political theorists in capturing the eventual spread of
capitalism “…to nearly the entire world, in a complex sometimes violent process
that dramatically raised worldwide living standards but also provoked social
upheaval and war” (SW,1995a:5). The authors in no way suggest that the spread
of capitalism was smooth or painless, rather they do suggest that there was
167
confusion caused after 1989 by “…the flush of the communist collapse”
(SW,1995a:5) and in making that point occasion to remind the reader that
“…global capitalism had emerged twice, at the end of the nineteenth century as
well as at the end of the twentieth century” (SW,1995a:5-author’s italics). Sachs
and Warner continue the reference to the short-twentieth century in referring to
the peak of “…the earlier global capitalist system […] around 1910”, which the
authors suggest marks the first run of capitalism while “…the reemergence of a
global, capitalist market economy since 1950, and especially since the mid-1980s,
in an important sense reestablishes the global market economy that existed one
hundred years earlier” (SW,1995a:5)98.
In no uncertain terms Sachs and Warner describe the environment of the
prototypical economy and its related development activities under Western
European leadership as “the first episode of global capitalism” (SW,1995a:5),
approximating its commencement at 1840. In fleshing out their comparison of the
late twentieth century to the late 19th century, the research team points out that,
“the emergence of the first global system was based on the interaction of
technology and economic institutions” (SW,1995a:7), and in doing so highlights
the role of long-distance transport and communications in condensing
international networks then as they do even today. The authors narrate the spread
of railways across the world99 as, “often built with foreign finance” as it tracked
98
It is important to note that the authors’ peers also criticized the selected parameter. Anders Åslund wrote
that if, “…we focus on something other than trade liberalization, the parallel with the end of the nineteenth
century does not hold. Another key feature of the period before 1914 was financial stability and currency
stability, whereas our time is characterized by extreme financial instability” (SW,1995a:100).
99
Defined as “India, Russia, the United States, and Latin America” (SW, 1995a:7).
168
the prosperous spread of capital opening “vast, fertile territories for settlement and
economic development” (SW,1995a:7) along the way. Indeed innovation was key
as the authors demonstrate that not only was industrialization the critical
foundation of the mass production of military innovations, “particularly the
breech-loading rifle in the 1840s” (SW,1995a:7), which shifted the military
advantage to Europe, but medical advances as well. SW convey that malaria was
a key deterrent limiting, “the spread of European settlements, domination, and
investment, especially in Africa”100 but that the prophylactic use of quinine
“played a pivotal role” in redirecting development efforts in uncompromising
tropical environments (SW,1995a:7). Sachs and Warner state that unequivocally
the technological breakthroughs, “were as revolutionary in underpinning the
emerging global system as those of our own age” (SW,1995a:7) and in doing so
suggest that today’s “economic reform and the development of international
institutions” (SW,1995a:5) go hand in hand with “the instruments of violent
conquest and colonial rule” (SW,1995a:5) from a time when “Western European
powers wielded their superior industrial—and hence military—power to challenge
traditional societies around the world” (SW,1995a:6).
The authors highlight Japan as the only Asian/Near Eastern society that
was able to “mobilize social and political institutions to support market reforms,
implementing history’s first “shock therapy” reforms” (SW,1995a:6), while North
Africa fell prey to France in the 1830s and 1840s, China to Britain by way of the
Opium Wars from 1839-42, Russia to both Britain and France in a collaborative
100
Though Acemoglu, Johnson, and Robinson note that “…high population density made it less attractive for
Europeans to settle” (AJR, 2001:8).
169
effort during the Crimean War from 1854-56 and India to Britain by 1857
(SW,1995a:6).
By Sachs and Warner’s account, this period of warring and social
upheaval established the lines along which the global market, by the 1870s, had
begun to take shape with Western Europe and the United States constituting the
principal industrial powers (SW,1995a:6) followed by Germany, Russia, and
Japan to round out the early core of economic leaders in the world system. At this
time, as Sachs and Warner explain, Latin America, having emerged from fifty
years of “post independence upheaval, finally settled into market-based, exportled growth in the 1870s, based on raw materials exports and capital imports”
(SW,1995a:6) while Africa, late to development and lagging farthest behind in the
world-system remained under siege and, “was gobbled up by Western European
powers in an orgy of imperial competition that reached its height between 1880
and 1910” (SW,1995a:6). The authors note that trade barriers remained low in
Japan, especially, because of “unequal treaties” [quotes provided by SW], as well
as in the economies of Latin America and Africa between the 1860s and the start
of the First World War.
Beyond the human dimensions of proto-globalism, Sachs and Warner
convey that the economic institutions of the international gold and silver
standards101 spread to become “nearly universal” in the period of post-1870s
liberalism, eventually “embracing North and South America, Europe, Russia,
Japan, China, as well as other European colonies and independent countries”
101
Currency convertibility is a key driver in the sustainability of international trade.
170
(SW, 1995a:7). This period of economic integration also included institutional
harmonization closely modeled along the Napoleonic Code whereby “basic legal
institutions, such as business and commercial codes, were widely adopted” (SW,
1995a:8). So remarkable was this earlier period of economic integration and
institutional harmonization that the authors highlight the progressiveness of a
period that could cultured the rise of the Universal Postal Union (1878), which
Sachs and Warner exemplify as the first of a novel governance superstructure, the
multilateral institution102.
In comparing the conditions that gave rise to the avant-garde global
society of the nineteenth century with those of the twentieth century, SW explain
that just as the current trend of liberalism is highly integrative, the emergent
system was equally as impressive in its connectivity. They make the point that
"the adoption of a stable currency tied to gold was seen as a key step in the
strategy of international integration" (SW, 1995a:8) and while emphasizing that
currency convertibility was key to the success of earlier economic reforms, posit
that the strategy worked in tandem with a check on protectionism. Sachs and
Warner parenthetically qualify two exceptions whereby tariff rates were relatively
high in the United States and Russia but that overall "...a network of bilateral
trade treaties kept protectionism in check in most countries" (SW, 1995a:8).
They explain that the benefits of these treaties saw to it that, in Latin America, for
example, "liberal market regimes stabilized under both democratic (Argentina and
102
In fact, the UPU was so remarkable that scholars still encourage the study of the institution as an example
of advanced liberalism. For instance, Stanley Fischer tells of his LSE tutor, the late Leonard Schapiro,
suggesting that someone take up the study of the UPU as an example of a successful international
organization, though in the same breath he also notes that the UPU is more of a technical endeavor than
political suggesting that such an organization would be more neutral geopolitically (SW, 1995a:101).
171
Chile) and authoritarian (Brazil and Mexico) political regimes" (SW, 1995a:8)
and that in these four cases particularly, "overall growth of GDP and exports was
very rapid, indeed historically unprecedented" (SW, 1995a:8). Sachs and Warner
note that while under British rule India enjoyed similar export growth from 1870
to 1914 (SW, 1995a:8). The authors are clear in that they do not suggest that this
unprecedented success was easily accomplished, in fact, the authors reference
what appears to be the necessitated tricking of the Russians, by Count Witte into
aligning themselves with the emerging standard of currency convertibility103.
Additionally, Sachs and Warner explain that both Russia and Argentina, "nations
as diverse" as any, still "struggled to adjust their economic policies, and especially
their financial policies104, to attract foreign investment, particularly for railway
building" (SW, 1995a:8). Harkening back to the dynamic relationship between
economic institutions and technological innovation, Sachs and Warner remind
their readers that economic reform focused on export-led growth is largely
responsible for increased global prosperity measurable in terms of overall growth
of GDP.
103
SW, 1995a:8 referencing Owen (1994): “Autocracy and the Rule of Law in Russian Economic History”.
Paper prepared for John M. Olin Lecture Series. Harvard University, Russian Research Center (October).
Exact language as stated by Sachs and Warner is as follows: “In Russia, Count Witte recalled how he
outmaneuvered the conservative tsarist court to introduce the gold standard at the end of the nineteenth
century” (8).
104
Heinrich (2011) differentiates between monetary and fiscal policies such that monetary policies are
controlled and set by the larger international community whilst fiscal policies are directly set and controlled
by the domestic government.
172
Key Supporters: Williamson, Reynolds, and Keynes
To support their assertion, Sachs and Warner encourage their readers to examine
"a series of important papers" by Jeffrey Williamson and his collaborators105,
wherein they believe Williamson, et. al. has "…shown that the open international
system at the end of the nineteenth century produced an era of economic
convergence" (SW, 1995a:8). In Sachs and Warner's paper, they then describe
examples of Williamson's convergence explaining that as a result of rapid growth
Ireland and the Scandinavian countries, at the time characterized as peripheral
countries in Europe, experienced a narrowed gap in real wages, comparable to
their advanced neighbors, the U.K., France, and Germany (SW, 1995a:8). The
authors point out that on the same basis, former European colonies in Latin
America, Australia, and New Zealand "…similarly achieved convergent growth"
(SW, 1995a:8).
In addition to Williamson et. al., Sachs and Warner summon the expertise
of Lloyd Reynolds, who conducted a "…massive study of long-term growth in
forty-one developing countries" and who the authors allege arrived at a similar
finding that "…the open international economy of 1850-1914" that is, the period
of proto-liberalism prior to the start of what would become the short twentieth
century,"…was crucial in promoting the onset of rapid economic growth in much
105
Williamson (1992): “The Evolution of Global Labor Markets in the First and Second World Since 1830:
Background Evidence and Hypotheses”. Working Paper on Historical Factors and Long Run Growth 36.
Cambridge, Mass.: National Bureau of Economic Research (February); Williamson (1993): “Economic
Convergence: Placing Post-Famine Ireland in Comparative Perspective”. Discussion Paper 1654. Cambridge,
Mass.: Harvard Institute of Economic Research (September); O’Rourke and Williamson (1994): “Late
Nineteenth Century Anglo-American Factor Price Convergence: Were Heckscher and Ohlin Right?” Journal
of Economic History. 54(4):892-916.
173
of the developing world outside of Europe and North America" (SW, 1995a:8).
In particular, Sachs and Warner draw attention to not only the following notation
by Reynolds that "…politics apart, the main factor determining the timing of
turning points has been a country's ability to participate effectively in the trade
opportunities opened by expansion of the world economy", but also his
identification of "… a wide range of countries the were indeed able to avail
themselves of the burgeoning trade opportunities" including almost all of Latin
America (except Venezuela), much of Asia, and parts of Africa106.
Rounding out the expert triad, Sachs and Warner call upon Keynes
himself, whose opening in the pages of The Economic Consequences of the Peace
(1919) is described by the authors as, "surely the most famous evocation of this
remarkable international setting" (SW, 1995a:9). In the selected excerpt Keynes
extols the strides of commerce in a time, before being abruptly halted by the
commencement of the First World War in 1914, where the high-value Londoner,
having yet risen from bed, could enjoy imported tea over an advanced
communication system through which he made his desires known with every
expectation that they would be carried out accurately and without delay. He could
also, by the same means and expectations, "adventure his wealth in the natural
resources and new enterprises of any quarter of the world, and share, without
exertion or even trouble, in their prospective fruits and advantages". In the
selected excerpt Keynes also talked of the liberality of global transit (uninhibited
106
Asian countries listed in Sachs and Warner included "but not limited to Ceylon, Burma, Malaya,
Thailand, Japan, Taiwan, and the Philippines". African countries listed were Algeria, Nigeria, Ghana, the
Ivory Coast, Kenya, Uganda, Tanganyika, and Southern Rhodesia (SW, 1995a:9).
174
global exploitation) and the role of currency convertibility in his expectation of
freedom lest this man of wealth "consider himself greatly aggrieved and much
surprised at the least interference". Still what Keynes points out as being above all
else most important is the fact that such a man "regarded this state of affairs as
normal, certain, and permanent, except in the direction of further improvement,
and any deviation from it as aberrant, scandalous, and avoidable" (fragments
taken from Keynes excerpt in Sachs and Warner, 1995a:9).
The World After 1918
Keynes's statements were published the year following the first world war, and it
is understood by the authors, who in crediting Keynes's insightfulness, expound
that from this war experience Keynes rightly intuited a deviation that would come
to define the short twentieth century and thus see to it that "the Humpty Dumpty
of world markets and shared institutions would not soon be put back together in
the harsh peace that followed World War I" (SW, 1995a:9). By Sachs and
Warner's account, the harsh reality of the post-World War I economic
environment was punctuated by the failure of international gold and silver
standards, e.g. the fact that the "…financial underpinnings of the late nineteenthcentury liberal order were not reestablished" (SW, 1995a:7 on economic
underpinnings), in addition to the demise of British dominance. The United States
was still rather wobbly in its assumption of power at this time107, leaving Sachs
107
This unsteadiness is more fully explained by Prebisch’s account in his The Economic Development of
Latin America and Its Principal Problems (1950).
175
and Warner to declare that "…neither U.S. leadership nor international
cooperation took its place" (SW, 1995a:9) indicating among the international
constellation a vacuum was open. Latin America, being economically dependent
upon the stability of the dominant nations, was left in a particularly precarious
circumstance. Anticipating their forthcoming statements antithetical to Raul
Prebisch's position, Sachs and Warner, go on to explain that in this harsh peace
between the dominant nations "…the export-led growth of the primary producers
in Latin America and elsewhere was undermined by low and unstable
commodities prices in the 1920s, and then was devastated by the Great
Depression, which brought the utter collapse in the terms of trade, intense
protectionism in Europe and in the United States, and the end of capital inflows"
(SW, 1995a:10), i.e. investment and borrowing.
Sachs and Warner ascribe the collapse in the terms of trade to the eventual
undermining of the traditional political power of the landowners and mine
owners, particularly in Mexico, Argentina, Brazil, and Chile, and further
associating this collapse with the timing of revolutionary regimes that "…were
heavily influenced by the state planning of the communist and fascist regimes in
the Soviet Union and in Europe" (SW, 1995a:10). As the authors describe the
political environment, they convey that the stage was being set prior to World
War II, as "…state planning, authoritarianism, and militarism competed with
limited government and market-based economies" (SW, 1995a:10). According to
Sachs and Warner this competition was not only the catalyst for popular political
upheaval, but it was accompanied by economic and military upheaval that was
176
flaring up throughout the world, from the commencement of the Russian
Bolshevik Revolution in 1917 to the emergence of fascist states in Italy and
Germany in the 1920s and 1930s (SW, 1995a:10). Sachs and Warner hold that
the unexpected breakdown of the emergent capitalist system effectively
provisioned a justification for experimentation in the pursuit of prosperity. In their
words, despite the guidance of established economic theory relative to alternative
strategies, “…political leaders felt compelled to push for new and radical
experimentation” (SW, 1995a:10).
As Sachs and Warner narrate, the world was ripe for revolution after 1945.
In their words, "…the international economic system was in shambles.
International markets for trade in goods, services, and financial assets were
essentially non-existent. International trade was destroyed by currency
inconvertibility and a web of protectionist measures stemming from the Great
Depression and World War II" (SW, 1995a:11). In a global environment so
economically distressed, "…most of the world's population lived in countries that
chose fundamentally nonmarket (sic) economic strategies for development", such
that quantitatively, "…roughly one-third of the world's population lived in
socialist countries […] another 50 percent or so lived in countries where
governments proclaimed a kind of "third-way" between capitalism and socialism,
state-led industrialization (SLI)” (SW, 1995a:12- authors’ italics). While pointing
out that, "…the governments of almost all the developing countries adopted either
socialist or SLI policies after World War II" the authors equally emphasize these
outcomes as an aberrant state of the times. In making this case they expound on
177
the state of the world economy (as of 1994) writing that in 1960 "…around 20
percent of the world's population lived in open economies" but by 1993 "…more
than 60 percent of the world's GDP, and more than 50 percent of the world's
population, was located in open economies" (SW, 1995:12). They note
particularly that if both Russia and China (which were not included in the 1993
calculation) were to "…cross the threshold to openness108 […] the proportion of
openness by population would reach around 87 percent of the world's population;
and the proportion of openness by GDP […] around 83 percent of the world's
GDP" (SW, 1995a:12).
Not to underestimate the salience of such a revolutionary period in
economic history, Sachs and Warner dedicate nearly eight pages to an
illuminating summary of the forces that led the majority of the world109 down a
path of socialist policy making.
Upheaval: Natural Laboratories and Social Experimentation
The language of Keynes is supportive of Sachs and Warner’s advocacy of
capitalism as a historically superior economic system. Focusing on a selection of
excerpts from Keynes’s 1933 lecture on National Self-Sufficiency, wherein he
refers to economic changes as experiments, the authors make the case that the
108
Sachs and Warner add here parenthetically that trade reforms of 1995 may be instrumental in their
qualification as open economies.
109
Understood as the "…long-independent economies of Latin America as well as most of the postcolonial
countries of Africa, the Middle East, and Asia as they gained independence", including "…Eastern Europe
and the Baltic States", where in these cases socialist policies were a result of the Soviet Union's imposition,
rather than an organic upwelling of indigenous decision making (SW, 1995a:13).
178
“…collapse of faith in market institutions lived on to dominate most of the world
through much of the post-war era” and that this, in an ironic twist110, then justified
Keynes’s stressing of the fact that “…countries simply demanded the right to
experiment with new economic models, since the old ones no longer commanded
respect and assent” (SW, 1995a:11).
In threading references to the language of Keynes throughout the first
section of their paper, Sachs and Warner pay special mind to their summary of the
complex and myriad forces that reflected trade policy decisions, now
appropriately placed as “policy experiments”, quotes added by Sachs and Warner,
“(albeit enormously mistaken and costly ones111)” (SW, 1995a:13). In prefacing
this summary the authors also take great care to differentiate between policy
decisions and structural frameworks as the source of the social upsets during the
period. In their words, “…socialist and SLI policies should be understood mainly
as “policy experiments” […], rather than as inevitable consequences of the
economic structures of the countries in question” (SW, 1995a:13).
110
While the authors refer to Keynes’s fundamental reversal in belief, “…leading him to see aggregate
demand management and international institutions such as the IMF as linchpins of a renewed global capitalist
system” (SW, 1995a:11), a more subtle interpretation would find irony in that faith was lost in the emergent
capitalist system catalyzing a nearly global revolution yet faith was also required to venture into what Sachs
and Warner would deem to be exclusively experimental modes of management. So, while the “…genie of
experimentation unleashed by the collapse of faith” (SW, 1995a:11) supported alternative modeling, those
models would still require faith to endure.
111
In the authors parenthetical statement “...albeit enormously mistaken and costly ones” a cyclical reference
to Keynes’s language is made by secondarily referring to an excerpt included by Sachs and Warner wherein
Keynes explains that, “…a deliberate movement towards greater national self-sufficiency and economic
isolation will make our task easier [referring to making “…our own favourite experiments towards the ideal
social republic of the future” <
http://www.panarchy.org/keynes/national.1933.html> Accessed 23 September
2013., in so far as it can be accomplished without excessive economic cost” (Sachs and Warner, 1995a:11).
Italics added by MM. In Sachs and Warner’s statement the qualifier ‘enormously’ weights socialist and SLI
policies more heavily as an experiment even though it can be argued that Keynes referred to economic
systems in general, as of 1933, as experiments towards the ideal social republic from which our favorite
would be made and further, that the nature of experimentation was all the more illuminated by the failure of
capitalism.
179
Categorically segregated into historical reviews covering the international
economic forces, macroeconomic policies, intellectual beliefs, the incentives of
state building, as well as the internal political economy of SLI strategies in
developing countries Sachs and Warner present their views on the collective
drivers of socialist popularization in the post-World War II period. The authors
review these forces in anticipation of their greater presentation on the weight and
role of trade regimes and economic reform.
International Economic Forces
As explained earlier currency convertibility was depressed globally as a result of
the second great war, inducing a significant level of skepticism among the
developing nations regarding their trading prospects; termed and accepted by a
“…wide range of economic analysts” as well as by Sachs and Warner as "export
pessimism" (SW, 1995a:14- authors’ quotes). While the authors acknowledge
such export pessimism as a rational response to international pressures112 they
nevertheless find that the response is unsatisfactory in explaining "…the behavior
of about one dozen countries (mainly in Central and South America, […]) that
were relatively open in the late 1940s, but closed up during the 1950s and early
1960s", known as the "late protectionists" (SW, 1995a:14- authors’ quotes),nor
does it explain "…the persistence of closed policies in developing countries" even
after the rich countries, namely "the United States, Canada, the European
112
The authors note Rodriguez (1974) who found that where countries use trade quotas to shift terms of trade
in their favor, most often the Nash equilibrium leads to no trade since the optimum response of each country
is to tighten their own quotas in response to everyone else doing the same. Rodriguez (1974) "The NonEquivalence of Tariffs and Quotas under Retaliation". Journal of International Economics. 4(3):295-98.
180
Community, and Japan" having adopted more outward policies and re-stabilized
currency convertibility by the 1960s (SW, 1995a:14). Ultimately Sachs and
Warner did not accept export pessimism as a sufficient explanation for neither the
revolutionary attitudes commonly observed in Central and South America, the
liberalization delays, nor the resulting marked persistence of closed trading
policies (SW, 1995a:14).
In seeking answers to these concerns the authors recognized that even
though an interaction between currency convertibility pressures and trade policy
designs created an environment of export pessimism, which the authors allege
reasonably catalyzed a post-war rash of development closures therefore setting the
floor for socialist policies, only a deeper analysis of concomitant factors would
appropriately outline a full explanation regarding the persistence of such policies.
Macroeconomic Policies
To Sachs and Warner the importance of an established regime of currency
convertibility and its influence on trade practices can hardly be overstated. And
still, deliberate closures via trade policy were not the only way global market
restrictions were effected. As the authors articulate matters, "…overly
expansionary macroeconomic policies […] (could also induce) a rise in the
relative prices of import-competing goods, a reduction of imports, and a reduction
of exports" (SW, 1995a:16).
181
Historically, the tightening of trade, which in aggregate drove export
pessimism among developing countries, occurred with wartime income flows113,
exacerbated by "…domestic price controls, foreign exchange controls, and
extensive rationing of goods" (SW, 1995a:16), created a reflexively complex
network of interactions that amounted to a significant amount of money in the
system which ultimately needed to be removed to prevent another round of
inflation-induced depression and currency inconvertibility. As the authors
explain, "…by the end of the war, there was an enormous overhang of nominal
money balances in most countries" and qualify that, for example, "…in the British
Commonwealth, […] the Indian government held large reserves of sterling which
were restricted in use according to imperial monetary policy" (SW, 1995a:14).
Sachs and Warner explain neoclassical prescriptions to such circumstances in
that, "…the restoration of exchange rate convertibility required either a monetary
reform114 (to remove the monetary overhang); a temporary rise of prices and a
currency devaluation (to absorb the monetary overhang through inflation); a long
period of real economic growth to raise the demand for nominal money balances;
or some combination of all three" (SW, 1995a:15, authors’ parentheses).
Indeed inflation is unavoidable in any case, and Sachs and Warner call
upon Milton Friedman's argument, long since a proponent for the unrestricted
freedom of commerce, that convertibility is the monetary basis of free trade
therefore the importance of both the basis (free trade) and the channel (currency
113
Sachs and Warner refers to this line of finance from the central bank to governments for the purposes of
making wartime purchases, "inflationary finance" (SW, 1995a:14).
114
That is, action on the part of international donors.
182
convertibility) is not to be understated in the urgency of its coordinated institution
as less than, "… automatic[ally] and immediate[ly]" (SW, 1995a:15). In
furthering currency convertibility the authors advocated the primacy of shock
therapy, as Friedman suggests, to encourage growth and yet remain aware of the
resistance of such a doctrine as the authors express that at the time, "…most
countries shied away from the temporary inflationary consequences that would
have accompanied such a move, even though they would have been one-shot
rather than ongoing" (SW, 1995a:15). Sachs and Warner suggest that the
hesitation of Europe and many other parts of the world to comply delayed the
"…return to convertibility […] for more than a decade after World War II" (SW,
1995a:15).
In this same vein, the authors remark that for some countries the hazards
of delay were even longer lasting. Citing India as an example, and in anticipation
of observations made later in the paper, the research team identifies that weak
attempts at liberalization were easily reversed under populist pressures and the
ideology of state control115. Ultimately, "…the initial macroeconomic pressures
delayed the establishment of convertibility, while ideology and interest-group
lobbying cemented the postwar polices of inconvertibility, licensing, and
protection" (SW, 1995a:15) and in particular, populist fiscal policies116 in Latin
American countries "…repeatedly undermined the commitment to currency
convertibility" (SW, 1995a:15) and allowed the emergence of significant import
115
To this end Sachs and Warner direct readers to the work of Tomlinson (1992): "Historical Roots of
Economic Policy". In Foundations of India's Political Economy: Towards and Agenda for the 1990s, edited
by Subroto Roy and William E. James, 274-308. Newbury, England: Sage Publications.
116
Policies effected at the country level and therefore are more vulnerable to populist revision.
183
controls through the rationing of foreign exchange117 (SW, 1995a:15). These
actions essentially closed the economy and historically induced rationally
retaliatory responses118.
Intellectual Beliefs, State-Building and Political Economy
In the ordered fashion of a warning shot, Sachs and Warner sum up the fecund
ideological substrate that supported the populist movements against free-market
principles, and in turn, both illuminate and orient their own ideological
commitments in clear juxtaposition. The authors also establish their views on the
relationship between ideology, the centrality of trade policy in state building, and
geopolitics.
Returning to the premise of the short twentieth century, the authors
explain that the nearly worldwide adoption of State-Led Industrialization and
socialist strategies was as much about timing as it was about ideology and about
alternatives in general; in the context of Milton Friedman’s ideas, this is not
illogical. It was he who stated of the role of crises in mitigating change, that
"When […] crisis occurs, the actions that are taken depend on the ideas that are
lying around" (Friedman, 1962)119. Indeed given the aftermath of two world wars
and the Great Depression, 1945 marked both the beginning and the end of a
closely cultivated social order as the world was in the throes of crises with the
117
Defined and qualified on page Sachs and Warner,1995a:25 as the black market premium (BMP).
Such as bans, embargoes, coups, and other forms of economic-military interventions rationalized as
essential for national security.
119
Full quote reads: "There is enormous inertia—a tyranny of the status quo—in private and especially
governmental arrangements. Only a crisis—actual or perceived—produces real change. When that crisis
occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic
function: to develop alternatives to existing policies, to keep them alive and available until the politically
impossible becomes politically inevitable" Capitalism and Freedom Preface (1982 ed., pg. ix).
118
184
only popularly acceptable resolution appearing to be the direct opposite of the
assumed cause. Consequentially, the liberal worldview suffered on the vine as
“…seemingly indefensible” (SW, 1995:16). Indeed, the authors call upon the
foresight of J.A. Hobson and Lenin in noting that "…capitalism had proved to be
rapacious and violent", as well as Keynes in his own subscription to a similar
view in 1933 that "…capitalism was inherently unstable and needed the steadying
rudder of the state" (SW, 1995a:16). The extreme the anti-capitalist sentiments
allowed the spread of Marxist notions "…that profits were the result of the
exploitation of labor" which proved to be an "…extraordinarily enticing
explanation for elites in the poorer countries, who could justifiably view the
poverty of their own nations as the result of degradations committed by the richer
nations" (SW, 1995a:16).
The combined intellectual currency of Marx's notions in concert with the
fact that "…Keynes had seemingly demonstrated capitalism was inherently
unstable" buttressed the revolutionary idea that the role of the state, under such
circumstances, was to lead a "…nearly full nationalization of future investment"
(SW, 1995a:16)120. Amid the contributions of both renowned theorists, along with
Hobson and Lenin came the theories of modernization via Rosenstein-Rodan,
Gershchenkron, and Prebisch and Singer121.
120
Though the authors treat socialism as a revolutionary response to the failure of capitalism, at least in the
developing nations, they also remind the reader that in fact nationalization had already been attempted in
"…many other Western European countries, and not just in the developing and socialist worlds", for example
under Charles De Gaulle of France and Clement Atlee of Britain "…it should be remembered that banking,
insurance, and much heavy industry were nationalized" (SW, 1995a:16).
121
While remaining unnamed, in contrast to the other highly influential intellectuals listed alongside their
contributions, the theory associated namely with Prebisch of Prebisch and Singer nevertheless was attended
185
By Sachs and Warner's account, the views of Rosenstein-Rodan and
Gershchenkron were related in that Rosenstein-Rodan developed the theoretical
strategy of the "big push", being the belief that "…coordinated, large-scale public
investment was necessary to make a breakthrough to modernizing
industrialization", and Gershchenkron argued that just such an investment was
historically supported by the record of nineteenth-century Europe "…in which the
countries lagging in industrialization increasingly relied on the state to catch up
with richer countries" (SW, 1995a:16). Conversely, Sachs and Warner suggest
that Rosenstein-Rodan's "big push" concept was perverted in its combination with
a characteristic of the Latin American experience, the previously discussed,
export pessimism, which produced, "…the highly influential view that open trade
would condemn developing countries to long-term subservience in the
international system as raw materials exporters and manufactured goods
importers" (SW, 1995a:17). In SW’s narration, comparative advantage as argued
by "…the Economic Commission of Latin America (ECLA) and others, was
driven by short-run considerations that would prevent raw materials exporting
nations from ever building up an industrial base" and therefore justified the
protection of infant industries as vital to developing away from "…their over
dependence on raw materials production" (SW, 1995a:17). Sachs and Warner
note that these views were highly prolific throughout the United Nations system
and were even sanctioned by GATT122 in 1964. Sachs and Warner convey the
injustice of what the GATT sanction implied in their expression of the following:
to with strong remarks. Additionally, given the audience of the Brookings Papers on Economic Activity, this
cavity was surely observed.
122
General Agreement on Tariffs and Trade
186
"…[W]hile the developed countries should open their markets, the developing
countries could continue to protect their own markets. Of course this "right"
(quotes-SW) was the proverbial rope on which to hang one's own economy!" (SW,
1995a:17)123. Sachs and Warner follow their declaration to profess that "…more
radical anti-capitalist views fueled Marxist-inspired revolutions in nearly two
dozen countries during the postwar period" (SW, 1995a:17). In support of their
views Sachs and Warner call upon Forrest Colburn who,"…offers a masterful
evocation of the underlying symbols common to these revolutions" by putting
"…great stress on the role of ideas, rather than the political economy in
motivating revolutionary leaders" (SW, 1995a:17). According to Colburn,
"…[T]he trajectory of contemporary revolutionary regimes illuminates why, at
least in poor countries, the choices of political elites are so consequential. In
many such countries, political elites are not significantly constrained by the
institutions and norms of government, or by civil society. Thus, the time for
experimentation and implementation of ideas can be dangerously compressed"
(Colburn, 1994:103, as cited in Sachs and Warner, 1995:17). That is to say the red
tape of bureaucracy embodied by either rule of law states or rule-of-state laws124
dramatically slows the spread and implementation of revolutionary fires. This is
123
Such rights, as Todd Moss, author of African Development (2011) explains, while clearly contentious and
especially debatable as to their effectiveness, are also known by their function as “special poor country
provisions” which allow LDCs to “…maintain trade barriers they believe to help support their development
needs and strategies” although it will cost them since this LDC-opt out in practice means “…these countries
are excluded from some of the main decision making since they have made themselves irrelevant” (Moss,
2011:225), that is to say alternative development strategies are punitively discouraged.
124
Robert Cooter, as cited by Karla Hoff, defines a Rule of Law State as a state governed by laws that mirror
social norms, and defines a Rule-of-State Law as states where laws are imposed and enforced from above.
Hoff, K. (2001). “Beyond Rosenstein-Rodan: The Modern Theory of Coordination Problems in
Development”. In Proceedings of the Annual World Bank Conference on Development Economics. 2000 (pp.
145-88). Referencing Cooter, R. "The Rule of State Law and the Rule of Law State: Economic Foundations
of the Legal Foundations of Development". Annual World Bank Conference on Development Economics.
1996. Washington, D.C.: World Bank.
187
especially so given the well-honed suppression capabilities associated with the
"tyranny of the status quo"125 which so settles the crevices of pre-revolutionary
conditions.
The Centrality of Trade Policy in State Building
In making the case for the centrality of trade policy in state building, Sachs and
Warner enlist the likes of Eli Heckscher, Alexander Hamilton, and Friedrich List
who all subscribed to the notion that industrial policies are a "crucial mechanism
by which new nation states consolidated their political power both relative to
competing domestic interest groups (such as guilds and local gentry) and other
nations" (SW, 1995a:18). SW presented several contemporary cases exemplifying
a rationale that remains unchanged among the headliners and new comers alike.
The authors suggest that in mimicking the established industrial
economies, the founding fathers of the post-world war II newly independent
industrialized economies, namely Sukharno of Indonesia, Nehru of India,
Nkrumah of Ghana, and Nyerere of Tanzania, "were as concerned about the
political consolidation of power as they were about economic strategy per se"
(SW, 1995a:18). In the authors’ view this was especially the case
when,"…countries used such policies to build up a military-industrial
establishment" (ibid:18), referencing particularly Russia, the Soviet Union, as
well as Nehru's India and Nasser's Egypt as examples.
125
Refer to footnote 25 for details.
188
Political Economy
Sachs and Warner explain that geopolitically, trade policy is a good deal more
than the "outcome of the relative political strengths of various factional, class, or
sectoral interests" (SW, 1995a:18) or the given understanding of interest-group
politics. The authors posit that while such political considerations have been
important, they have been more so in "the perpetuation of policies [rather] than in
their onset" (SW, 1995a:18). This is to say that the construction of popular
consensus behind the policies more greatly influenced the longevity of the SLI
policies than did merely the interest-group view of trade policy. In support of this
position, Sachs and Warner call upon John Waterbury126 who showed that
"ideology, state building, and geopolitics, rather than domestic interest groups,
were the fundamental forces that initially led to SLI" (SW, 1995a:19).
Macroeconomic Dimensions of Socio-politics
To capture the more purely economic aspects of geopolitical environment,
Sachs and Warner refer to the basic Heckscher-Ohlin-Samuelson (HOS) and
Ricardo-Viner (RV) models of trade in order to make suggestions about interest
groups in terms of favoring either free trade or trade protection (SW, 1995a:20).
The authors refer to the way in which the models complement each other since
both utilize several characteristics of the factors of production (capital, land,
labor), i.e. particularly their abundance or scarcity preference and autarkic or trade
favorability (HOS), as well as their immobility (RV), to explain what specific
126
Sachs and Warner refer reader to Waterbury (1993) Exposed to Innumerable Delusions: Public Enterprise
and State Power in Egypt, India, Mexico, and Turkey. New York: Cambridge University Press. Pgs. 69-70.
189
preferences of interest groups are implicated and under what circumstances. Sachs
and Warner explain that, Ronald Rogowski and others have found that the HOS
model holds that a closed trade regime gives way to an open regime following the
abundant factors of production (land and labor) and consequentially reduces the
real income of the scarce factors of production; implying that relatively scarce
factors of production would favor autarkic policies. For instance, if land is
abundant, landowners would favor open trade (“to raise the export prices of
foodstuffs”, (SW, 1995a:20 [therein raising domestic prices]) while workers
would favor closed regimes (“against the import of labor intensive goods and the
export of foodstuffs”, (SW, 1995a:20). Conversely, if labor is abundant, the
workers would favor open-trade (“to benefit from the export of labor intensive
goods and to import inexpensive food, (SW, 1995a:20) while landowners would
favor closed regimes (“to raise the price of foodstuffs in the local economy, (SW,
1995a:20)127.
Complementarily, the RV theory picks up to suggest a consequence of
factor immobility between sectors. Whether factors can move and take advantage
of opportunities has an affect on interest preferences to the extent that when
capital or labor is liberalized, self-interested protectionism is decreased,
127
A note on labor abundance: The presence of people does not necessarily make labor abundant. Industries
credit labor as abundant or scarce based on the level of education and training relevant to industrial needs.
For example, an electronics manufacturer would find labor abundant in Taiwan rather than in Kenya where
land is not only absolutely more abundant, but relatively more abundant as advanced technology-trained
labor is scarce. So countries with undereducated, undernourished workers will likely favor autarkic
management of a land-based economy while a country with educated or trained workers will likely favor a
free-market managed industrial economy. Whether the upper classes in either scenario consist of wealthy
landowners or industrialists, the service sector tends to remain relatively stable over time as wealth
accumulates over time.
190
irrespective of the relative abundance or scarcity of land (immobile), as both
factors are unhindered in locating and taking advantage of alternative
opportunities. This holds except when place-based investments have been made
on the parts of capitalists and workers. Under these conditions capitalists and
workers will then lobby on behalf of their vested interests, at times even unifying
to do so for collective interests, while using ‘Chinese wall’ tactics to lobby for
competing interests.
Such was the case in Latin America when, given the ripeness of the time,
terms of trade collapsed in the early 1930s, to the extent that "wealth and power
of the free-trade supporters, the large landowners and mineowners, [had been]
sapped by the collapse of the terms of trade" (SW, 1995a:19) these smaller
landowners were so much better able to advantage themselves that “a domestic
import-competing sector arose naturally in the 1930s and 1940s” (SW, 1995a:19).
Yet fortunes were primed to change in the immediate post-war era leading “the
import-competing sectors, which now faced the threat of renewed trade
competition, [to] add their voices to other forces lobbying in support of state-led,
autarkic policies” (SW, 1995a:19). More simply, the smaller landowners, vested
their interests with the large landowners with whom the supportive authoritarian
government was already vested to the end of promoting free trade128. Sachs and
Warner explain that the formulation of the timing and circumstances behind the
installation of state-led, autarkic policies supportive of free trade principles can be
128
This is understood by the verbiage “free trade, […] was typically promoted by authoritarian governments,
siding
with large land owners and mine owners” (SW, 1995a:21).
191
calculated under the combined rubric of the basic Heckscher-Ohlin-Samuelson
(HOS) and Ricardo-Viner (RV) theories.
Given a mainly agricultural and extractive economy, the authors elaborate
that under HOS, large landowners and those with vested interests would favor
free trade over autarky because land is the abundant factor of production. When
land is the abundant factor the real income of workers (the scarce factor of
production in this case) is reduced which incentivizes them to be in favor of
autarky; presumably, because free trade might bring in mechanization or simply
better trained, more experienced workers. In addition to the implication of HOS,
Sachs and Warner point out that the relevant highlight of the RV theory, is that
“firms with sunk capital in the import-competing sector, and workers with skills
specific to that sector, should tend to favor protection of the sector” (SW,
1995a:20). Collectively then, the condition under which large landowners, small
landowners, and related workers would all be unified in their support of
protection (autarky) would have been in the immediate post war era as the threat
of renewed trade was raging, at least this was the case in Latin America. Taking
the nature of interest group politics into consideration, this behavior is by no
means unusual as the authors cite the case of Nehru’s India where, “many key
industrial backers […] had vested interests” (SW, 1995a:19) as well129.
129
This thread regarding corruption is picked up in the next sub-section on Socio-cultural Dimensions of
Geopolitics
192
In applying the two theories, SW observed Ronald Rogowski’s130 work, of
which they claim found that the HOS/RV theories held in its combinative ability
to describe the relation of Asian economies to Latin American and African
economies. Where in Asian economies land is the scarce factor (and labor for
advanced manufacturing is abundant) as opposed to Latin America and Africa
where land is abundant (and labor for advanced manufacturing is scarce). The
implied pattern of the operation of free trade within in these geographic
regions131, and relative to each other is significant for at least two reasons. Firstly,
the point of delineation between internal free trade advocates and protectionists
(at the national domestic level) is the same as between these regions at the global
level. Meaning that a theoretical line dividing the economies of these global
regions, and the issues along that line at an international level, would remain the
same line and attendant issues, that divide protectionists and free trade advocates
at the domestic, nation-state level to culminate in a pattern where the outcome of
free-trade interests are inverse about each other relative to the national and
international levels of economy.
For example, taking the rhetorical context of domestic party-politik and
global internationalization, the middle-income countries and domestic middleclasses132 occupy the same positions about the theoretical delineation where class
is the theoretical delineation (producers and consumers). This relation is aptly
130
From authors see: Commerce and Coalitions: How Trade Affects Domestic Political Alignments. 1989.
Princeton,
N.J.: Princeton University Press.
131
Here I am aggregating the Latin American and African experiences for the limited purpose of illuminating
the
pattern.
132
Whatever the income-level of the country where a middle-class exists.
193
characterized by Sachs and Warner's assessment of Rogowski’s work product,
since the conditions under which free-trade is favored by workers within Asia are
the same conditions under which free trade is also favored by landowners within
Latin America/Africa. This means that free trade prevails where opportunities are
conditioned for profit optimization. Inversely, if comparing the economy of Asia
to that of Latin America/Africa, by the same accordance region to region, one
would find that free trade would less dramatically rest with Asia's labor-intensive
economy while it would otherwise need to be forced upon Latin America/Africa's
land- or resource-intensive economy where the conditions for profit optimization
are more often catered to and thus captured and promulgated by the elite rather
than by the larger working classes as in Asia.
The second significant feature is of a more formally linguistic nature. The
inverse behavioral pattern of the applicability of free trade rhetoric, suggests that
the effectual meaning of democracy is dependent upon context, while the words
used to describe or insinuate democracy133, remain the same irrespective of
context. For instance, even though protectionist policies are associated with what
is nominally understood as non-democratic regimes or closed, rather than open,
free-trade regimes, Sachs and Warner describe Latin America during a period
“…where from the 1950s to the 1980s protectionism tended to be favored during
democratic periods” (SW, 1995a:21) whereas liberal democratic principles were
effected by the affluent.
133
Related to the concept of free trade by the characteristic word “liberty”, and phrase “pursuit of happiness”,
coupled to give free-trade as the unrestricted pursuit of happiness. Of course access and means as the tools of
power has everything to do with an ability to pursue happiness even if restricted, so certainly an unrestricted
pursuit would call more upon power than even liberty itself, which is merely open space, affords.
194
Given the implications of the HOS-RV theories and the outcomes
established by Rogowski, the authors drive home the point that, "it might seem
that a labor-intensive economy would tend to lean more readily toward free trade
than would a land-intensive (or resource-intensive) economy" (SW, 1995a:21).
On the systemic level, economic integration, institutional harmonization and
related control measures are crucial in the management of this extremely tight
knot of interaction between free-trade proponents and implementation specialists
for the developing nations, as well as domestic managers in Asia, Latin America,
and Africa134.
Essentially, the drive to manifest global integration begets the need for
control of global integration. To this effect the authors grant that, "[o]f course, the
relative power of the various interests to influence trade policy will depend on a
myriad factors, including the capacity of competing groups to organize politically
and the institutions for political competition (for example, elections or military
rule)" (SW, 1995a:20-authors’ quotes), where elections can either support or
suppress free trade policies and thus affect the flow of capital, or where military
rule can either support or suppress labor mobility. For example, the authors note
that “…some labor-intensive economies, such as the South Asian countries […]
were long protectionist, while labor-scarce Chile became the first sustained free
trader in Latin America (although, notably, under a military regime)” (SW,
1995a:21-authors’ quotes). These, in fact, are additional instances of outcomes
134
Here world-system analysis does well in the study of global management in terms of global north-south
power relations, sovereignty and drivers of economic independence.
195
counter-indicative of those expected normally from Rogowski’s application of
HOS/RV.
Socio-cultural Dimensions of Geopolitics
With continued emphasis on Latin America and Africa, Sachs and Warner
conveyed that urban density is a volatile factor affecting free trade. Having earlier
showed that historically, postwar governments trended toward a propensity to
revolt, the authors make the point that "…political power has been
disproportionately concentrated in urban areas, thereby adding the political weight
of labor relative to landowners and turning the trade regime more protectionist"
(SW, 1995a:21). Under such pressure, they explain that, "…postwar governments
have tended to respond more to labor interests than landowner interests". Given
the implications of the HOS-RV theories and the outcomes established by
Rogowski this would be understandably necessary for management reasons such
as the consensus-building "…search for votes, or the fear of labor unrest, or the
urban bias promoted by government sector workers" (SW, 1995a:21), though the
latter is presumably a reference to bureaucratic corruption. In this regard Sachs
and Warner link deeply entrenched corruption, associated mainly with Latin
American and Indian autarkic regimes but especially with sub-Saharan African
leadership, where in fact the previous imperial infrastructure, in this case the
"…wartime controls on agriculture, became postwar mechanisms of a profound
196
anti-export bias" (SW, 1995a:19)135. In a presentation that anticipates the authors'
conveyed sentiment of egregiousness toward the African practice of
monopsony136 Sachs and Warner called upon an illuminating excerpt by author of
West African Trade137 P.T. Bauer, to assert that a long-held sub-Saharan African
export bias is tied to an ironic twist of historic structural utility.
Lending a "brilliantly explained […] critique of African agricultural
monopoly boards (SW, 1995a:19) Bauer explains the British wartime policy
objectives after which African marketing boards modeled their own efforts. In
three parts, the first was to "…deny supplies for the enemy and secure them for
the Allies, particularly the United Kingdom", the second was "…a prevention of
the collapse of the local price of cocoa" while still the third principle objective
"…was to increase the export of groundnuts and oil palm produce after 1942"
(SW, 1995a:19). Additionally Bauer characterizes the "…machinery of export
control” for which the following principle elements were key in the wartime
policy objectives of Britain, in the first being the "…licensing of exports to direct
these to specific destinations […] the second was statutory monopoly in the
principle exports" followed by the third which "…was a system of quotas in the
purchase of export produce" (Bauer,1954:256 as cited by Sachs and
Warner,1995:19).
135
This would not be the first time colonial structures have been grandfathered in, such is the case with the
Berlin-derived bordering system, replete with arch-nemesis mash-ups that still rage on today, however
evolved in current times. An example would be the Kikuyu and Luo peoples of Kenya, East Africa.
136
A buyer’s monopoly wherein rather than a large seller, a large buyer— in this case an African
government— controls a larger proportion of the market and drives prices down.
137
Bauer, (1954). West African Trade: A Study of Competition, Oligopoly, and Monopoly in a Changing
Economy. Cambridge: Cambridge University Press.
197
SW then continue on with Bauer and turning to Robert Bates138 for a
further explanation of how "…these original intentions were later subverted into
very different aims" (SW, 1995a:19)139. Those aims are recognized throughout the
authors' currently referenced work as the marks of autocratic socialism being
"…the expansion of bureaucratic power; the enhancement of government tax
revenues through the monopoly purchases of agricultural output at below-market
prices; and the tilt of the internal terms of trade in favor of urban (largely
government) workers, and away from peasant cultivators" (SW, 1995a:19).
Additionally, in many cases, a centrally located and corrupted government
apparatus is behind the wielding of these subverted aims to the detriment of its
poor masses. Still even this is not always cut and dry as the authors do point out
that “…the sub-Saharan African countries relied extensively on export
monopolies on foodstuffs, in part to maintain low domestic prices of food for
urban residents” (SW, 1995a:26) i.e. themselves, and in the case of urban
migration, those coming from the rural areas to find work, one hopes.
Concluding History
In having established a review of liberalization and global integration prior to
1970 from the perspective of the short twentieth century, including special
138
Bates (1988). Toward a Political Economy of Development: A Rational Choice Perspective. Berkley:
University of California Press.
139
It is important to note that this type of subversion is an example of a non-linear externality associated with
the special problems of development under non-parity conditions. The historical problems in modeling such
issues is a topic taken up later in this thesis as it has direct bearing on Sachs and Warner’s linear
prescriptions.
198
emphasis on the tripartite world after 1945, the authors go on to explain how the
timing of trade policies was influenced by this history.
Sachs and Warner have shown how labor interests are related to free trade
adoption and trade liberalization in the developing world but hold that labor
interests and interest group politics are far from the determining factors since
neither are decisive enough to be so, despite the fact that on these grounds
"…trade liberalization would come more readily in Asia than in Latin America or
Africa (SW, 1995a:21). In positing trade openness as the more qualified factor for
consideration, Sachs and Warner explain how their method of classification by
timing of trade liberalization is poised to provide valuable insight to the
relationship between open trade and convergent rates of growth, therefore
speaking to the larger debate on free trade and global convergence.
Sachs and Warner on the Classification and Timing of Trade Policies
Without a doubt the pre-war economic history140 juxtaposed against the post-war
forces previously discussed could only have marked a great rift in time for the
interaction between global backwardness and cosmopolitan society. By the
authors’ own classification “…seventy-eight developing countries outside of the
Soviet bloc chose some form of inward-looking development strategy in the
postwar period” (SW, 1995a:21) and only by way of painstaking effort, by 1994 a
little less than two-thirds of these countries were open economies, was this
140
Sachs and Warner focus on the period 1850-1914.
199
circumstance “…gradually reversed over the next forty years” (SW, 1995a:21),
beginning in the 1940s and 1950s.
The following section summarizes the authors’ explanation of how the
“…chronology and patterns of trade policy reforms” (SW, 1995a:3), that is, how
the classification and timing of trade policies can be understood in its role of
prolonging the desired economic equilibrium globally or in other words sustaining
what “…postwar liberalization has painstakingly restored”; that being “…an open
trading system somewhat reminiscent of the world in 1900” (SW, 1995a:3)141.
Sachs and Warner describe the process of liberalization as “…parallel” between
the developing countries, which would have been modernizing via SLI policies,
and the developed economies, which approached modernization via cooperative
free-trade. In already hinting at the benefits of strong and early reform, the
authors convey that integration had been more easily instituted among the
developed economies and thus arrived earlier in the 1950s and 1960s rather than
in the 1980s and 1990s as was the case for the developing countries (SW,
1995a:22).
141
Despite the insidiousness of the statement and yet to the authors’ great credit, they note the “…crucial”
difference between now and then being primarily that, “…developing countries in Africa and Asia are now
sovereign, rather than colonies of Western powers” followed secondarily by the fact that now more than ever
“…the world economy is increasingly supported by international commercial law agreed to by individual
governments and implemented with the support of international institutions such as the WTO and the IMF”
(SW,1995a:3). It is not even debatable whether developing countries in general, but especially in Africa, are
economically sovereign, most are not as they are indebted to the Bank, the Paris and London Clubs, and the
IMF and are faced with accepting short-run development strategies in order to pay off the debts.
200
Cross-country Indicators of Trade Openness
The authors classified a country as having a closed trade policy if one of the
following five characteristics (SW, 1995a:22) were met:
1. Nontariff Barriers (NTBs) covering 40 percent or more of trade.
2. Average tariff rates of 40 percent or more.
3. A black market exchange rate that is depreciated by 20 percent or more relative
to the
official exchange rate, on average, during the 1970s and 1980s.
4. A socialist economic system (as defined by Kornai142).
5. A state monopoly on major exports.
An open economy is determined has having none of the five qualifying conditions
(SW, 1995a:24).
In a series of tables143 the authors delineate the total dataset by: date of
trade liberalization144, those qualifying economies that were initially closed in the
post-war period but then opened by 1994, those qualifying economies that were
still closed by 1994, those economies qualifying as ‘temporary liberalizers’145,
142
From authors see: Kornai, Janos. 1992. The Socialist System: The Political Economy of Communism.
Princeton, NJ.: Princeton University Press. (Table 1.1)
143
These tables cover 8 “developing economies that have always been open”, 43 “developing economies that
had opened by 1994 after initial closure”, 35 “developing economies that were closed at the end of 1994”, 22
“developed economies with year of opening”, and 26 “post-communist countries with year of opening”,
respectively. The 118 countries mentioned come from table 6.
144
“…taken to be the year from which the economy is open continuously through the end of the sample
period, 1994” (SW,1995a:24).
145
Where “…the date of opening is taken to be the date at which the openness criteria are finally met without
subsequent reversal up to 1994 (in effect ignoring the temporary episode of openness)” (SW,1995a:24).
201
those developed economies along with their year of opening, and the
liberalization record of the post-socialist European economies146.
Sachs and Warner judged the timing of the shift from closed to open trade by
examining the time series of tariff and non-tariff barriers through an independent
literature review (SW, 1995a:24).
Since there are many ways to effect a closed economy the authors also
provide basic trade barrier data147 for 118 developed and developing countries, for
the mid-1980s148 (except where indicated). The following data categories were
chosen “…in order to cover all of the major types of trade restriction” (SW,
1995a:25) average tariff, quota coverage, black market premium for the 1970s,
black market premium for the 1980s, export marketing board, and socialist (SW,
1995a:27). Where tariffs are considered an overt trade policy (SW, 1995a:25),
diametric to laissez faire, central planning—which is covered under the
socialist149 header—is considered systemically subversive therein qualifying it as
a closure measure. Because “…export controls are symmetrical with import
controls in their effects on closing an economy” (SW, 1995a:25), the black market
premium (BMP) is included as a classification because it is a form of import
control taken to evince “…the rationing of foreign exchange” (SW, 1995a:25).
The further delineation between the BMP for the 1970s and the BMP for the
1980s, particularly tumultuous periods for SLI and socialist supporting countries
146
The authors used established standards of openness from the EBRD (European Bank for Reconstruction
and Development) to define this list.
147
Data classifications derived from United Nations Conference on Trade and Development (UNCTAD).
148
To this extent the authors’ note “…the tariff and nontariff barriers are for the mid-1980s” (SW,1995a:24).
149
“…used as an indicator to cover countries like Poland and Hungary” (SW,1995a:25).
202
as trade orientations came under attack and crises hit in the ‘80s, seems to suggest
that the authors are highlighting the effect of anti-closure interventions via the
free flow of foreign exchange.
The tabulation of the data allowed the authors to observe that there were only a
few countries that had been continuously open since their independence or since
1946150, while many more pursued inward-oriented growth in its hey-day of the
1950s and 1960s, and still a few only closed “quite late in the period”151.
Simple Propositions:
Testing Socialist Policies as Trade Growth Drivers
Because history, from the vantage of the short-twentieth century, is a platform for
making the case that trade liberalization is the critical element for “…integrating
an economy with the world system” (SW, 1995a:1) Sachs and Warner spend
considerable time outlining the history of global integration, from 1840 right up to
the mid-1990s to include the successes of the East Asian economies. Still, the
weight of this paper, rests with the authors testing of four of “…the simplest
prepositions that arise from political economy considerations” (SW, 1995a:32)
involved in the process of global integration.
Returning to Sachs and Warner’s application of the Ricardo-Viner and
Heckscher-Ohlin-Samuelson theories in concert with the work of Ronald
Rogowski regarding the construction of popular consensus behind SLI policies
150
“…Barbados, Cyprus, Hong King [sic], Malaysia, Mauritius, Singapore, Thailand, and the Yemen Arab
Republic” (SW,1995a:26). Hong Kong was released by Great Britain in 1997.
151
Bolivia (1978), Ecuador (1983), and Jamaica (1973).
(SW,1995a:26).
203
and its effect on interest group behavior toward free trade for Asian and Latin
American/African economies, these considerations are that, “…timing should be
related to the relative endowments of labor and land, the size of the economy, the
per capita income, and perhaps the previous political history152” (SW, 1995a:32).
The Hypotheses
In outlining their hypotheses to be tested the authors add that “…[i]n a later paper
we intend to specify a detailed model of the timing of liberalization during the
post war period” (SW, 1995a:32). With a broader aim toward “…examining the
timing and implications of trade liberalization for subsequent growth” (SW,
1995a:1) those hypotheses consisted of:
I. An expectation that “…the transition to openness to be faster in land-scarce and
labor-abundant economies, since it is plausible that governments will tend to be
more responsive to the interests of labor over landowners” (SW, 1995a:32).
II. An expectation that “…the transition to openness to be earlier in less populous
economies since the gains from trade are presumably larger for an economy with
a small domestic market (SW, 1995a:33).
III. An expectation that “…countries that begin the postwar era with a high per
capita income would be more likely to liberalize, because of a higher initial level
of division of labor and degree of specialization within the economy (SW,
1995a:33).
152
Parenthetically the authors note, “…for example, number of years since independence” (SW,1995a:32).
204
IV. An expectation that “…postcolonial countries would be less likely to
liberalize (because of the “imperatives” of nation-building153) than countries that
have long been independent (SW, 1995a:33).The authors also include three
dummy variables as stand in approximations for the effects of “…post-colonial
status154 ”, the association as a “…British Commonwealth country” and another
for the association as a “…former French colony”. The colonial dummy
approximations were added “…on the grounds that the type of colonial
relationship might affect the timing of postcolonial trade liberalization” (SW,
1995a:33)155.
Sachs and Warner tested these hypotheses with an estimated logit model (N= 72)
156
that took into account whether a country “…liberalized between 1955 and
1970” or “…did not liberalize before 1970” (SW, 1995a:33). To this effect, an
output of their equation was the classification of sixteen developing countries that
had liberalized between 1955 and 1970. The model also took into account a “…
the land-to-population ratio for 1960 as a proxy for the land-to-labor ratio, the
population in 1960, the per capita GDP in 1970” (SW, 1995a:33).
The Results
The expectations were met for hypotheses one, three, and four, respectively: an
increased probability of liberalization concordant with a high population-to-land
ratio, that high-income countries are more likely to liberalize before low-income
153
Such imperatives are described by Sachs and Warner as mobilizing the population with rallying cries of
self-sufficiency, “…specifically as a way to foster national unity and political power of the national
government” after a long struggle with the imperial power (SW,1995a:18), or in some cases to “…bolster the
military potential of the state” part and parcel of the institutional course of a military-industrial complex
(SW,1995a:18).
154
Whether independent before 1945 (SW,1995a:33).
155
For instance, French colonists residing in Franco-Africa may have found that since imports were cheaper
as a result of the relatively depressed local economy, living in the African colonies afforded a luxurious and
privileged lifestyle, if one could manage the temperatures and other stressors, as a result of “…the overvalued
exchange rates in the French franc zone” which led to the delay of former French colonies (SW,1995a:33Footnote:47).
156
“…countries with GDP per capita of less than $5,000 in 1970” (SW,1995a:33).
205
countries, and that post-colonial countries would be less likely to liberalize as
opposed to those long independent. This latter result pertains to the former French
colonies as, the authors also report that the “…dummy variable for British
Commonwealth status was not statistically significant” (SW, 1995a:33). In
returning to the authors’ contribution to the dialogue on the successes in Asia,
given the result of hypothesis I, the authors more directly associate the Asian
Tiger/Cub economy successes with trade liberalization in general, and with early
liberalization in particular, noting of the “…statistical evidence that a high
population-to-land ratio raised the probability of an early trade liberalization” that
“…this fact helps to account for the early liberalization in much of Southeast
Asia” and “[s]imilarly, high income countries tended to liberalize before low
income countries” (SW, 1995a:33). It is conveyed here in this latter statement the
authors’ emphasis of a key point to be made continually throughout their paper
that early liberalization leads to market-based success as exemplified by the
overall case of Southeast Asia.
The result for hypothesis two, that the transition to liberalization would be
earlier in less populous economies, was counter to expectations. The authors
acknowledged that, “[s]urprisingly, size of population did not prove to be
significant” (SW, 1995a:33) 157.
157
Indeed this is quite surprising from the vantage that it is also counter to one of the classical notions of
economic growth as explained by Viner in the literature review for the current thesis. In short, Viner asserted
the notion that one of the elements of growth is the quality and quantity of the working population. A society
of consisting of a high quality (education/nutrition/sanitation), low quantity population would enjoy the fruits
of labor and be in a better position to save, and thus accumulate wealth than would a lower quality, higher
populated society. Not only would there simply be more to go around but the recipient earners would know
what to do with it. This notion is translated by Sachs and Warner as “…since gains from trade are
presumably larger for an economy with a smaller domestic market” (ibid:33). It would appear that the
206
Sachs and Warner on Ideological Barriers to Trade Policies
Prior to concluding part I of Economic Reform and the Process of Global
Integration, Sachs and Warner placed special emphasis on liberalization episodes
in the 1950s and 1960s, as a time when a “…parallel process of integration was
underway in the developed economies” (SW, 1995a:22), as evidence that
“…political and ideological shifts” (SW, 1995a:35) were the basis of aberrant
trade policies. Their representation of the period, and of ‘temporary liberalizers’
in this way suggests the importance of addressing ideological barriers to trade
liberalization.
Sachs and Warner define ‘temporary liberalizers’ as those postwar
economies characterized by “…initial closure (failure on one or more of the five
criteria […]), followed by subsequent opening” (SW, 1995a:24) and note that
most economies in the postwar era were temporary liberalizers by this score. Still
more particularly, the authors have identified fifteen countries158 that, while
having experienced an episode of temporary liberalization, additionally represent
the return to reason epitomized by the premise of the short-twentieth century. The
authors explain that, “…in almost all cases, these are countries that had a tradition
of open trade, which was resurrected immediately following the Second World
authors have found that the potential gains from trade are not enough to induce a less populous
economy/country into liberalizing.
158
As listed by Sachs and Warner in Table 9 with average growth rates for open versus closed periods:
Bolivia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Kenya, Morocco, Nicaragua,
Peru, Sri Lanka, Syria, Turkey, and Venezuela (ibid:34).
207
War” (SW, 1995a:35). In buttressing the larger argument that the free-market
system of enterprise is the equilibrium state, being the natural economic order, to
which all anomalous economic experiments will return (either through the
institution of democracy or military intervention), the authors contribute to the far
older but equally as exciting discourse on declining terms of trade as the vehicle
of slow growth159. They explain the importance of understanding that “…the
eventual decision to close the economy was generally not caused by slow growth
during the open period” (SW, 1995a:35-authors’ italics) but in fact by “…political
and ideological shifts within each country” as “corroborated by economic
histories of these countries, which rarely give slow growth as the reason for the
policy switch” (SW, 1995a:35).
Sachs and Warner forward their finding that “…in twelve of the fifteen
cases, average growth in the open period exceeded that in the subsequent closed
period” (SW, 1995a:35) as evidentiary support that ideology, while being a strong
substrate, ultimately produces inferior outcomes when cultured with popular
idealism rather than classical iterations of practical expertise. To this end the
authors also present the later temporary liberalizations and high average growth
rates of Sri Lanka (open from 1977-83 after a closure from 1957-1977) and
Venezuela (open from 1989-1992 after a closure from 1960-1989) as additional
support of the claim that ideology, not slow growth induced policy transitions.
More forwardly, the authors proclaim, “…[o]verall, we find little direct evidence
159
While attending strongly to their contribution the authors again refrain from acknowledging by name the
leading discussants, understood by the current author to be mainly Raul Prebisch.
208
that slow growth played an important role in ending these episodes of
liberalization” (SW, 1995a:35)160.
The Impact of Postwar Global Integration on Economic Performance,
1970-1989
According to Sachs and Warner the current economic state of the
developing nations is the consequence of the ideological spread of anti-market
sentiments, which were politically embodied and, wielded to guide policy
decisions; and as such lends an answer to the question of whether economic
integration is leading to economic convergence or not. To this end the authors
respond that, indeed, economic integration would lead to economic convergence
(poorer countries growing faster than richer countries) so long as the poor nations
opt-in to integration schemes. In their words there is a “…close relationship
between economic integration and economic convergence […] as long as the poor
and rich countries are linked by international trade” (SW, 1995a:35), such that
“…[p]oor, closed economies have often performed significantly less well than the
richer countries” (SW, 1995a:35).
To demonstrate this, the authors utilize the nineteen-year period from
1970 to 1989 as a collective finish line with which to compare the economic
outcomes of countries open in the 1950s and 60s, that is those countries with
160
Indeed, especially in the cases of Sri Lanka and Venezuela, where growth was much higher at a respective
5.37 and 6.17, it appears that the second period of temporary liberalization significantly outpaced the first
period and where average growth rates were 0.48 (1950-1956) and 3.88 (1950-1959), respectively (SW,
1995a:34-Table 9 notes c and d).
209
long-standing open trading policies, to the outcomes of those of countries closed
for some or all of the same period. In examining “…the effects of late trade
liberalization on economic performance” they found that “…open economies
outperformed closed economies on three main dimensions […]: economic growth,
avoidance of extreme macroeconomic crises, and structural change” (SW,
1995a:35).
Postwar Global Integration on Economic Performance in Terms of Openness
and Growth Trends
While it is clear that the unspoken argument to which Sachs and Warner give no
quarter is the Prebisch-driven premise that slow growth induced a rash of selfsufficiency, given an analysis of growth data for open and closed economies, and
taking into account transition states (temporary closures) and the emergence of
openness (late liberalizers), the authors draw several interpretations from the
growth patterns.
Primarily they find “…no cases supporting the frequent worry that a
country might open and yet fail to grow” (SW, 1995a:44). The authors also deny
that their results are attributed to reverse causality or sample selection bias finding
“…little support for the idea” and instead assert that they simply find “…very few
examples of developing countries that started open, performed poorly, and then
closed as a result” (SW, 1995a:44). They reiterate three key features of their
argument:
210
I. “The far more common case is that developing countries started closed,
performed
poorly, and then opened” (SW, 1995a:44).
II. “Most developing countries started out closed” (SW, 1995a:45).
III. “The few that had temporary episodes of liberalization had high growth rates
during the open period” (SW, 1995a:45).
In keeping with these premises Sachs and Warner hold “…[i]t is therefore hard to
argue that slow growth caused the turn to closed policies” (SW, 1995a:45).
Rather the authors re-assert “…it seems that for reasons unrelated to growth
performance [i.e. ideological spread], the developing world in 1970 was sorted
into a large group of closed economies and a much smaller group of open
economies” and “twenty-five years later, sufficient time has passed for us to see
the effects of this fundamental policy choice on growth” (SW, 1995a:45). Even
though they assert that the “…evidence so far suggests that being open to
international trade has been sufficient to achieve growth in excess of 2 percent for
developing countries (SW, 1995a:45), the authors anticipate the question of
necessity given that even their own data show “…there are four developing
countries that are classified as closed during the period and yet had per capita
growth of more than 3 percent per year during 1970-89” (SW, 1995a:45). Sachs
and Warner lent an interpretation for each exception: Botswana, China, Hungary,
and Tunisia, but ultimately in their opinion, China, truly “…is the only puzzle”
211
(SW, 1995a:45), though despite its theoretically paradoxical nature, “…it is
essentially consistent with the importance of open trade” (SW, 1995a:45). Thus
the case of China is given to deeper interpretation, both comparatively in terms of
the authors’ interpretative efforts toward the three other exceptions and
analytically as a function of the current thesis.
Openness Report:
The Growth Effects of Trade Liberalization in Developing Countries Since
1975
In the previous section Sachs and Warner were able to show that economies open
during the period of 1970-89 faired far better, in terms of avoiding balance-ofpayment shocks and high inflation, than economies closed during that period.
This section summarizes and discusses the authors’ report of outcomes among an
aggregate of late liberalizers. Beginning with their assessment that “…there are
thirty-eight non-communist reformers that have opened their economies since
1975 and sustained the opening until 1993” (SW, 1995a:57), Sachs and Warner
examined the growth of three sub-classes consisting of 37 (including Israel) noncommunist recent reformers, the 25 post-communist transition economies (the
former Soviet Union and Eastern Europe), and another 36 countries that “…did
not even achieve a temporary liberalization during 1980-93” (SW, 1995a:57).
212
Chapter 5
5.1 Evaluating the Sachs-Warner Set:
Natural Resource Abundance and Economic Growth (1995/97)
Having already established the history of contending policy environments to make
a case for poverty as a consequence of poor policies in Economic Reform (1995a),
thereby holding for initial income and trade-specific policies, in Natural Resource
Abundance and Economic Growth (1995b, 1997R) SW more particularly address
the relationship between the quantity of natural resources and economic growth,
to draw a contrast between the economic outcomes of relatively resource-poor
and resource-rich countries.
In a continuation of testing the empirical weight of trade openness as a
representation of good economic policies, SW run a series of robustness tests.
These two papers, NRAEG I and NRAEG II, essentially do little more than report
out results of these tests in an effort to dispel claims of selections bias and reverse
causation.
The NRAEG II revision of 1997 additionally, “…presents extensive
robustness analysis of the results” (Lederman and Maloney, 2002:2) to show that
their key finding, that the basic “ …negative relationship is present after
controlling for other relevant characteristics of the economies, such as initial
income levels and trade policies” (SW, 1995b:2), remains even after a
comprehensive comparison with the posited factors of previously published
213
studies by Barro (1991); Mankiw, Romer and Weil (1992); DeLong and Summers
(1991); King and Levine (1993).
To frame these results SW pose the question “…[i]s there a curse to easy
riches?” (SW, 1995b:3), the authors go on that while, costs of transportation are
decreasing the “…[endogenous] natural resources are no longer a decisive
advantage to economic growth”, still, “…it is surely surprising that they might
pose an actual disadvantage” (SW, 1995b:3)161. By the authors’ account the
“…failure of resource-led growth in the 1970s and 1980s” has been noted by
previous researchers, while none before them have “…confirmed the adverse
affects of resource abundance on growth on the basis of a worldwide, comparative
study of growth” (SW, 1995b:3) as they do in this paper. Implicitly, their results
support the social hypothesis that “…easy riches lead to sloth” (1995b:4) and
have proven to facilitate a related political economic hypothesis that “…resource
rich economies are subject to more extreme rent-seeking behavior than resource
poor-economies” as the government leaders, termed ‘national politics’, are
“…oriented to grabbing the rents earned by the natural resource endowments”
(1995b:4). From this point the case is made against improving terms of trade or
supporting the endogenous development of natural resource deposits as such
“…can lead to a “feeding frenzy” in which competing factions fight for the
natural resource rents and end up inefficiently exhausting the public good”
(1995b:3). Sachs and Warner note that the research of Gelb (1988) and Auty
(1990) “…lend much support to these political channels of influence” (1995b:3).
161
This is a bit of a satirical assertion since cheaper oil as well as cheaper acquisition and production costs is
part of the decrease in transportation costs when taking into account the larger logistical network, such that
cheaper transportation costs are endogenous to the political-commercial conditions.
214
The authors also address a set of possibilities they term to be “strictly
economic”162, involving the Prebisch-Singer hypothesis and closely related views,
such as those holding “…that world demand for manufactures would grow faster
than demand for primary products or that the rich countries would be more
protectionist against primary imports than manufacturing imports” (SW,
1995b:4). SW convey that while these concerns are not even necessarily
incorrect, the real problem, is the practical policy recommendation of avoiding
trade until some level of parity, that is, true competiveness, has been reached.
Evoking the basis of Economic Reform (1995a), SW more formally explain that
“…[t]he great historical mistake of this thinking, however, was to recommend
industrialization through prolonged import-substitution behind tariff and quota
barriers, rather than through export promotion” (SW, 1995b:5)163. SW
summarizes the views related to the Prebisch hypothesis in saying,
“A second set of economic arguments against
natural-resource-based growth [sic.] involved the
purported characteristics of the domestic economy
rather than the international economy. The work of
Hirschman (1958), Seers (1964), and Baldwin
(1966) encouraged the view that beneficial “forward
162
In the forthcoming chapter on resilience thinking and CAS approaches I will argue that this may not be
strictly the case, since such cut and dry economic problems lend themselves to formal modeling more easily
than those with deeper social dimensions and other non-convexities.
163
Note the inclusion of the word ‘prolonged’, relative to ‘great historical mistake’ and ‘import-substitution
behind tariff and quota barriers’. This is very revealing because, as will be discussed later, every wealthy
northern country made this mistake of protecting their infant economies until they were ready to graduate into
the world, not only this but these countries then traded preferentially with each other which is clearly a very
logical thing to do. The problem arose when southern countries employed the same means and competition
ensued. As much as the neoclassical rhetoric praises competition, the neoliberal models are designed to yield
monopolies eventually flushing out all competition, as will be shown in (SW, 1999). So ‘prolonged’ merely
means, from north to south, longer than it took us to do what they’re still trying to do, therefore they must be
incompetent or its just not the right strategy for their success. Obviously both are mostly wrong since there
are always nuances, interruptions, and outright extraversion at play.
215
and backward linkages” from primary exports to the
rest of the economy would be small. The basic idea
was that manufacturing, as opposed to naturalresource production, leads to a more complex
division of labor and hence to a higher standard of
living. The negative assessment of resource-based
development in due course led to a revisionist
literature describing successful cases of staples-led
growth. See for example Roemer (1970) on Peru,
and further success cases reviewed in Lewis
(1989)”164
Natural Resource Abundance and Economic
Growth
(Sachs and Warner, 1995b:5)
Paul Krugman explains that Hirschman’s theory of forward and backward
linkages is related to Rosenstein-Rodan’s theory (1943) of the economics of scale
whereby external economies are created such that the coordinated
industrialization of the economy arises and employment follows as surplus labor
is absorbed from lower paying agriculture and recruited into higher paying
manufacturing165. As each external economy comes into being (taking on hires)
and matures (reaching advanced innovation), a complex division of labor and a
higher standard of living arises after which international trade becomes especially
beneficial since not all production opportunities will be exploited leaving room to
trade for domestically unavailable consumptive desires, the income to afford
them, and the trading parity to command better pricing. In combination with the
164
From authors see: Roemer on Peru in Fishing for Growth: Export-led Development in Peru, 1950-1967.
Cambridge, MA: Harvard University Press, 1970; and Lewis for additional revisionist histories of staples-led
successes
165
Paul Krugman’s “Development, Geography, and Economic Theory”. 1995.
216
Prebisch hypothesis the idea, then, was that natural resource production, as a big
push, would lead to manufacturing followed by a complex division of labor and
so on, such that natural resource production would be a substitute for foreign
investment which tended toward hair-trigger capital flight or in the post-war
period case of Europe and the United States, upon which Latin America
depended, self-preservation.
Thus SW’s claim that the “…negative assessment of resource-based
development in due course led to a revisionist literature describing successful
cases of staples-led growth” would indicate that cases of successful staples-led
growth (natural resource-based growth) while it has been known to happen and
cases can be found in the literature, they are nevertheless illegitimate. Recall the
larger historical context and that the point of entry for natural resources in
development was initially positive, since the “resource-rich economies such as
Britain, Germany, and the U.S. experienced particularly rapid industrial
development at the end of the last century” (SW, 1997:3), [the 1880s onward], so
that while the resource curse literature typically begins the timeline for the earlier
convention about the 1950s, it is because of this period of resource-led
development166. Naturally, a theory such as the big push would be posited to
assist poor countries, since it had been shown to work. The advent of Prebisch’s
hypothesis regarding the secular decline in the terms of trade brought to light the
circumstances under which resource-led development would not work, thus stateled industrialization and import-substitution industrialization was quite valid from
166
Canada is included, to which the assertion of staples-led growth directly applies, i.e. Canada’s resourcebased economy founded on staples such as wheat and fur.
217
the development perspective of poor countries during the 1950s, 1960s, and
1970s.
However this would be incredibly unpopular with what are now wealthy
but resource poor nations needing markets for their goods and energy for their
markets. So as the tide began to turn in the 1960s, and 1970s with colonial
emancipations and other social revolutions erupting world wide, socio-economic
experiments, nothing less than economic warfare, ensued so that by the 1980s and
1990s natural resource abundance had become bad for development and remains
the dominant scholarly opinion that holds into the present.
The ‘Resource Curse’ and the Metaphorical Use of ‘Dutch Disease’
The discovery of natural resources, in industrial quantities, can create a host of
problems from inflation management of the overall economy to sectoral
management crises within the economy. The ‘Dutch disease’ touches on both of
these problems. The ‘Dutch disease’ is a two-part problem, though generally
modeled in three sectors, relating to industrial economies. The key issue is the
simultaneous management of the extractive and manufacturing sectors, which if
done improperly, can lead to a devastating loss of capacity in the manufacturing
sector, as the notoriously volatile extractive sector will cause inflation, especially
when it is on an upswing, and again if the manufacturing sector incapacitated
during a downswing. Sachs and Warner explain that, “…when an economy
experiences a resource boom (either terms-of-trade improvement, or a resource
218
discovery), the manufacturing sector tends to shrink and the non-traded goods
sector tends to expand” (SW, 1995b:6).
Sectoral competition for labor, as it offers better wages, can leach the
manufacturing sector of human resources, which in theory are flowing into the
extractive sector, driving up the costs of production. Since increased production
costs are passed on to the consumer base, competiveness is reduced as
manufactures are generally elastic, and cheaper substitutes will do. Reduced
competiveness translates reflexively into reduced production capacity, which is
funded by sales directly, and indirectly through stockholders tied to firm
profitability. If the manufacturing firm can not reverse the effects of reduced
competition and recapture the market the reduction in production capacity can
become crippling and when the extractive sector hits its inevitable downswing,
where a strong manufacturing sector would have been able to buoy the economy,
a much reduced manufacturing sector would lack the capacity to do so, often to
the detriment of external economies as well, leading to the macroeconomic
depression of a entire economy. As Sachs and Warner explain, “the greater the
natural resource endowment, the higher is the demand for non-tradeable goods,
and consequently, the smaller will the be the allocation of labor and capital to the
manufacturing sector” therefore the shrinkage of the manufacturing sector is
dubbed the “disease” (SW, 1995b:6-authors’ quotation marks).
The way SW explain the resource boom experience would easily justify
denying an improvement in the terms of trade on the grounds that such would
induce ‘Dutch disease’ effects and thus contribute to further impoverishment but
219
it assumes corrupt leadership. ‘Dutch disease’ normally impacts industrial
economies but preindustrial economies with relatively high amounts of natural
resource wealth can exhibit ‘Dutch disease’-like effects operating through
windfalls of resource rents. These rents can suppress endogenous industrial
development if captured by unscrupulous government leaders or expended upon
technical expertise that fails to properly guide development to international
competiveness. In the context of preindustrial economies or developing countries,
the ‘Dutch disease’ is closer to a metaphor for rent-seeking governments than it is
close to its original definition167.
Recall that Hirschman and Rosenstein-Rodan’s theories worked in concert
with the Prebisch’s theory on the secular decline in the terms of trade to increase
the standard of living through the state-directed, as opposed to market-directed,
utilization of resource-based development approaches to modernization. It would
be considered the slow-track to development, relative to an infusion of foreign
capital and its attendant problems, but it would and has worked. Still, it was
Prebisch’s realization of a secular decline in the terms of trade that helped to
catalyze efforts at national self-sufficiency in developing countries. Arguing to
prevent an improvement in the terms of trade not only justifies that there is a
secular decline in the terms of trade but that it is more politically intentional than
market-driven168.
167
There are also ‘Dutch disease’ effects associated with foreign aid, which can also cause inflation, but it to
can be captured and thus the metaphorical representation would apply here as well.
168
I say this lightly as markets are not ideologically apolitical.
220
While a contraction of the manufacturing sector characterizes an economic
disorder leading to such places as the ‘Rust Belt’ and the former City of Detroit,
in the U.S. Midwestern region, Sachs and Warner note that “…there is nothing
harmful about the decline in manufacturing if neoclassical, competitive conditions
prevail in the economy” (SW, 1995b:6). This suggests that the disease could be
in fact a socially efficient decline in growth given free movement of labor and
capital globally such that manufacturing will colonize where it is most efficient,
that is more often than not, wherever labor and transport will be cheapest. The
rationale is that everyone would be better off, eventually, and benefit from cheap
prices for goods.
Nevertheless, because resource abundance can catalyze ‘Dutch disease’
effects, when the authors examine cross-country growth for the 1970-89 period
and “…ask whether the evidence from the past 20 years [sic.] supports the notion
that abundant natural resources depresses growth”, they report finding “…the
answer to be yes” (SW, 1995b:7). Natural Resource Abundance and Economic
Growth concludes with SW maintaining that “…a key division that matters is for
endogenous growth effects is tradable manufacturing versus natural resource
sectors” that conditional convergence is a fact of life as “…suggested by
neoclassical models of economic growth” thus SW “…also find that trade policy
matters enormously for growth and for convergence, as summarized by our
SOPEN variable (and related results in Sachs and Warner (1995[a])). Not to be
misunderstood in their leaning SW note that “although this paper does find
evidence for a negative relation between natural resource intensity and subsequent
221
growth, it would be a mistake to conclude that countries should subsidize or
protect non-resource-base [sic.][industries] as a strategy for growth” (SW,
1995b:22). In citing their research from Economic Reform, the authors reiterate
their argument that “…the evidence from the recent past suggests there are
simpler and more basic policies that can be followed to raise national growth
rates, especially open trade” (SW, 1995b:23). Presumably, the authors are
referring to the economic effects experienced by strong trade reformers after rapid
adoption of structural adjustment packages. Though the authors acknowledge that,
“…welfare implications of resource abundance can be quite different from the
growth implications. Resource abundance may be good for consumption even if
not good for growth; policies might be good for GDP growth while reducing real
consumption” (SW, 1995b:23), the nevertheless maintain that “…government
policies to promote non-resource industries would entail direct welfare costs of
their own, and these could easily be larger than the benefits from shifting out of
natural resource industries” (SW, 1995b:23). This refers back to the recent
future/distant future results in Economic Reform where even though such
government support could decimate the growth of an ongoing economy by 88%
within 1-3 years trade enforcement and economic reform, the long term benefits
might be worth the hit in terms of GDP growth.
Where consumption is a measure of what people tangibly have access to
and are able to take possession of, the authors recognize that while socialistdevelopment policies and natural resources may be bad for GDP growth, they
could, in fact, be good for social welfare and thus human capital. The authors
222
recognize that the converse could also be true thus leadership ultimately makes
the most impactful difference. SW exemplify this point in noting that their results
“should not be taken to deny that thee are benefits from good policies regarding
natural resource exploitation. Compare, for example, the experiences of the
primary producers in Asia, namely Malaysia, Indonesia, and Thailand with those
in Africa (see Roemer, 1994)” (SW, 1995b:23).
223
5.2 Evaluating the Sachs-Warner Set:
The Big Push, Natural Resource Booms and Growth (1999)
Introduction
Rosenstein-Rodan asserted that since the “…theory of growth is very largely the
theory of investment” (Rosenstein-Rodan, 1957:2) and a high initial investment in
social overhead capital (SOC) is required to attract investment in manufacturing,
that not only did these conditions lead to a highly uneven, “lumpy”, investment
field among underdeveloped countries, but that this in fact was “…one of the
main obstacles to development of underdeveloped countries” (Rosenstein-Rodan,
1957:8)169. The investment paradox here is that investors need modernized social
overhead capital (roads, utilities, security, etc) needs to be in place before
manufacturing investments, “directly productive investments” (8), can be made
yet the income that manufactures bring is required for investment in SOC,
therefore a substantial initial investment is required to break out of the povertycreating underinvestment cycle. The coordination and long-run economic
management of this initial capital was termed “programming”, effectively,
managed development. State-led development was especially necessary in
underdeveloped countries because, even in a system based on constant returns
(static competitive economy), the “…allocation of investment […] is necessarily
169
Rosenstein-Rodan, P.N. “Notes on the Theory of the “Big Push””. Center for International Studies. MIT.
Cambridge, MA. (March 1957).
224
an imperfect market” (2), but those markets in underdeveloped countries “…are
even more imperfect than in developed countries” (3), that is, the “[p]rice
mechanism in such imperfect markets does not provide the signals which guide a
perfectly competitive economy toward an optimum position” (3), where the price
mechanism is said to allocate the distribution of goods and imperfect market is
“…a market on which prices do not signal all the information required for an
optimum solution” (2).
For Rosenstein-Rodan, and others subscribe to this and related theories, a
more appropriate system for an economy with the special problems of an
underdeveloped country, that is the poverty trap, would instead be a dynamic
coordinated economy. Here the initial investment would be of such a scale as to
induce external economies so that the growth of a national economy was based on
size of the firms, size of the markets (which already is in a reflexive relationship)
and the increasing returns to scale between them. Eventually, industries if large
enough to begin with, would spawn additional industries, learning-by-doing and
innovation would increase, leading to increased employment and higher standards
of living. Since the labor force is working in these industries there would be
unexploited economies of scale, and thus consumer goods deficiencies, which
international trade could then address.
Of course this ‘slow-track’ process of development, based on a solid
foundation of social overhead capital, takes time, uninterrupted effort to prevent
the unnecessary prolonging of the process, and most importantly, “vision at large
[…] as well as good foresight of future development” (7) such that a critical factor
225
of a successful state-led development effort is the “...sufficiently organized force
to organize” (16) the overhead assets and induce the reinforcing loop of the
economics of scale170. The creation of external economies is paramount to the
‘big push’ method because it sustains the economy through the creation of
descendent industries, such that while SOC is the means, coordinated industry is
the end. As Rosenstein-Rodan explains about the output of social overhead
capital, “…its services are indirectly productive with long gestational periods and
delayed yields. Its most important “products” are investment opportunities created
in other industries” (6:quotations-RR). Thus, with regard to endogenous
resources, the “big push” model of development asserts that a “…minimum
quantum of investment is a necessary (though not sufficient) condition of
success” (1), and therefore inherently requires a leadership environment that
values integrity to the extent of political embodiment, as well as checks, to see
that such opportunities are managed well and for the long-term. But even before
the opportunities arise they must be sown such that the minimum quantum of
investment, itself, must be managed with integrity and competence to derive the
emergent processes that will then guide the economy away from poverty traps
such as poor education, nutrition, sanitation, and healthcare.
Here one can see immediately the ideological challenge between state-led
development and laissez-faire development as the former requires, and therefore
170
I am aware that the development-takes-time premise is actually a universal truth, in that processes and
transitions do take time, which is why the length of time it takes an external entity to see appropriate results
from a development program is essentially irrelevant. The issue is economic sovereignty and right of a
nation’s people to select and execute their chosen development trajectory without what amounts to punitive
damage from the international community for non-compliance in general, and in what they would consider to
be an appropriate time frame. (McNeish and Logan, 2012 refer to resource sovereignty in a very similar
way).
226
assumes, the integrity of leadership in its functionality where laissez-faire
development assumes people are self-interested and that the market is thusly selfregulatory to the extent private interests. This is not to say that state-led
development is not equally as subject to corruption, clearly it is. Matters are even
more complicated by cases of structural subversion. When fractious political
usurpation and coups predominate in an atmosphere of economic warfare and
where the external shell of socialism stands to house the inherently self-interested
laissez-faire policy.
In positing a ‘resource curse’ it follows that in this article the authors
would seek insight as to whether “…specialization in natural resources is a viable
strategy for successful economic development” (SW, 1999:44) but even more
specifically, the authors ask “...whether natural resource booms are beneficial in
the way that the big push reasoning would suggest—by providing the catalyst for
low-income economies to overcome the fixed costs of industrialization” (SW,
1999:44). More to the point, in Natural Resource Abundance and Economic
Growth, SW showed that the relationship was negative, therein asserting resource
booms are actually not beneficial to growth despite what successful cases of
resource-led development would indicate.
In this paper, directly taking on ‘big push’ as the last ideological frontier
before a paradigmatic ascendency, the authors question not whether booms are
beneficial, since Peru, Mexico, Chile, Brazil, Columbia, Costa Rica, Venezuela,
and Ecuador did very well with their booms post-independence (SW, 1999:44),
but whether they induce growth over the long-term. The answer determines
227
whether the ‘resource curse’ can succeed the ‘big push’, truly marking a
theoretical paradigm shift in development economics and further substantiating
the reach of its political ideology. After all, it is growth over the long-term that
lends viability to the strategy in creating successful economic development.
Homing in on this condition of success, SW add that “…several recent case
studies have documented the problems with natural resource-led-development in
specific countries or groups of countries” (SW, 1999:44). The authors
particularly reference the work of Auty (1990), and Gelb (1988) who looked at
problems in Venezuela, and Ecuador and Venezuela, respectively171. Here it is a
good idea to add and juxtapose SW’s comments from (SW, 1995b) where the
authors claim that the “…negative assessment of resource-based development in
due course led to a revisionist literature describing successful cases of staples-led
growth”, which as was pointed out earlier would indicate that cases of successful
staples-led growth (natural resource-based growth) while it has been known to
happen and cases can be found in the literature, they are nevertheless illegitimate.
Therefore while these Latin American cases of successful natural resource based
growth form a formidable list of high-achieving bootstrappers, for SW, thus only
proves to be an aberrant litany against the policy implications of the ‘resource
curse’ diagnosis and therefore should be considered illegitimate, in the grand
scheme of economic reform and the process of global integration.
While the Rosenstein-Rodan’s big push theory came about in 1943 and
Prebisch/Singer’s declining term of trade came about in 1950, the former justified
the policy implications of the latter, while the latter exemplified, in part, the
171
Auty (1993) has also assessed both Chile and Peru.
228
consequences of being structurally underprepared for network failure, see (SW,
1995a:14) on “export pessimism” and the Nash equilibrium (SW, 1995a:14footnote 24). So that the deceleration and de-legitimation of the big push theory
would affect the persistent currency of the Prebish-Singer thesis, though not so
much that a direct attack was less necessary. Such is suggested when SW, in the
context of questioning “…whether specialization in natural resources is a viable
strategy for successful economic development” (SW, 1999:44), note that there is
“…recent cross-country evidence of an inverse association between natural
resource intensity and per capita growth between 1970 and 1990” referring to
Natural Resource Abundance and Economic Growth (1997a) and Sources of Slow
Growth in Africa (1997b). The authors suggest that this research could be
complementarily extended by “…time series evidence to study the impact of
commodity booms on long term growth” (SW, 1999:44). Further SW underscore
the potential import that such evidence would have cooperatively in that “…it is
an open question whether the observed negative association between growth and
natural resource abundance is due to the fact that natural resource abundant
countries are more likely to experience booms, busts and the accompanying
uncertainty, or whether something else about resource abundance causes slower
growth over the long term” (SW, 1999:44), referring to the Prebisch-Singer
debate whereby terms of trade are not the problem rather the notorious, and
granted volatility of the extractive sector is the source of slow growth. It is
important to understand that the volatility perspective is an argument for which
solutions are mitigation-based as opposed to the solution to a decline in terms of
229
trade for which solutions are reconstructionist such that SW are positing a
measure aimed at the root of a systemically noxious idea.
In returning to the suggestion of big push reasoning, SW explain that in
“…big-push logic, anything that stimulates demand will do, whether a large
public spending program, foreign aid, discovery of minerals, or a rise in the world
price of natural resource” (SW, 1999:43), suggesting, then, that natural resource
abundance should be sufficient to transition a low-income economy to a higher
income economy via industrialization. Though, since it is external economies of
scale which Rosenstein-Rodan posited as the vehicles of growth over the longrun, more pointed questions might be: Is specialization in natural resources a
viable strategy in creating external economies as Rosenstein-Rodan outlined?
Will natural resource abundance sufficiently create economies of scale as
Rosenstein-Rodan outlined? Additionally, the demarcation between specialization
and diversification while generally rigid, depends on the industry, social overhead
capital capacity of the host country and the agent relationships. So that with
regard to an extraction-based economy, specializing in natural resources does not
require re-capitalizing the rents to create endogenous industries from which
external economies are derived, such a country could simply become a petrostate. Yet without diversification, a coordinated national economy based on the
creation and interaction of external economies are highly unlikely. Ultimately, the
larger the extractive sector is in proportion to the total economy, without active
investment in sectoral diversification, the less likely diversification will ensue as
rent utilities develop and become entrenched. This can lead to rent-seeking as
230
recipient groups, be they social services or corruptible patrons, come to budget
around the income. It is clear then that prior to investment in natural resources,
social overhead capital must be established, just as Rosenstein-Rodan
hypothesized, in order to channel the rents into directly productive investments
thusly recapitalizing the rents into the initiating of external economies therein
developing a diversified national economy.
It does follow that a large bureaucracy would develop as the social
overhead capital would need to be managed, but ideally this also means
employment in a co-op like fashion, where people are invested not just in their
jobs but in their country’s well-being; and this naturally has clear implications for
environmental stewardship if the people are so inclined, most transitioning from
agricultural societies are so inclined. But largely because it is asserted that private
enterprise can employ people, the neo-liberal aversion to large government is said
to be incompatible with socialist policy environments. Still, private enterprise
divested of the interest of the nation’s popular masses, having only been invested
by those who have the access and means to literally to have invested significantly
into the enterprise, will prioritize entrepreneurial sovereignty not necessarily
keeping in mind national sovereignty. Yet one can observe how very similar these
diametrically opposed circumstances are in that both scenarios are interested in
taking care of their people. One can also observe, without getting into types of
power, the scalar cross-linked pattern in the possession of power such that
minority hold the bulk of the power within what still remains a general minority
of stockholders, in the case of entrepreneurial sovereignty, while a majority of
231
people hold the majority of the power amid socialist national sovereignty, and still
a minority of the international community holds the majority of the power, the
international majority holds a majority of the remaining global resource wealth
but a minority of the power. Effectively, stealing resources from leaders without
both integrity and systemic understanding, as opposed to simply systematic
understanding, is little more than taking candy from a baby. In highly corrupt
settings the people are considered only to the extent that they are highly malleable
(due to under-education, under participation in local and national politics,
institutional lethargy, or hyper-consumerism) and are otherwise disposable
factors. Notice the United States, China, and many African nations are a similar in
its treatment of its masses versus its elites. The ‘resource curse’ is an excellent
example of how power shifts based on governing structures, take for instance the
development of Latin America.
There are historic examples172 of recapitalization and economic
diversification having “…had a positive effect on long-run development” (SW,
1999:44) such as the Caribbean and Latin American resource booms of the 1800s
where “…Cuba became the first country in the region to construct a railway in
1838 after its sugar boom […] and the Guano boom in Peru led to the
establishment of banks for the first time in the 1860s” (SW, 1999:45)173.
172
From authors see: Bulmer-Thomas, V. on Cuba in “The Economic History of Latin America since
Independence”. Cambridge Latin American Studies, 77, Cambridge University Press, New York. (1994:35);
and Randall, L. on Peru in “A comparative economic history of Latin America: 1500–1914”. Monograph
publishing on demand: sponsor series. University Microfilms International, Ann Arbor, MI. (1997:110).
173
See: Tilton (2012) “The Terms of Trade Debate and the Product Policy Implications for Primary
Producers” Working Paper 2012-11, http://econbus.mines.edu/working-papers/wp201211.pdf, Accessed 13
November 2013.
232
Here it is important to note that an economic management strategy can,
and often should be seen, especially is historic contexts, as separate from the form
of government since autarkic governments can be export-centric and democratic
governments can approach self-sufficiency. For instance, consider that Cuba was
still the colonial wealth of Spain during its sugar boom in the 18th and 19th
centuries, and when its 1838 railway was constructed “…with foreign finance”
(SW, 1995a:7), conversely Peru was already independent (1821) by the time of its
Guano Boom (1840s-1880s). When decoupled one can see clearly that the form of
government matters less in economic warfare, than the economic management
strategy, so that the benefits of preventing some countries from executing certain
management pathways while prescribing another as the superior alternative is par
for the course. Two points on self-sufficiency and form of government, selfsufficiency or protectionism is historically the superior management strategy for
establishing a national economy, especially when resource wealth is endogenous;
once it can be established and allowed to thrive, that is there are no punitive
actions taken from the larger international community, then government matters
because integrity and checks are required for this management strategy as
discussed previously. One point on free-trade, because as big push suggests,
social overhead capital, endogenous industries, and external economies must be
first established to take full advantage of international trade for the benefit of
individual nations such that only after self-sufficiency has been met is free-trade
then the higher order evolution in global economic management. Pre-mature
involvement in free-trade is highly damaging to developing national economies,
233
where instead of healthy symbiosis the global economy is marked by parasitism
which in fact is backward.
To this end, “…the development strategy led by natural resource exports
was not seriously questioned in Latin America in the nineteenth century”, since at
the time Great Britain was the economic hegemon and its industrial strength was
in manufactures, not raw materials exports. Still, “…it has come under increasing
challenge in this century” (SW, 1999:45) Because the U.S. industrial strength is in
command of the complete value chain, from raw materials via a technological
advantage to finished goods. The issues of global resource scarcity, problematic
reserve distribution, the rise of counter-intellectual thought and shifting
hegemonic powers are in addition to this.
As SW explain, “...[t]o be sure, an important impetus for this challenge
was the interwar experience with declining commodity prices, and the early
postwar view associated with Singer (1950) and Prebisch (1950) that commodity
prices were on a secular decline” (SW, 1999:45). Referring especially to the
intellectual inertia of the Prebisch-Singer thesis SW add, “…the critique runs
deeper than this, and has persisted even after the evidence has overturned the view
that commodity prices were on the secular decline” (SW, 1999:45).
Today it appears to be the trend that neo-liberal economists, even if
begrudgingly, concede the secular decline assertion though decoupling it from its
policy implication, arguing that despite the concession, the policy implication that
resources are bad for development is nevertheless incorrect. Despite the early
history of natural resource-driven success, SW adds “…[y]et, the record is far
234
from the unmitigated success that one might expect from a naïve application of
the big push reasoning” (SW, 1999:45), after all a “…leading text on the
economic history of Latin America concludes that overall, the experience with
primary-export-led development has been a failure” (Bulmer-Thomas, 1994,
p.344), irrespective of the fact that “…a definitive answer to the question of
whether booms invariably bring on slow growth awaits more data” (SW,
1999:45).
Nonetheless, since the idea that natural resource-led development has
failed overall, and said has become a patently distributable fact, it is expected that
a crop of attendant research would be raised; as is the case when theory is based
on theory or existing theories get a fresh infusion of interest or perspective such as
when “..the evidence is nevertheless sufficiently suggestive enough to raise the
possibility that resource booms can result in slower growth” (SW, 1999:45).
Essentially the authors explain that the very idea, of a shadow, of a
doubtless possibility, that maybe the ‘resource curse’ is founded on the basis of
even a sufficient truth provides enough “…motivation, [for] the rest of the paper
[to] present a model to better understand the role of a big push in a natural
resource intensive economy, and the conditions under which growth may actually
be depressed as a result of the natural resource boom” (SW, 1999:45). So
warranted, the authors present “…evidence from seven Latin American countries
that natural resource booms are sometimes accompanied by declining per-capita
GDP” (SW, 1999:43) in the framework of a “…model with natural resources,
235
increasing returns in the spirit of big push models, and expectations to clarify
some of the reasons this may happen” (SW, 1999:43).
SW explain that researchers already understood why “…GDP in booming
economies ends up lower than it might have been with better linkages or more
investment” (SW, 1999:45) but they did not understand, indeed no one had yet
explained, “…an actual decline or fall in the growth rate after the boom has run its
course” (SW, 1999:45). Since “…the disappointing performance of resource
booms” (SW, 1999:45), being post-boom growth reductions, could not be
addressed by “…poor forward and backward linkages” or the authors own
observation that “…revenues are consumed rather than invested” (SW, 1999:45),
the authors expressed that “…something more pernicious must be going on to
account for slower growth” (SW, 1999:46).
It should be noted that a potential way in which growth may actually be
depressed as a result of the natural resource boom is if growth can be said to
characterize an increasing capacity to produce. For instance, in a resource-based
economy, if resource booms are associated with an increase in aggregate GDP, if
accounting for what appears to be typical malfeasance and extraversion, an
increase in aggregate GDP can become a declining per capita GDP. Since
declining GDP per capita can be seen as a smaller proportion of aggregate GDP to
be distributed, this decline would likely be proportionate with the residence time
of corruption, reflecting facilitated graft.
236
In another channel, not so much associated with corruption, assume a
resource-intensive economy striving for recapitalization of rents toward social
overhead capital toward to promote endogenous industry; minimal corruption is
assumed and growth is still characterized as an increasing capacity to produce.
Here the bump in aggregate GDP would indicate that the resource boom outpaced
cottage manufactures in influencing growth, which is reasonable because cottage
goods are hardly comparable with strategic fuels and minerals in terms of income.
So that effectively when a resource boom hits all, other products are macroeconomically irrelevant. The rate at which the extractive hits the market and its
value is returned outpaces goods produced in cottage industries so that if per
capita GDP can be said to represent the rate of production per person in society,
then even with a cottage sector, it would make sense that a boom is associated
with a low per-capita GDP since the extractive economy is known to be enclave,
hiring few nationals, such that the rate of production per person in an extractive
economy could only be low.
On another note as it is a common suggestion in the general literature, and
SW have suggested this to be the case as well, resource wealth leads to laziness.
That the production of a society decreases (low per-capita GDP) as described
above with the onset of a resource boom would seem to suggest laziness except
when the boom is considered in an economy dominated by the extractive sector,
in which as described above, production per person could only be low. In many
African cases, where post independence was much later than in Latin America
and there appears of have been significantly less knowledge-sharing, omitting
237
imperial inertia and the role of underdevelopment in shaping modern initial
conditions surely would obfuscate these perspectives.
Though the authors do “…focus on the economic effects of resource
booms on growth” (SW, 1999:45), very little of it is in regards to the
disappointing post-boom behavior to the extent that all they did was select “…five
country-episodes from recent Latin-American history where we have both an
identifiable natural resource boom as well as time series data on GDP” (SW,
1999:46), observed these cases and followed with some modest generalizations.
Here their efforts on explaining why, counter to big push, resource booms have
been followed by decreasing growth is effectively a red-herring. Assessing natural
resource booms for big push effects is necessarily to assume endogenous external
economies, and it is well known that the extractive sector is an enclave, even
Davis and Tilton proclaim, in a “… more direct challenge to the enclave
argument, suggested by some, is that it is irrelevant” (Davis and Tilton,
2005:239), so that the major precondition for big push-based development was
inherently missing. There are limited, if any, external economies in developing
‘host’ countries for extractives174. In fact, an evocative exemplar of the neo-liberal
view, in general, is given by Davis and Tilton who state,
“…Indeed, host government efforts
to replace expatriate employees with
174
Davis, Graham and John Tilton. “The Resource Curse”. Natural Resources Forum 29. (2005) 233-242.
238
nationals, to promote downstream
processing, and to require mining firms to
acquire supplies from domestic firms can be
counterproductive if these efforts raise the
costs of mining and so reduce the monetary
rents flowing to the host country. In such
situations, the government is in effect
subsidizing these linkage activities simply
because they are associated with the mining
industry. While a desire to create domestic
employment may be commendable, there are
far more labour-intensive industries than
mining or mineral processing. Moreover,
economic development requires the creation
of wealth. Subsidizing industries that would
other- wise lose money destroys wealth.”
The Resource Curse
Davis and Tilton, (2005:239).
It should be said that the enclave argument, as it relates to
underdevelopment, would not hold for national economies of scale since the
resulting external economies would in fact reverberate throughout the national
economy but if the national economy were under attack by the international
community and eventually privatized by such then the relevance of the enclave
argument is restored. The 1970s and 1980s, the time frame from which the
authors draw their data, were periods of intensive economic warfare in Latin
America as the shock doctrine treatment was increasingly unleashed.
Recall that in Economic Reform, to evince the effect of timing on
liberalization, SW zeroed out growth in the recent past with growth in the recent
future so as to draw a sharp contrast between the distant past and the distant future
239
analogous to policy outcomes associated with free-trade versus national selfsufficiency. Effectually, the same maneuver is done in this paper such that the
model building of the timing effects of natural resource booms on the process of
industrialization takes precedence, as the rest of the paper is comparatively
‘zeroed-out’. Thus on the whole, (SW, 1999) is dedicated to their model of the
process of resource-based industrialization with timing effects.
But how does a resource boom induced declining per-capita GDP relate to
the process of industrialization? In what environments would industrialization be
stimulated, in what environment would it be frustrated by resource booms, and in
what environment would a resource boom reverse the process of industrialization?
Consisting of three primary phases the process of industrialization includes:
division of labor, factorization (accreting specialized labor in a factory), and
mechanization (machines assisting labor). Just as industrialization is the socioeconomic dominance of industry, globalization is the dominance of industry and
its capitalization over the world’s capital resources (human and physical),
therefore the process of globalization is the process of industrialization where the
worlds labor is divided, factorized, and mechanized. Resource booms then
frustrate this process of globalization in that it provides the impetus for economic
independence, leverage for terms bargaining, and otherwise, from the perspective
of a uniform global system, funds anarchy operationalized as autarky.
In forwarding what can now be understood as Sachs and Warner’s
development of the resource curse, one can grasp the underlying assertion,
operating through the frustration, or at worse the reversal, of industrialization, that
240
resources concentrated in the wrong global sector can lead to irrational ‘waste’,
the gravest of inefficiencies, requiring intervention for the resource security of the
global system, or as Sachs and Warner put it, the “...one dominant global
economic system” (SW, 1995a:1) in painstaking re-emergence since 1995.
One can now observe clearly the intention of economic reform in the
“…institutional harmonization and economic integration among nations” (SW,
1995a:1) is to check systemic anarchy operating through unsanctioned economic
sovereignty. The systematic analysis of the ‘resource curse’ in its systemic
context is the scope outlined in this evaluation of the Sachs-Warner series.
Beginning with the lock, Economic Reform and the Process of Global Integration
(1995a), Natural Resource Abundance and Economic Growth (1995b/1997) is the
keyway, and The Big Push, Natural Resource Booms and Growth (1999) is the
key, such that the Curse of Natural Resources (2001) appreciates a newly minted
intellectual apparatus justifying a full institutional assembly in the charge of the
global security of primary products, strategic resources, the internal system of
production, and the larger industrial order. The key purpose is the academicintellectual justification of double standardization with regard to resource-led
development pathways, such that the ‘resource curse’ is a systematic construction
of a global double standard for systemic gain to the benefit of the current
hegemonic administration and its patrons.
The authors used this paper to formally “clarify” some of the systemic
problems induced by the double-edge of natural resource booms which can either
stimulate an incentive to industrialize or “…frustrate and even reverse
241
industrialization that is in mid-stream” (SW, 1999:46). In an environment where
entrepreneurs are willing to invest in establishing an industrial scale firm if other
entrepreneurs are also willing to create industrial scale firms and incentive to
industrialize will be stimulated to the presumable end that economies of scale are
multiplied, therein lending the spirit of big push, but additionally the risk-load is
shared and inter-trade networks are created strongly. Though left unaddressed by
the theory of big push, is SW’s finding that natural resource booms can
“…frustrate and even reverse industrialization that is in mid-stream” (SW,
1999:46)175 such that the “…timing of the natural resource boom matters, and so
does the sectoral distribution of the increasing returns and whether the booms
stimulates the right sectors” (SW, 1999:46).
In other words, the authors assert that resource booms can cause the deindustrialization of an economy via the Dutch disease, more broadly (and of
considerably greater systemic consequence), Sachs and Warner assert that
resource booms in the wrong global sectors, coupled with industrial capacity
building in those sectors as is required by Rosenstein-Rodan’s big push
prescription, can consequentially cause the de-industrialization of the global
175
The petroleum and, in general, fossil-fuel industry is usually divided into three major components:
Upstream, midstream and downstream, though midstream operations are usually included in the downstream
category. 1. The upstream oil sector is a term commonly used to refer to the searching for and the recovery
and production of crude oil and natural gas. The upstream oil sector is also known as the exploration and
production (E&P) sector. The upstream sector includes the searching for potential underground or underwater
oil and gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring
the crude oil and/or raw natural gas to the surface. 2. The midstream industry processes, stores, markets and
transports commodities such as crude oil, natural gas, natural gas liquids (LNGs, mainly ethane, propane and
butane) and sulphur. 3. The downstream oil sector is a term commonly used to refer to the refining of crude
oil, and the selling and distribution of natural gas and products derived from crude oil. Such products include
liquified
petroleum gas (LPG), gasoline or petrol, jet fuel, diesel oil, other fuel oils, asphalt and petroleum
coke. The downstream sector includes oil refineries, petrochemical plants, petroleum product distribution,
retail outlets and natural gas distribution companies. The downstream industry touches consumers through
thousands of products such as petrol, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics,
fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas and propane. (source: wikipedia)
http://www.oilandgasiq.com/questions/what-is-upstream-and-downstream-in-oil-gas-describ/. Accessed 13
November 2013.
242
economy’s current industrial centers, such that it is imperative that the resources
be removed as quickly as possible from their host locations to the industrial
centers of the global north in order to prevent an economic regime shift. To this
end the authors explain that “[t]he core of the Dutch disease story is that resource
abundance in general or resource booms in particular shift resources away from
other sectors of the economy that have positive externalities for growth” (SW,
1999:48), where ‘positive externalities for growth’ infer the capacity to utilize the
boom for increased growth (which is beyond big push as these countries are
already industrially established).
The linking factor between the two major papers in this set, Economic
Reform and Big Push, is the role of timing; timing of liberalization and level of
commitment to it, and timing of a resource boom on the process of
industrialization. Very interestingly the distribution of increasing returns, and
whether the booms stimulate the right sectors could only be a foundational
concern considering the systemic consequences of resource booms. Thus
reasonably, the next questions are: What are the right sectors? How should
increasing returns be distributed?
Taking into account peripheralization in the world-economy, the classical
assumption that the market regulates value through prices such that prices indicate
value or worth, and Rosenstein-Rodan’s functionality of external economies and
increasing returns to scale, then it would be expected that midstream and
downstream sectors should be stimulated to increase external economies and that
those economies would direct increasing returns to scale to those sectors as
243
internalized value addition; and that this would only frustrate development efforts
in developing countries, who might then resist industrialization concurrently
frustrating globalization overall. Thus the right sectors are those promoting value
addition to the global economy, increasing returns should be distributed
accordingly, and it is imperative that insurgencies are managed in service of
globalization not in rise against it.
Therefore with regard to Sachs and Warner’s observations of the “…five
country-episodes from recent Latin American history” (SW, 1999:45), the authors
make the tentatively emergent conclusion that “…there doesn’t seem to be a
single case where GDP growth was obviously faster after the boom was finished
than before the boom started, as the big push would suggest” (SW, 1999:45).
Further, SW assert that “…[i]f anything, GDP growth seems to be slower in
several cases after the boom period” (SW, 1999:45). But just as the statistical
construction of Economic Reform had its problems, The Big Push is not immune
as the overall intentional methodology is consistent between the two papers.
Thusly Sachs and Warner add, “…[n]aturally, there are issues about whether
these conclusions would remain after controlling for other factors affecting
growth, which we discuss, but the simple evidence is far from supportive of the
idea that booms should serve as catalysts or development” (SW, 1999:45).
Crafting the Case:
Cross-country Results and the Latin American Pattern
This case is framed first by “…recent findings from cross-country research” (SW,
1999:46), for which Sachs and Warner’s own seminal work is central, juxtaposed
with evidence on recent natural resource booms in Latin America (SW, 1999:50).
244
On this foundation, the authors then “…consider an economy in which there are
increasing returns to scale in one of the sectors, so that a big push is potentially
beneficial, and which is also capable of international trade and natural resource
production” (SW, 1999:52). This clause is crucial, as many of the most resource
abundant countries, such as in sub-Saharan Africa, lack the Rosenstein-Rodan
floor of social overhead capital, and thus can only host extraction but are
otherwise unable to competitively and beneficially engage international trade.
From this standpoint, the genius of Sachs and Warner is that they reinforce
the obfuscation of the institutional perspective, that it would be imprudent and
non-beneficial, for such nations to attempt what has been historically, a highly
successful development pathway precisely because it would be to their
competitive advantage. Davis and Tilton exemplify this point in stating,
“…More developing countries, it is true, would probably
enjoy a comparative advantage in downstream processing
if the developed countries did not impose a structure of
tariffs and other barriers to mineral trade that
discriminates against the more processed mineral
commodities. So changes in the trade policies of the
importing countries could help mineral-producing
developing countries (and consumers in the importing
countries as well). But this does not change the fact that,
as long as the current structure is in place, subsidizing
unprofitable industries reduces the wealth of the
developing country. This is true even when the industries
receiving subsidies would not need them in the absence
of discriminatory trade policies.”
The Resource Curse
Davis and Tilton, (2005:239).
245
Essentially, the authors imply the relevance of extraordinarily resource wealthy
SSA if these countries were to industrialize, while explicitly excluding these
countries from the immediate results of the model because most were not yet
industrialized. To do this the authors refer to the inclusivity of evidence from
Sources of Slow Growth in Africa (1997) so that the results of their model could
consider the relevance of the generalized sub-Saharan African (SSA) while the
authors use the model’s parameters to imply an exclusion of much of sub-Saharan
Africa (SSA) from the model’s implications though still relaying the potential of
the SSA resource wealth condition to the global structure. In this way, the
implication of the double standard of the resource curse was, by virtue of rhetoric,
integrated into the influence of the model.
This section reviews the authors’ presentation of the cross-country
research, the report of resource booms in Latin America and the juxtaposition of
the two segments through its relation to Economic Reform and the Process of
Global Integration (1995a) followed by an analysis of the presented model.
Recent Cross-country Finding
Beginning with the evidence presented in Natural Resource Abundance and
Economic Growth (1995b), along with the “additional and updated results” from
the 1997 revision, and the evidence presented in the authors’ 1997 article, Sources
of Slow Growth in Africa176, as well as the early work of both Gelb (1988) and
Auty (1990) which documented “…many of the development problems of natural
176
Journal of African Economics. 6 (3), 335-380.
246
resource-intensive economies, without however, showing the inverse association
on the basis of a cross-country study” (SW, 1999:46), the authors reiterate the
value of the cross-country regressions representation of “…the negative
association between resource abundance and growth, even after controlling for a
number of additional variables” (SW, 1999:46).
In a tabulation of four regressions, these previously established
foundational regressions, and their implications as covered up to this point in the
current thesis, are summed up in this paper’s regression 1, whereby the authors
effected a reduction of “…per-capita GDP by about 7%” (SW, 1999:46) by taking
the mean of the annual average growth of all the countries referred to in the
relevant data sets for the previous papers, then distributing the mean over the 20year period. Regression 2 is the Latin American dummy-adjusted177 regression 1,
demonstrating that the “…eleven countries in this paper are not, on average,
unusual in their growth experience” (SW, 1999:46). The third regression replaces
“…the natural resource export variable, which includes exports of primary
agriculture and basic metals and minerals, with an alternative measure of natural
resource exports that includes only basic metals and minerals” (SW, 1999:46) to
show that the alternative variable “…is also negatively associated with growth,
with a slightly higher estimated coefficient (higher in absolute value) (SW,
1999:46-authors’ parentheses). The authors explain that this particular alternative
variable is to be used in the measurement of “…natural resource booms over
time” (SW, 1999:46). Finally, in the fourth regression the authors use the “
177
Beginning with regression 2, see table 1 on page 47. The eleven countries evaluated are: Argentina,
Bolivia, Brazil, Chile, Columbia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.
247
standard deviation over the 20-year period (1970-1990)” (SW, 1999:48) to
“…show that the negative association between natural resource exports and
growth is unaffected by the inclusion of a variable to measure volatility in natural
resource prices” (SW, 1999:47), such that the notorious volatility of the business
cycle for extractives is discounted as is “…each countries [sic.] external terms of
trade” (SW, 1999:48).
It should be noted that even when discounted, unequal terms of trade, as
represented by the volatility variable, “…is itself weakly, negatively, associated
with growth” (SW, 1999:48) such that Sachs and Warner’s own assertion that
“…the evidence overturned the view that commodity prices were on a secular
decline” (SW, 1999:45), itself strongly hinges on the evocation of ‘secular
decline’ to further discount the absolute realization of unequal trading relations.
The strength despite discounting can also be said to indicate stability of Prebisch
and Singers assertion of a secular decline in the terms of trade, regardless of
Sachs and Warner’s conveyed sentiment of the theory’s obnoxious persistence
(SW, 1999:45). In fact, today it appears to be the trend that neo-liberal
economists, even if begrudgingly, concede the secular decline assertion though
decoupling it from its policy implication, arguing that despite the concession, the
policy implication that resources are bad for development is nevertheless
incorrect178 (Marnia, 2013).
Additionally, an important function of this thesis to draw forth the authors’
178
See: Tilton (2012) “The Terms of Trade Debate and the Product Policy Implications for Primary
Producers” Working Paper 2012-11, http://econbus.mines.edu/working-papers/wp201211.pdf, Accessed 13
November 2013.
248
ideological leanings in that while the authors explain the ‘resource curse’ in terms
of a “…dynamic Dutch disease model” (SW, 1999:48), citing their foundational
work (1995b), they nevertheless “…remain open to other explanations (Sachs and
Warner, 1995)” (SW, 1999:48), presumably those included in this article
beginning with a behavioral explanation (sloth), followed by the political
economic theory of extreme rent-seeking, corruption, and inefficient
bureaucracies (a somewhat more refined assertion of sloth), assertions of
declining terms of trade, and absent forward and backward linkages. Such that the
authors’ add, “other possible explanations focus on the effects of natural resource
abundance on human or physical capital accumulation, corruption and
institutional quality, or endogenous policy choices” (SW, 1999:48), where the
latter includes the sovereign decision to nationalize for self-sufficiency.
Returning to the four regressions, the authors’ associate the abovementioned explanations supportively with the cross-country evidence. They
generalize, for example, that “…there is no robust association between natural
resource abundance and any of the following: national saving, national investment
or rates of human capital accumulation, at least when the latter is measured in
terms of average years of schooling” (SW, 1999:48), such as to suggest that social
welfare is not improved by natural resource abundance; aligning with corruption.
The authors also explain that “[t]here is an inverse association between natural
resource abundance and several measures of institutional quality” (SW, 1999:48),
suggesting that natural resource abundance does weaken institutional integrity and
governance capacity; aligning with sloth. Here the authors deflect to Knack and
249
Keefer and express a professional uncertainty to soften the implication of the
conclusion and the authors own alignment with it, writing, “[t]his result is based
on the institutional quality measures in (Knack and Keefer, 1994), and is
presented in (Sachs and Warner, 1997a,b, Table 11). However, since the
alternative institutional quality measures are themselves highly positively
correlated across countries, the data do not allow us to be very precise about
exactly which aspects of institutional quality are related to natural resource
abundance, or in turn, exactly which are relevant for growth” (SW, 1999:48).
Relative to “…the eleven Latin American countries in this paper” (SW,
1999:49), the authors “…gauge the importance of natural resource abundance in
accounting for slower growth” (SW, 1999:49), by multiplying “…the estimated
regression coefficient by the natural resource intensity variable for each country”
(SW, 1999:49). Since the estimated regression coefficient is representative of the
negative association between natural resource intensity (share of exports of
primary products over GNP) multiplied by resource intensity (natural resource
exports over GDP), then the negative correlation is extrapolated exponentially for
each country to give the regression estimates (all negative) of the natural resource
effect for each of the eleven countries, the highest of which is Venezuela. The
authors report a 77% decrease in growth “…due to natural resource intensity”
(SW, 1999:49) in 1970. SW add that “taken literally, this implies that at the end of
the 20-year period I 1990, Venezuelan per-capita GDP was about 14% lower than
it would have been if Venezuelan [sic.] had no natural resources” (SW, 1999:49).
If economic growth is calculated from changes in the size of the overall
250
economy which, by Dutch disease rationale, is effected by the size of the export
sector relative to the entire economy, then the larger the export sector (with its
increased volatility) the more unstable the economy is due to low diversification.
In this way resource abundance/intensity could be said contribute to the
deceleration of the manufacturing sector (if comparatively present) by crowding it
out. From the world-systems perspective, the an increasing number of countries
utilizing their comparative advantage of primary production through the
establishing of economies of scale and external economies would reduce the
manufacturing capacity and market share of the current manufacturing centers
whose productive progress is held by economic suppression of those with a
natural comparative advantage. The authors elude to the dangers of suppressive
easing to the extent that the authors report regression results of the association of
natural resource abundance and sectoral data showing that “…countries [resourcerich] that followed open trading policies tended to have higher growth in
manufacturing exports, and that, after controlling for this, resource-poor countries
tended to have slower growth in manufacturing exports” (SW, 1999:48, data from
SW, 1997a-Table 8), to the end that “[i]f exports of manufactures are an
important engine of growth, and if the Dutch disease effects of natural resource
abundance tends to squeeze this sector [of the world economy], then tis provides a
channel for the negative association between natural resource abundance and
growth” (SW, 1999:49). Therefore a reversal, whereby Dutch disease affects
Latin America instead, or similarly conditioned developing states, is not only
systemically preferred but can be explained, in part, by institutional (systemic)
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induction.
To the end of showing the results of suppression the authors offer
“…supportive evidence that natural resource abundant countries tended to have a
larger service sectors and smaller manufacturing sectors than resource-poor
economies Sachs and Warner, 1997a,b, Table 8)” (SW, 1999:48). By drawing an
association between natural resource abundance and sectoral data the authors
were able to show that the ratio of services to manufactures output in 1970 shows
the positive correlation (6.54) between resource abundance and the output of the
service sector relative to manufacturing. Meaning that government spending (the
service sector) increased proportional to resource abundance “to the extent that
the service sector proxies the non-traded sector and manufactures the nonresource traded sector” (SW, 1997a: Table 8), where the non-resource sector
includes “…output of transport, storage and communications, wholesale and retail
trade, banking, insurance, real estate, services, public administration and defense,
and manufacturing” (SW, 1997a: Table 8)179, where non-resource traded sector
and non-resource sector are analogous. The second regression shows the growth
of services and manufactures output for the period 1970-1990 where over twenty
years the combined output of the services and manufactures sector was decimated
by negative growth represented by regression coefficient -5.92 as a result of the
179
The authors note that the construction, and electricity, gas, and water sectors are missing. This is possibly
because such operations are related to the upstream functions of exploration and production (E&P) and the
point is to show that the service sector is squeezed by the expansion of E&P, the size of which relates to
abundance and resource intensity, so that if resource abundance is high, there will be an intense expansion of
E&P, which, if nationalized or is state-led to begin with, “…can also frustrate and even reverse
industrialization that is in mid-stream” (SW, 1999:46), where the midstream industry processes, stores,
markets and transports commodities such as crude oil, natural gas, natural gas liquids (LNGs, mainly ethane,
propane and butane) and sulphur.
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decrease in the export share of manufactures, -.46, over the period 1970-1989.
Recall that in resource-led development environments the government
employs many workers in the administration and production of social overhead
capitol, which if funded by natural resources would anticipate a large government
relative to its funding source (natural resource abundance). If this funding source
were privatized, along the lines of economic reform, workers would be fired,
government would shrink and the endogenous mid-stream and down-stream firms
would atrophy to give regression 8.1 showing that “…natural resource abundant
countries had slower growth in their share of manufacturing exports, holding
constant the initial share” (SW, 1997a: Table 8), such that over nineteen years of
economic warfare the endogenous manufactures sectors of Latin American
countries had been damaged by a 46% decrease in productivity.
The authors claim that these regression results supports their preliminary
evidence that, “…over the period 1970–1990, natural resource abundance and
trade openness were related in a u-shaped pattern. That is, at low levels of
resource abundance, more resource abundant countries were more likely to be
protectionist (Taiwan is more open than Venezuela for example), but at higher
levels of resource abundance, more resource abundant economies were more
likely to be open (Venezuela is less open than Saudi Arabia for example)” (SW,
1999:48). This aligns with Sachs and Warner’s previous assertion in Economic
Reform (1995a) in that the East Asian success were due to an absence of abundant
natural resources, a condition which lent itself to the openness of these countries
to market idealism and an inability to compete in the highly lucrative mid- and
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down-stream chains of natural resource production. Here it is important to note
that the, Middle Eastern peninsula, in the strict sense, had a very different
development trajectory than the Latin America in that the ruling families had
always, as more commonly reported, been in support of resource-led development
and thusly free-trade as a vehicle for such development; similar to Botswana,
where the ruling families inherently appreciated the protections of private
property and this pre-industrial cultural bias, in part, lent itself to visionary longterm planning.
Natural Resource Booms in Latin America
Having described the theorized behavior and effect of natural resource booms on
industrial sectors the authors move on to a discussion of the case specific boom
results relative to a sub-set of Latin American countries. Among the eleven
subjects, the categorical experiences of the countries reflect those that have had a
boom, “…clearly identifiable” (SW, 1999:51), those that have not had a boom,
“…no significant boom” (SW, 1999:51), and those for which the evidence of a
boom is somehow inconclusive or is “…less clearly identifiable” (SW, 1999:51);
where a natural resource boom is defined as “…a rise in the realized natural
resource exports to GDP of at least 4% of GDP, from beginning to the peak of the
boom, with a duration of at least three years” (SW, 1999:50). In determining that
“…both price and quantity movements are relevant for measuring natural resource
booms” (SW, 1999:50), and to adjust for Ecuador and Mexico, “…since
discoveries of new oil deposits were important in both country’s natural resource
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booms” (SW, 1999:50), the authors excluded “ …evidence on the external terms
of trade for each country” (SW, 1999:50) as it “…soon became clear that the
terms of trade evidence was potentially misleading” since it “…measured only
price movements” (SW, 1999:50).
According to the authors’ classification there was a significant natural
resource boom in Bolivia, Ecuador, Mexico, and Venezuela; while there was
mixed evidence of a boom in Chile, Columbia and Peru; and there was no boom
in Argentina, Brazil, Paraguay and Uruguay; where the assessment was garnered
by looking “…at time-series evidence on realized exports of natural resources
divided by GDP for each of these countries” (SW, 1999:50). The authors explain
their rationale in writing, “…what we try to do in dating the boom is to identify
the year just before the ratio of primary exports to GDP rose significantly and also
identify the year when the primary export ratio was approximately back to its preboom level” (SW, 1999:51).
Taking in turn the clear boomers and the inconclusive boomers, SW
explain that out of the four countries that experienced booms only Ecuador
“…was the level of GDP significantly higher after the boom ended” (SW,
1999:51), while the following three countries “…exhibited an initial rise and then
a collapse in GDP during the boom period” (SW, 1999:51), Mexico’s level of
GDP after the boom remained stable, qualified as “…about the same” (SW,
1999:51), and the level of GDP after the boom in Bolivia and Venezuela “…was
actually much lower” (SW, 1999:51).
The case that best represents the authors assertion that natural resources
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are bad for development is that of Bolivia where, after the resource boom of 1985,
the export ratio “declined precipitously so that by 1987 it was back below the
1973 value” (SW, 1999:51), where ‘precipitous drops’ are the calling card of
shock therapy indicating an economic regime shift reform efforts, such as
“…price devaluation, financial reform, pension reform, and privatization” (SW,
1999:51) were rolled out Chile, Bolivia, Venezuela, and Peru in the 1970s and
1980s. Additionally, the phrase ‘back below’ would indicate that the reduction
was due to systematic control measures taken for institutional benefit, as would be
expected by increased success of autochthonous country-level efforts at economic
sovereignty.
Recall, in the analysis of Economic Reform and the Process of Global
Integration (1995a), that “…essentially, Sachs and Warner report that the
economic growth of their sample of 36 developing nations was higher in the
distant past during a period of poor economic policies than in the 1-3 year period
after the reformation and establishment of good economic policies which led to,
on average, an 88% decrease in growth, comparatively, during that period. In
other words the authors make the statement that if one compared growth in the
recent future with growth in the distant past, less an additional year, then
compared growth in the distant future with growth in the distant past, the increase
is even larger since growth is lower in the recent future by 88%, so that
precipitous drops make a regime shift from the wrong kind of boom to the right
kind of boom from socialist-based poverty reduction to capitalist-based wealth
creation, where the costs of the wealth gained was the destruction of the wealth
256
accumulated under systemically-incompatible pretenses. For instance the case of
Peru exemplifies this assertion in that “ after the boom per-capita GDP in Peru
declined precipitously [such that] the boom period, and its aftermath seems to
have reversed more than a decade of growth of positive growth between 1960 and
1974” (SW, 1999:52). Juxtapose this with Stanley Fischer’s statement in response
to Sachs and Warner’s apparent bias “…against the import-substitution strategy”,
where in he claims that, “[w]hatever happened later, Latin American and African
countries did quite well in the 1950s and 1960s, despite their perverse regimes”
(SW, 1995a:103). This is to reiterate that, broadly, timing is then an imperative
factor which would make the costs of forced entry, however conceived and
implemented, both reasonable to the goal-oriented and ultimately warranted. Thus
operating through the channel of replicability, extracting value from the concept
of trade liberalization is tangibly worth substantially more than the warrant and
the transaction costs of forced entry. Further if new markets are unavailable
because of trade closure policies than the concept of free trade would suddenly be
highly and necessarily undervalued. One can see clearly that the costs of the
wealth gained equate to the warrant and transaction costs of forced entry.
Of the four boom cases (Bolivia, Venezuela, Mexico), though
“…somewhat less clear in the case of Ecuador” (SW, 1999:51), the authors claim
“…it is not obvious in any of the countries that GDP growth was faster in the
period after the boom than in the period before the boom” (SW, 1999:51). They
add that, “This was clearly the case in Bolivia, Mexico, and Venezuela” (SW,
1999:51). As if reporting the success of shock therapy, the Sachs and Warner
257
expound that “Overall, there was no consistent pattern of a take off in GDP in
these four cases, growth declines were not uncommon; and even the level of GDP
was not invariably higher after the end of the boom” (SW, 1999:51); all good
news from a systemic point of view. Thusly in summary, the authors “…see one
case (Ecuador) where the boom may have had a positive, lasting effect on percapita GDP, two cases (Chile and Columbia) where the was probably no major
effect in either direction, and four cases (Bolivia, Mexico, Peru, Venezuela)
where per capita GDP actually declined during and/or after the boom period”
(SW, 1999:52). The authors depart this case analysis to develop an optimized
economic framework in which these results could follow, to the extent that they
are able to present “…a model to explain this diversity of experience with natural
resource booms” (SW, 1999:52). In this thesis the model and results are
summarized prior to a presentation of analytical commentary.
SW-Model of Natural Resource Booms and Industrialization
In the context of the Set, SW support their assertion that natural resources have a
negative impact on economic development the authors stylize a model to
demonstrate how a natural resource boom can frustrate industrialization ongoing
or act as the impetus behind the de-industrialization of an economy. The authors
contrast two theoretical cases in which increasing returns to scale accrue to the
non-tradable service sector in one case and to the tradable manufacturing sector in
the other. The model is further parameterized such that the economy experiences
a resource boom; produces two consumption goods, one produced with labor
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alone and the other is produced with N intermediate goods and labor; the
economy produces one natural resource that is not consumed domestically but is
traded; and there are competitively monopolistic increasing returns to scale (IRS)
and education is inherently restricted. The sectors of concern are the tradable
manufactures sector and the non-tradable service sector. To the extent that there is
no capital in their model, it is highly stylized to illustrate the point to be supported
by the case analysis of the first section of (SW,1999).
Since the impact of resource booms on increasing returns, as a proxy for
industrialization, are the subject of evaluation the authors begin by first
characterizing the dimensions of a sector with competitively monopolistic
increasing returns, irrespective of whether the IRS accrue to the tradable
manufactures sector or the non-tradable service sector. Overall, the authors show
that a ‘big push’ can be effectuated under limited conditions dependent upon
whether the increasing returns sector is either traded or non-traded. The authors’
modeling enables them to demonstrate that under certain circumstances a resource
boom can be shown to promote de-industrialization rather than industrialization
and can even be shown to frustrate industrial process in midstream. The authors
dichotomize societal attitudes about the future into optimistic and pessimistic,
then code the dichotomy as representing the investment mood based on
“…expected growth or decline in the number of entrepreneurs establishing
factories” (SW, 1999:56); in this way the authors enable their model with the
capability for multiple equilibria with respect to the process of increasing returns,
the number of factories expected to grow over time (n), and the movement of
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labor to and from the sector with IRS. Although there is no capital in this model
that authors have managed to proxy entrepreneurial confidence, which can be
represented by (n).
While the authors are able to show that for a small, constant range of (n)
both the pessimistic and optimistic equilibria exist, their major point is that
industrialization and de-industrialization follows the contraction and expansion of
the range of (n), that is, the entrepreneurs’’ expectations for the number of
factories to grow over time, plays a role in whether the sector industrializes or deindustrializes since IRS represents interdependencies which are weakened or
reinforced by entrepreneurial confidence in sector-wide profitability. To this
extent, and where the output of the IRS sector determines whether the sector is
classified as tradable or non-tradable, industrialization ensues when the output of
the IRS sector is service-oriented and conversely de-industrialization follows
when the output of the IRS sector is manufactures-oriented (tradable).
Critical Commentary on (SW, 1999)
Despite what some southern natural resource abundant countries would have be
the case, systemically, the industrial position of these countries represent the
constant-returns sector while the increasing returns sector represents the mid-and
down-stream sectors dominated by the resource-poor global north. Recall that the
point of national self-sufficiency, autarky, is to reverse these systemic conditions
for the political end of economic sovereignty in service of social freedom among
arbitrary global constraints and the material end of a higher standard of living for
their people. Overall the authors’ model represents both the sustainable
260
structural interest and a facet of a structural problem. Consider that to the extant
that the non traded sector has increasing returns to scale180 and the traded sector, a
proxy the for non-resource traded sector, has constant returns, these mid- and
down-stream sectors are cooperative; and because systemically these sectors are
geographically defined by and concentrated in the global north, this is a positive
circumstance for established northern industrialists.
In regards to natural resource booms in the wrong sectors, the systemic
problem is that a boom induces the upstream sector (geographically defined as the
global south, where extraction occurs) to hyper-perform becoming thus
institutionally competitive if these firms are not vertically integrated within
northern firms, that is, if they are state-owned and operated. This means it is
irrelevant who wields the tool of resource-led development; be it the global north
in the 19th century, along with some members of Latin America; or the 20thcentury, post-colonial first attempts of Africa or reemergence of Latin America
and other members of the global south; the tool works. For this reason claims to
the contrary must be seen as control-driven and ideologically justified; a
justification that extends itself to the suppressive control of southern hyperperformance as required for continued domination.
Though I would question the functional distinction between measuring
‘only price movements’ and measuring ‘price and quantity movements’, since
180
In Table 8 of Natural Resource Abundance and Economic Growth (1997R), where the non-traded sector is
a proxy for the non-resource sector, also known as the service sector, constituting mid-and down-stream
services such as “…output of transport, storage and communications, wholesale and retail trade, banking,
insurance, real estate, services, public administration and defense, and manufacturing” (SW, 1997:Table 8bold added by MM); and the non-resource traded sector is proxied by manufactures. Where petroleum
product distribution is a down-stream function, manufactures is analogous to the non-resource traded sector,
which when considering bid-trading, includes “…construction, electricity, gas and water” (SW, 1997:Table
8) or is otherwise a function of E&P (exploration and production).
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price is said to allocate resources, unless, as Rosenstein-Rodan explained prices
do not properly conduct allocation in the markets of underdeveloped countries,
that is, “…the price mechanism does not necessarily put the economy on an
optimum path” (Rosenstein-Rodan, 1961:3), especially so because “…markets in
underdeveloped country are even more imperfect than in developed countries”
(Rosenstein-Rodan, 1961:3). He further explains that the, “…[p]rice mechanism
in such imperfect markets does not provide the signals which guide a perfectly
competitive economy towards an optimum position” (Rosenstein-Rodan, 1961:3).
In this regard, the difference between price movements and price and quantity
movements appears to be as subtle as the difference between resource abundance
(share of exports of primary products in GNP, SW1997) and resource intensity
(natural resource exports/GNP, SW1999) where there are reflexive relationships
between price movements and resource abundance as well as between price and
quantity movements and resource intensity.
This is to say that the weight of external terms of trade for each country
relative to the boom classification appears to be significantly at issue in whether a
positive, lasting effect on per-capita GDP, which is responsive to accumulation
and recapitalization, was in fact affected by declining terms of trade, such that of
the eleven country subset the evidence substantiating a boom versus no boom is
evenly split (4:4), though with the inclusion of the mixed evidence leaning more
toward no boom, and the long-term effects of the clear booms are made
questionable by SW, so that the majority of the sub-set reflects no boom.
The timing of a boom sets the period at which to assess the level of GDP
262
after a boom relative to before, as well as the lasting effects on long-run growth in
GDP. The country classification of having experienced a boom indicates the
country’s qualification for an appreciable application of big push in the first place,
such that SW’s full definition of a natural resource boom can inherently limit an
application of big push if it is difficult to classify the commencement and/or
convocation of a boom. To this end, the authors explanation that that “…we want
to separate the question of the direct effect of the booms on GDP growth from the
question of whether the boom sets in motion forces which have a lasting effect on
growth. We are interested in the second question, which requires a comparison of
the path of GDP before the boom started, with the path of GDP after the boom has
fully run its course” (SW, 1999:51).
Rather than directing, here, that a big push does not work, the authors
indirectly suggest questionable development potential overall and more directly
the authors definitively limit the theory’s applicability. Despite this, the clearest
alarm rings from the fact that, when one drops the ‘spacer’ countries being
Argentina, Uruguay, Paraguay, and Brazil the N of the evaluated subset is
reduced to a meaningful sub-set of eight countries such that Ecuador, Venezuela,
Bolivia, Chile, and Peru, in other words, over 60% of the sub-sets semiotic value
is derived of archetypal ‘resource curse’ cases as researched by Auty (1990Venezuela, 1993-Bolivia, Chile, and Peru) and Gelb (1988- Ecuador and
Venezuela). Further it is well known, that Jeffrey Sachs’s career grew
magnificently during Bolivia’s own shock treatment with his attention to
hyperinflation.
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In re-telling the narrative of Sach’s success, Klein referred to it as a story
“…about a bold, boyish professor from Harvard who had, virtually, singlehandedly “salvaged the inflation-wracked economy of Bolivia” according to
Boston Magazine”, (Klein, 2007:188). Termed “Bolivia’s Miracle”, Sachs gained
“…immediate star status in powerful financial circles and launched his career as
the leading expert on crisis-struck economies, sending him on to Argentina, Peru,
Brazil, Ecuador, and Venezuela in the coming years” (Klein, 2007:188). She goes
on that the praise heaped on Sachs “…was not just about beating inflation in a
poor country. It was that he had achieved what so many had claimed was
impossible: he had helped stage a radical neoliberal transformation within the
confines of a democracy and without a war, a change far more sweeping than
those attempted by either Thatcher or Reagan” (Klein, 2007:188-189).
Sachs and Warner’s conception of natural resource booms and economic
growth in relation to a big push approach to development is a bit of a stretch as it
conflates two stages in the what has historically been the process of development
overall, where some form of protectionism for competitive purposes is involved.
Big Push assumed the industrializing benefits of economic autarky while SW
disregarding capital, save labor, assumes an open industrial economy. It should
be said that Sachs and Warner’s relation to the big push could be construed as
tangential since it is essentially limited to the inclusion of a wage premium to
induce labor mobility from the cottage industry to factory production (1999:58).
In this approach SW undermine the benefits of natural resource booms to catalyze
industrialization by laying out a model economy that from the outset is open,
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industrial, and capable of both international trade and natural resource production.
In this way the ‘big push’, which was part of the intellectual justification for
economic autarkic movements, along with the Prebisch-Singer thesis, is
integrated into a largely incompatible model for the purpose of associating the
concept of the ‘big push’ with a demonstration of industrial hyper-performance
via Dutch Disease.
In the next and final paper of this set Sachs and Warner wrap-up their
narrative on the ‘resource curse’, asserting that natural resource-led development
is a failure, not because countries were ever closed but because the global slump
in commodity prices in the postwar period led to a devastating export pessimism
which went on to nurture the Prebisch-Singer Thesis despite the evidence put
forth by studies based on the post-war experience which argue that the negative
correlation between natural resource abundance and economic growth stands even
after controlling for trends in commodity prices (SW, 2001:828-authors’ italics).
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5.3 Evaluating the Sachs-Warner Set:
The Curse of Natural Resources (2001)
In general, the ‘resource curse’ is established by a set of economic growth studies
based on negatively correlated data from a twenty-year post-war period. In this
thesis the ‘resource curse’ is explicitly recognized as a paradigm shift from the
previous convention holding that natural resources were a great boon to economic
development181. By 2001 the somewhat amorphous ‘resource curse’ observation
was paradigmatically formalized as “…the observation that countries rich in
natural resources tend to perform badly” (SW, 2001:827), having survived, up to
this point, six years of at times scathing peer review regarding their econometric
applications, to have nevertheless become accepted as an “…demonstrable,
empirical fact” (SW, 2001:828). Indeed the authors claim to rule out the notion
that the curse of natural resources “…is a statistical mirage from natural resources
being the only surviving sector in slow growth countries” (SW, 2001:831). As the
shortest paper in this series, The Curse of Natural Resources (2001) represents the
maturation of the ‘resource curse’ phenomena since Gobind Nankani (1979)
evaluated the special comparative nature of mineral-exporting countries, therein
setting a structural foundation for the oft-cited early works of Richard Auty
(1990,1993) and Alan Gelb (1988).
In this paper the authors cinch together what can be aptly referred to as the
Sachs-Warnerian narrative, beginning with Economic Reform and the Process of
181
The oft referred to embodiment of this convention are the words of Norton Ginsburg, who was cited in
Rosser (2006:557) as writing, “…the possession of a sizable and diversified natural resource endowment is a
major advantage to any country embarking on a period of rapid economic growth”.
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Global Integration (1995a). In an effort to answer whether the curse exists as well
as furnishing an explanation for it, and beyond reiterating principal econometric
findings from their earlier papers, a key purpose of this executive summary is
two-fold. In the first place it allows the authors a platform to defend their position
that natural resources are bad for economic growth considering the poorest
nations seems to simultaneously be the most abundant, as well as defend their
policy assertions in favor of open trade, which would reduce resource stocks and
increase wealth, and in the second place the authors are able to address persistent
claims regarding “…little direct evidence that omitted geographical or climate
variables explain the curse, or that that there is a bias resulting from some other
unobserved growth deterrent” (SW, 2001:827).
To this extent the authors present a “special example” whereby a
geographical variable, characterized as constant through time and growth, projects
a subtle bias throughout the negatively associated data set therein misleading
interpretation. The broader conditionality operating on this variable is that natural
resources are randomly distributed. Sachs and Warner’s rationale merits its
excerption:
“If we let time pass in such a world, eventually
the countries with favorable geographic
conditions would have high income, since they
would have been growing for a while. Because
of their high income, they would appear to have
low shares of natural resources in the
economy— not because they were inherently
poor in natural resources, but because the rest of
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the economy would have been growing. On the
other hand, the poor-geography countries would
still appear to be high-natural resource
economies, since the rest of the economy would
not have been growing. Now suppose we were
to measure growth and natural resource as a
share of GDP after this process had been
unfolding for a while. We would tend to and a
negative association between growth and natural
resources as a share of the economy. But in our
special example, this negative association would
be driven by geography, which we do not
observe, and not by any inherent penalty from
high natural resources”
The Curse of Natural Resources (SW, 2001:830)
Given the authors rationale, previous growth would be correlated with omitted
geography variables such that the previous growth would then approximate
geography. So that if over time the robust significance of the natural resource
variable relative to previous growth is shown, then the claim of bias is technically
invalidated; such that the “…relevant question then is whether the natural
resource variable stays in the regression even after controlling for previous
growth” (SW, 2001:830). Sachs and Warner observe the work of Sala-i-Martin
(1997) and Doppelhofer et al. (2000) for having effectively answered this
question, writing that they, “…classify natural resources as one of the ten most
robust variables in empirical studies on economic growth” (SW, 2001:828).
The authors propose two ways this technicality could occur. The two
possibilities vary along the lines of difficulty in observation. If the geographical
variables affecting growth is hard to observe the authors suggest simply
controlling for previous growth rates in the regressions, but if those variables are
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not hard to observe the second solution is simply to control for them in the
regression. The authors report that the results of their 1997 paper failed to find
evidence “…that controlling for the previous decade’s growth rate altered the
negative resource affect” (SW, 2001:830). To control for the geographical
variables in the regression directly the authors, relying upon another Sachs paper,
compare the impact of geography182 on growth per capita relative to openness in
general, faster convergence among open economies, and resource intensity as it
stood in 1970, thus as a result of previous policies. Thusly restricted the authors
were able to establish that in general geographic variables did not “…eliminate
evidence for the curse of natural resources” (SW, 2001:830). Ultimately Sachs
and Warner found no clear evidence that after controlling for previous growth in
the 1960s or for geography and climate variables in general, that an omitted
variable remained to account for the curse of natural resources; therefore, in a
subscription to Popperism, the robustness of the natural resource variable appears
to stand as “controlling for previous growth rates does not eliminate the natural
resource variable from the regression. And direct controls for geography and
climate variables do not eliminate the natural resource variable” (SW, 2001:831).
Having thusly established the existence of the curse, the authors go on to
review leading explanations for the phenomena though, considering that many
explanations are couched in terms of Dutch Disease and its associated crowdingout logic, including the set paper just previously discussed, Big Push, the authors
admit they are limited in the endeavor to provide a complete explanation to the
182
Includes percent of land area close to the sea, distance to the major port, percent of land area in the tropics
generally, and the likelihood of contracting malaria. For more see Gallup, et al., (1999): Geography and
Economic Development. International Regional Science Review. 22(2), 179-232.
269
extent that the question of what ultimately drives growth awaits better answers.
In the work embodied by the focal subset of this thesis Sachs and Warner hold
traded manufacturing activities as the driver of growth. Their overall explanation
of the negative effect of natural resources involves an income effect whereby an
increase in wealth from extractives income are conjunct with increased prices for
non-traded services creating a domestic business environment of higher than
normal price levels for non-resource related firms which then become less
competitive globally as international prices, averaged across countries, remain
relatively stable but domestic inputs become more expensive. The impediment to
export-led growth is the weakened competitiveness. Since SW are concerned
with the size of an economy rather than the distribution of wealth and it is well
known that the largest economies are the products of successful manufacturing
sectors, the authors convey that the stability of an economy and the propensity
toward wealth is given by the fraction of the contribution of export growth of
manufactures relative to overall GDP growth. To this extent, “countries will have
a small contribution from exports of manufactures if either exports grow slowly or
if these exports represent a small share in the economy” (SW, 2001:835), meaning
that for Sachs and Warner, more important than the size of an entire economy is
the size of the manufacturing sector within it, and I would add if applicable.
Therefore if natural resources can be linked to a disappointing manufacturing
ability then an industrialization-based case for the ‘resource curse’ could be
legitimate as long as questions of distribution and access are left disjointed.
Indeed, the authors demonstrate such a tendency in this 2001 paper, a strong
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inverse relationship between natural resource abundance and the export
contribution to growth, leading them to surmise that since the export-sectors of
many resource abundant countries are uncompetitive, possibly due to high
domestic price levels, that they never successfully pursued export-led growth;
therefore, open trade policies are critical to economic development.
While this is Sachs and Warner’s understanding and approach to the
problem of poor development the authors do observe other explanations with
similar theoretical foundations based on expansive and contractive wealth effects
such as those asserting education or institutions as the driver of growth. In these
explanations are the behavioral channels positing any manner of predation from
rent-seeking and patronage to institutional capture and governmental usurpation,
as well as those termed ‘purely economic’. Assuming an industrial capacity,
crowding-out is a factor and the logic precedes that innovation via entrepreneurial
activity is diminished as these potential innovators and entrepreneurs migrate their
labor to the resource sector to reap higher wages leading to lower innovation and
lessened opportunities for learning-by-doing. Since it results in a crowding out
effect counter to the Dutch Disease channel, the authors highlight the possibility
of the crowding out of entrepreneurial activity in assembly manufacturing from
the perspective of labor aristocracy due to evidence of wage premiums in the
natural resource sector. Citing evidence from Trinidad and Tobago found that
workers, presumably of similar skills, earned different wages correlating with
their sector where wages were higher in the oil sector than in assembly-type
industries. While the authors explain that while the wage differential could be
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compensate unobserved higher productivity of petroleum workers183 or even be a
form of hazard pay for dangerous working conditions, they convey that if labor
aristocracy, the preservation of higher wages in the petroleum sector, is in play
then manufacturing may not be crowded out by the extractive sector via increased
higher wages because the wage floor is artificially fixed by industrial convention.
As it relates to entrepreneurs and rent-seekers alike, a fixed high wage floor is a
deeply profitably incentive for opportunists to invest in trying to gain entry into
the petroleum sector thus affecting the levels of legitimate growth-promoting
activities (SW, 2001:837). This leads to behavioral explanations characterized
most often as affecting resource rich countries.
Assuming an underdeveloped capacity, crowding-in is a factor, such that
the rents from natural resource booms present opportunities for corrupt activities
due to the highly concentrated and potentially appropriable nature of elite rent
control, which itself is not always supportive of pro-growth activities or even
capable of appropriate pro-growth management; both of which are distinctly
different as the former relates in this case to extraversion or the endogenous,
systematic undermining of development while the latter refers to the systemic
underdevelopment of economic sovereignty.
By Sachs and Warner’s accounting the various narratives based on the
Dutch Disease mechanism stimulating wealth-induced expansion and contraction
of a country’s economy are “…the most likely explanations for the curse of
natural resources” especially because “other possible explanations do not pass
183
Clearly if a tangible increase in wages is warranted and extracted the increased productivity is observed,
though maybe not statistically operational. See moss on fees and hazard pay for dangerous conditions.
272
even a cursory look at the data” (SW, 2001:835), among these the authors classify
the level of savings and investment as well as the weak evidence for an
association between non-authoritarian political systems and income inequality
(SW, 2001:836). Also while the authors acknowledge it has no explanatory
bearing on slow growth the research team nevertheless entertains the space to
promulgate the ‘white elephant’ narrative, which, founded on assertions of sloth
and general incompetence, posits that natural resource countries waste the natural
resources on unproductive projects as the basis of a permanently lower level of
GDP than would have been enjoyed with optimal use of its natural assets (SW,
2001:836).
Nevertheless all of these reasons reinforce and interact with each other to
support the authors’ conclusion that the curse of natural resources is “a reasonably
solid fact” from the commonality of stagnated growth since the 1970s to the lack
of evidence for omitted variable bias or unobserved heterogeneity the curse
effects still stand and can even support behavioral claims and macroeconomic
assertions of poor competiveness leading to these countries tending to miss-out on
export-led growth. Sachs and warner add that with the exception of successful
cases of resource led-growth such as Botswana, “…natural resource abundant
countries systematically failed to achieve strong export led growth or other kinds
of growth” (SW, 2001:837), presumably, political power and progress. Still, a
key argument against the resource curse is historical being that natural resourceled development was instrumental behind the success of the world’s economic
power centers today driven by the Smith-Ricardian logic of comparative
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advantage and exchange. Unfazed, Sachs and Warner maintain that the
proportion of the total economy driven by natural resources was far greater from
1950 through 1999 then it was from the 18th century through 1914, thus their
rebuttal argues then not resource abundance but resource intensity (SW,
2001:832) is the problem because intensity measures the importance of natural
resources in the economy. The more important the extractive sector the more
likely crowding out-crowding in behaviors will be apparent.
Critical Commentary on (SW, 2001)
While it is true that unparalleled technological change has a role in the
increased intensity of resource development as more of the resource-rich majority
is brought online, it is also true technology along with other geopolitical factors
have led to unparalleled wealth accumulation; which itself engages reflexively
with the highly skewed distribution of resources and market access. The
argument could be raised that if Sachs and Warner are concerned with poverty
reduction, as indicated by their stance on convergence in Economic Reform, why
not take a measurement that would indicate a distributive failure such as the ratio
of natural resources per-capita to social service offering availability and
participation per capita. The authors are explicit that they want to measure natural
resources in the economy, not just per-capita, as it is the better measure of
crowding out theories (SW, 2001:830). Thus while poverty is a real issue to be
managed, at the least, Sachs and Warner are far more interested in the impact of
natural resources in high-risk geographies on global business arrangements. For
example, the authors note that resources per-capita are higher in Canada than in
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Zambia even though natural resource production is over 50 percent of the
Zambian economy as opposed to lower than 10 percent of the Canadian economy;
thus natural resources pose more of a risk to the economic activities of Zambia
than Canada.
It should be said that in 2001 Canada had a higher land to population ratio,
giving 7.8, compared to Zambia’s higher population to land ratio, giving a
population density of 33.6184. While more resources distributed over fewer people
in a politically stable environment compared to less resources distributed over
more people in a politically unstable environment is a fair comparison of
diametrically opposed circumstances, for which there are many reasons, it
nevertheless obscures the fact that while Zambia was an extractive economy
Canada was relatively more balanced; thus the resource production values would
be appropriate and reflect the economic structure from which they are derived.
Fundamentally Sachs and Warner hold that the difference between
resource-led development in the past and more presently rests on a very subtly
juxtaposed argument that endogenous resource dependency, rather than long-run
optimization of natural capital, disadvantages developing economies. Ultimately,
foresight along with the ability to both dictate initial conditions and monopolize
the head-start, cleaves the world’s economic successes from its failures; that is,
“[t]hose who predominate in the process of ceaseless accumulation gain power,
184
A Google search provided 290,586 sq miles (752,614 km²) as the size of Zambia and 3.855 million sq
miles (9.985 million km²) as the size of Canada. The population of Canada for 2001 was found at
http://en.wikipedia.org/wiki/Canada_2001_Census and 9,770,199, the population of Zambia in 2001, was
found at http://www.indexmundi.com/g/g.aspx?c=za&v=21.
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which emanates from the creation of wealth” (Babones and Chase-Dunn,
2012:167). In this light poverty is a byproduct of natural selection where regimes
of the fit rule, though Sachs and Warner are hardly the first fashionable
economists to advocate such ‘international Darwinism’ as Oswaldo De Rivero
writes of it in his 2001 text, The Myth of Development. In it Rivero also discusses
how truly left behind raw materials exporters are not only in the face of capital
flight, but in the face of the technological march away from raw materials
dependence catalyzing a process of deproletarianization and dematerialization so
that access to education and technological knowledge is a critical imperative.
The following section summarizes a view of how the idea of the ‘resource
curse’ is developed though the selected works.
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Chapter 6
6.1 Analytical Commentary on Shared Patterns within the Selected SWSubset
By now it is clear how Economic Reform and the Process of Global Integration
(ER) and The Curse of Natural Resources (CNR) are the bookends of the sub-set.
While CNR refutes doubts that the resource curse exists, posits a Dutch Diseasebased explanation and reviews similar explanations, the role of ER is two-fold. In
the first place it lays out the ideological atmosphere of the tripartite era and in
doing so outlines a recent point of departure from which more evidence would
accumulate on the poor growth experience of resource-rich countries in the postwar era. In the second place ER presents a classification scheme that prioritizes
free trade as the driver of convergent growth, and problematizes threats to free
trade including self-sufficiency.
Economic Reform provided the definitions for open and closed
economies which holds for the of the set and the econometric analysis, which is
mirrored throughout the sub-set, as well. Natural Resource Abundance and
Economic Growth (NRAEG) is a direct extension of the tests run in ER, and
hazards subjection to the same econometric criticisms so plainly spoken of in the
real-time peer discussion and commentary of ER. The forecasts of secular decline
in the terms of trade and the skeptical environment of export pessimism outlined
in ER supported the popular idea that natural resources can be a development
impetus for poor nations as it had been for the wealthy nations thus The Big Push,
Natural Resource Booms, and Growth (BP) refers back to the content of the ER
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focusing on the ideological atmosphere while dealing directly with what would
seem to be a historical double standard by noting the increased resource intensity
of developing economies today relative to the resource rich economies of the past.
“…Sachs was fully aware of the
historical significance of what he had
accomplished”. “Bolivia was really the
first, in my view, combination of
democratic reform combined economic
institutional change and Bolivia more
than Chile showed that you could
combine political liberalization and
democracy with economic liberalization.
That’s an extremely important lesson, to
have both of those working in parallel
and each one reinforcing the other”
(Klein, 2007:189 citing Jeffrey Sachs in
Commanding Heights: The Battle for the
World Economy, March 20, 2001.)
Another pattern shared between ER and BP is the ‘zero-balancing’ mechanism
Sachs and Warner engage in order to demonstrate and effectively magnify growth
in the former and a lack thereof in the latter. Regarding ER it was described in
detail earlier in this thesis how the authors mathematically cancelled previous
growth to the extent of negative growth, expanded in chapter 3 by Naomi Klein’s
narrative, then proceeded to judge growth based on the difference between the
recent past and the distant future. even though the recent past and the recent future
were zeroed out such that the ultimate comparison was between the distant past
and the distant future. This operation served to explicitly disregard growth of the
distant past correlated with autarkic policy, and draw attention to the poor growth
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of the autocracy-correlated recent past juxtaposed against the distant future, which
correlated with trade reform as a proxy for overall economic reform. Ultimately
the comparison was between open and closed policies such that the distant past
and recent future were discounted to demonstrate poor growth in the recent past
and relatively strong growth in the distant future. The decrease in growth from the
distant past to the recent past reflected an intense macroeconomic pressure to
conform to Western norms and the devastating negative growth of the recent
future reflected full-scale economic warfare embodied by the extraverse185
installation of economic reforms.
With respect to BP, the authors determined that growth in Latin America
was minimal and that resource booms seemed to have done little to generate longterm growth, more likely hindering growth on average (SW, 1999:63). Sachs and
Warner claimed to have made this determination based on an eleven country
dataset though upon closer inspection the dataset was reduced to eight countries
five of which had been considered archetypal ‘resource curse’ cases since the
early works of Gelb and of Auty. Thus BP can be subject to the similar critique
made by Stanley Fischer in ER with regard to bias, in that by establishing proof of
a resource curse by using archetypal cases of the resource curse to then support an
optimized model to demonstrate the mechanisms of the curse effect, the authors
stack the deck in favor of their ‘resource abundance equates to slow growth’
narrative. Rather than a scaffolding of poor development outcomes over the an
185
Rajan (2011) accredits the term ‘extraversion’ to Jean-Francois Bayart (2009) and characterizes it as what
effectively becomes a grand collusion between endogenous elites and foreign interests due to the process of
engagement when negotiating for development. See: Bayart, J-F. The State in Africa: Politics of the Belly.
Second edition. (2009). Oxford. Polity; Bayart, J-F. “Africa in the World: A History of Extraversion”.
African Affairs. 99 (395) 217; Rajan, S.C. “Poor Little Rich Countries: Another Look at the ‘Resource Curse’
”. Environmental Politics. 20 (5). 2011. (617-632).
279
abundant natural resource supply, it is more likely that an abundance of natural
resources in an energy and mineral-dependent global economy indicates a lack of
successful resource-led development not because it is inherently an inferior
strategy but because the systemic conditions for its successful execution had long
since passed such that attempts lead to poor development outcomes, which are
greatly frustrated by extraversion. Nevertheless Sachs and Warner maintain
otherwise.
Another pattern of the set is in regards to the authors’ refutation of omitted
variable bias. In ER, Stanley Fischer pointed out that “Latin American and
African countries did quite well in the 1950s and 1960s” (SW,1995a:103) thus the
authors oriented themselves against the import-substitution strategy of selfsufficiency from the outset of selecting a starting period forward of 1970. In CNR,
the authors were reiterating that as early as their NRAEG 1997 they had
established that controlling for growth prior to 1970 did not yield evidence that
resource curse affect had been altered.
While of the set, ER established the lack of convergence, there being
virtually no overlap between the resource abundant, poor countries and the
wealthy, resource poor countries, CNR poses the question “If natural resources
really do help development, why do not we see a positive correlation today
between natural wealth and other kinds of economic wealth”? (SW, 2001:828).
Though other kinds of wealth was left undefined in the article, one presumes a
command of parity participation in the global economy to be one of these
alternative types of economic wealth, and this again would come back around to a
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secular decline in terms. CNR goes further to state that many resource-rich
countries have been so for a long time, perplexed that they are still undeveloped.
In doing due diligence of contrasting views in ER, the authors mention Romer’s
hypothesis that the learning by doing process of modernization meant that the first
countries to become rich would reflect higher levels of human skills so that if
education and training were monopolized it would raise the future productivity of
capital and trap the poor countries behind (SW, 1995a:39). The authors also
considered a related alternative, that of Baumol’s convergence club thesis
whereby a glass ceiling determined by human capital endowments separates the
rich and the poor countries so that the standard of living for those countries with
similar economies and similar human capital endowments would converge among
each other (SW, 1995a:39). Despite the rational appeal of these theories, Sachs
and Warner regard them as intriguing, the authors nevertheless hail the
contradictory evidence that open trade would lead to faster convergence,
conditional upon a comparison of country’s initial level of income and its
potential income level (SW, 1995a:40) such that while growth can be shown,
equality is not a reality since the timing of open trade policy adoptions is a core
initial condition of catching up, and thus of wealth accumulation in general. The
following section speaks specifically to resource-based wealth accumulation in
the world-system with respect to structural conditions for successful development.
6.2 The Resource Curse from a World-Systems Perspective
In the domain of world-systems scholarship there is a debate between
Wallersteinian analysts, trained to hold the western capitalist state as the universal
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archetype against which failures in modernization are compared, and
“humanocentric” world-system historians, who compellingly assert that all the
world did not begin in Europe therefore European macro-structures are not
prototypical. These historians, which Wallerstein would refer to as comparative
historical systems analysts, forward the critique that “[w]orld-systems analysis is
not so much “incorrect” as it is insufficiently world-historical and worldsystemic” (Babones and Chase-Dunn, 2012:159). The two should not to be taken
as mutually exclusive, since it is true that capital accumulation is a long-term
social process, which is not pre-determined by the European experience, but that
the ‘curse’ determination of natural resources is a Eurocentric ideological
execution of control such that the Wallersteinian analytical approach is equally as
compelling in its application.
To this end, Wallerstein writes of four unique attempts to adapt the
dominant social science premises186, centralizing the western world, to the
transformed global realities of the post-war geopolitical environment. The
adjustments, all of which presents a qualitative parallel to Sachs and Warner’s
relatively constrained treatment of convergence in ER, included the idea of
‘catching up’ by adopting proven socio-cultural policies as the foundation of
modernization theory; dependency theory led by Prebisch, in which catching up
could not be effectively led from the socio-cultural arena but required control in
political and economic domains, arguing that secular decline in trade terms
186
Based on the cleaving of the separation of the western world from the rest of the world whereby
economics studying the market, political science studying the state, and sociology studying the civil society
became a trio of nomothetic disciplines generalizing the western world while anthropology covered small
“tribal” groups and Oriental studies covered frozen “high” civilizations (Wallerstein in Babones and ChaseDunn, 2012:516).
282
undermined convergence; several bifurcations of Marxist revisionism which in
the first was similar to western-led modernization ontologically with the
exception that the former USSR was to be the global exemplar then leading to an
intellectual revolution as the Asiatic mode of production implicated multiple
development paths if people could but wrench themselves free of despotism187;
and the Braudelian concept of the longue durée, which minimized episodic
political history and emphasized patterns of socioeconomic history over time. By
viewing the resource curse through Wallerstein’s world-systems perspective
allows the evaluation of the selected sub-set as the embodiment of an intellectual
argument and also as an organizational apparatus.
The following section focuses on the constructed reinforcement of Sachs
and Warner’s professed and implicit ideological leanings as presented by the
interaction of the selected papers, closing the loop with a return to Economic
Reform. From a return to the original point of departure this section redirects from
the more specialized econometric and development economic literature toward
the broader political economic domain to scale up the authors’ leanings and policy
prescriptions within a world-systems perspective; particularly guided by Astra
Bonini’s emphasis of cooperative versus competitive regimes of accumulation as
it relates to capital access and developing nations.
6.1a The Resource Curse as Intellectual Argumentation
There is nothing new about capitalism or about capital accumulation. World
187
This enabled Marxist analysis to transition from trying to fit non-western history into a sequence derived
from the analysis of European institutions and thought (Wallerstein in Babones and Chase-Dunn, 2012:517).
283
Systems Analysis is the study of global development though the processes of
capital accumulation, while World-systems History is the observation and
evaluation of long-term historical continuities that pattern global history. While
the transitional ideological modes of the various lines of western thought, such as
rugged individualism, the inherent self-interest of men and survival of the fittest,
predominate the rhetoric and policy of economic development world-system
historians take a necessarily longer and more inclusive view of development
activities that include the processes and narratives from beyond the Eurocentric
perspective on time, space, and change. For instance Robert Denmark and Barry
Gills write, “From the perspective of world-system history, one must raise
questions about conceptualizations of hegemony that begin with modern states
like Portugal, the Netherlands, or Great Britain. These actors were not as wealthy
or as dominant as the coterminous Ming/Qing China or Moghul India, though
they outlasted them. The story of the domination of western hegemonic states may
be more a function of ideology than historiography” (in Babones and ChaseDunn, 2012:158; italics-MM).
In Sachs and Warner’s ER the authors discuss an earlier period, prior to
1914, of internationalization whereby free-trade drove wealth creation and
institutional harmonization as if because circumstances had been thus before that
this justifies a view of a permanent natural order that merely met with interruption
(the short-twentieth century); but a historical-analytical world-system approach
has observed a periodicity of economic rise and decline such that a “temporary
rise and decline of some states relative to others” (in Babones and Chase-Dunn,
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2012:158) is the norm to the extent that there are more periods of rivalry than
hegemony and therefore a natural economic order is indeed ideologically held
more than it is a historical predetermination. Since hegemony cements ideology
for the temporary period of its dominance its no small wonder Viner was held a
notoriously visceral stance against Prebisch and Singer’s theses on the secular
decline in the terms of trade for raw material exporters, though such contempt,
shared by Sachs and Warner, could have only been ideological.
Consider that from a world-system historical perspective hegemony is
defined as a force-mediated hierarchical structure of the accumulation of surplus
whereby the hegemon polities “subordinates secondary centers and their
respective systems of production and accumulation” (Gills and Frank, 1990, 1991,
1992 in Babones and Chase-Dunn, 2012:158), giving not only the central
complaint of Prebisch’s Economic Development in Latin America and but also the
rationale behind Sachs and Warner’s associative debunking of the ‘big push’
theory discussed earlier. In what amounts to rhetorical games, albeit with real
consequences, the rise and triumph of neoliberal globalization heralded in Sachs
and Warner’s ER justified the force (intellectual, economic, and physical)
required to reverse the changes (political, economic, and cultural) that followed
the dominance of centrist liberalism in the post-war era from 1945-1970.
Wallerstein maintains that this truly “political campaign was given the deceptive
label of neo-liberalism” (in Babones and Chase-Dunn, 2012:519) which was
actually developmentalism turned globalism after 1970. First tested in Latin
America, then more mildly executed in the twin Regan-Thatcher administrations,
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Wallerstein corroborates Naomi Klein’s assertions of violent extroversion as he
writes of globalization,
They used this new framework to impose,
primarily via the US Treasury and the International
Monetary Fund (IMF), a practical program that
came to be called the Washington Consensus. It
demanded that all countries that were not
“developed” institute a program that gave priority
to export-oriented growth, while simultaneously
opening their border to foreign direct investment,
privatizing state enterprises, reducing their welfare
programs, and downsizing their bureaucracies.
Geopolitically, this political effort was enormously
successful worldwide in a period running from the
mid-1970s to circa 1995.
Wallerstein in Babones and Chase-Dunn,
2012:520
Based on data from this successful period of re-establishing global control, the
framework for the ‘resource curse’ was laid as a practical extension of
intellectually justifying, theoretically explaining through Dutch Disease
assertions, and otherwise maintaining subordinate control. While all
accumulative regimes will inherently have some requisite measure of control, be
it an exclusive guild in one field or global domination in all commercially
relevant fields; such is largely driven by current industrial-political interests,
ambition, and executive command of power. And still history demonstrates that
accumulation does not always equal poverty. Thus economic growth is arguably
as much about the greater structural channels as it is about product innovation,
unless the product is an intellectual amendment to structure, as the diagnosis of a
‘resource curse’ would seem to be.
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6.2 The Resource Curse as Organizational Apparatus
According to adherents of world-systems analysis, the socio-commercial realm is
spatially tripartite where power extends from the core to the semi-periphery and
periphery states. While this general pattern does illustrate the core-centric
diffusion of power, the structure of the world economy plays a major role in the
reflexivity of the semi-peripheral and thus peripheral states to the mandates of the
core. World-systems researcher Astra Bonini hypothesizes that the limiting factor
in the economic development of resource abundant countries is the core-led
structure of the world-economy. While Sachs and Warner have treated the
correlation of resource abundance and economic growth in a nomothetic fashion
giving ‘the curse of natural resources’, Bonini refutes the argument that resource
abundance leads to poverty through economic peripheralization, conversely
asserting that the twentieth century U.S. regime is competitive and hostile to the
economic development of potential rivals as compared to the nineteenth century
British regime of accumulation, which was complementary to the development of
the resource-rich nations.
Hinging on a historical review of the legitimacy of the declining terms of
trade claim forwarded most famously by Prebisch and Singer, Bonini argues that,
“what appears to be a structural linkage between raw materials production and
peripheralization is merely an outcome of the particular structure of the twentieth
century world-economy” (Bonini, 2012:54). She explains that studies by Imlah
(1950) and Sarkar (1986) found that during times concordant with the British
regime, respectively1798-1913 and 1801-1881, terms of trade were in favor of
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raw materials exporters averaging 82 percent and 87 percent. Citing Cypher and
Dietz, she points out that by 1881 “…raw materials producers were able to
purchase twice the amount of imported manufactured goods as they had been able
to purchase in 1800 with their export revenue” (Bonini, 2012:54).
While there were ups and downs, the overall trend for this period was in
favor of raw materials exporters. Historically this would support an argument that
it is counter-productive for resource abundant countries to industrialize since they
could afford to meet the full quantity of their surplus needs through importation.
As Bonini notes (57), “colonies and countries committed to exporting primary
products saw virtually unlimited exports and credits under the British regime and
had very little incentive to industrialize given that the terms of trade, at least
before 1914, seemed to be running in favor of raw materials” (citing Hobsbawm
1987:64-65). But when the pre-symptomatic decline in terms of trade began
around 1883, fully coming to a head in the great depression years of the post-war
period, raw materials exporters were no longer able to meet their needs catalyzing
the domestic policy shift toward self-sufficiency; squaring themselves in
opposition to the newly adjusting American regime. Raul Prebisch describes the
Latin American response to the trade and monetary shifts introduced with the US
regime stating, “such measures had never been applied as widely as in those days,
since there had never been a shortage of pounds sterling under the monetary
hegemony of London” (Prebisch, 1950:29)
Citing a study by Grilli and Yang (1988) Bonini explains that for raw
materials exporters the decline in term of trade was about 0.5 percent per year
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from 1900 to 1986 but after this time additional studies188 reported that through
the 1990s that decline was estimated to have increased to between 2-4 percent
annually. This means that by a measure of the decline in terms of trade through
the1990s rate of divergence between the resource exporters and industrial
societies was between 150% and 350% per year. These countries transitioned
from being participating members of a cooperative global economy to, as
explained in Sachs and Warner’s ER, having no one to cooperate with (SW,
1995a:14). That is, these countries had no position that could be referred to, in the
same manner of its former iteration, as cooperation. Prebisch concisely
illuminates this change of circumstance when he stated,
“ The United States is a powerful and wellintegrated economic entity and has become so
largely through its own deliberate effort, the
great significance of which is recognized. One
cannot overlook, however, the fact that this
brought about, for the rest of the world,
conditions incompatible with the functioning of
the international economy in the same way as
before the First World War, when the British
centre strictly observed the rules of the game in
the fields of monetary policy and foreign trade”
The Economic Development of Latin America
and its Principal Problems (Prebisch, 1950:17)
Bonini bases her hypothesis of British complementary versus US competitive
regimes of accumulation from insights presented by Giovanni Arrighi whose
framework demonstrates “ how the history of capitalism has been characterized
188
Maizels et al., 1998; Cashin and McDermott, 2002. See also Grilli and Yang, 1998; Cypher and Deitz,
2004; Imlah, 1950; and Sarkar, 1986.
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by a succession of hegemonic powers that have each defines and made efforts to
control regimes of capital accumulation on a world scale” (2012:56), where
‘regime of accumulation’ is defined as “the strategies and structures through
which these leading agencies have promoted, organized, and regulated the
expansion or the restructuring of the capitalist world-economy” (Arrighi 1994:9
as cited in Bonini, 2012:56). Adopting this framework her analysis uncovers that
there were more opportunities for the economic development of raw materials
exporters under the British- centered regime that had a complementary industrial
policy.
The British used high tariffs to discriminate against foreign manufactures
but their raw goods duties were relatively near rock-bottom at an average of 6.9
percent compared to as high as 40 percent on manufactures (Bonini, 2012:56).
Still greater than low barriers to entry, the real advantage to raw goods exporters
was the “highly decentralized and differentiated” (56) business structure of
Britain. Bonini writes that it was “impossible for British corporations to control
all aspects of global production” (56). This paradigm shift in the organization of
commerce is what Prebisch refers to as the ‘rules of the game’ it and made the
critical difference in the development opportunities for the semi-periphery. By
specializing in manufacturing and attendant activities that facilitate trade for
manufactures, Britain was not competing for control of the raw materials
production process. That is Britain had the ambition and executive command of
power but it did not have the industrial-political interest of raw materials
production, leaving the comparative advantage to be exploited by those who
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would have it.
Contrary-wise the US-centered regime is marked by high levels of
operational concentration (mergers and acquisitions) leading to the near total
control of the commodity chain in tight vertical integration. Here the relation to
beta-convergence discussed in Sachs and Warner’s ER, is clear in that like
economies, similar at some threshold, do business and grow together while those
dissimilar, or below the threshold, fall further behind. The vertically-integrated
multinational structures of U.S. corporations effectively depresses the competitive
advantage of other natural resource producing countries since they are able to
compete “in all aspects of raw material production in locations around the world”
(Bonini, 59 citing Chandler, 1990). I would argue that this defines what
Wallerstein refers to as the ‘ceaseless’ imperative of capital accumulation such
that “those who dominate in the process of ceaseless accumulation, gain power
which emanates form the creation of wealth” (Denemark and Gills:167, in
Babones and Chase-Dunn, 2012). The contrast in operational dominance is
further drawn between Britain and the U.S. in that “the British regime provided
raw material producing countries with access to the means of raw material
production (capital, technology, and knowledge)” (Bonini, 2012:57) whereas,
after taking into account the full extent of global integration and institutional
harmonization, as well as vertically integrated commerce under the U.S. regime, a
global distribution of oligopolies acting in self-complementation of the U.S.
foreign and industrial policy can be described in the likeness of a viral
monopolist:
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“Rather than supporting the development of
other countries as independent raw material
producers by providing access to its markets,
capital, technology and knowledge, the United
States has appropriated a large portion of the
value added in foreign raw material production
while also competing in raw material export
markets”
Complementary and Competitive Regimes of
Accumulation:
Natural Resources and Development in the
World System (Bonini, 2012:59)
Bonini goes on to explain that those countries that do not “succumb to the
‘resource curse’”, such as Suharto’s Indonesia are surrounded by an air of
developmental exceptionalism, which is traced back to U.S. geopolitical interests
(59). By incorporating countries like Indonesia, which became one of the world’s
top recipients of financial aid, into the capitalist sphere of influence the U.S. was
able to stem the spread of communism throughout Southeast Asia. Remaining an
aid recipient until the end of the 1980s and early 1990s large sums poured into
Indonesia “because of its strategic geopolitical significance, making Indonesia an
exception to the general rule of the “resource curse”” (60), thus it is evinced that
the ‘resource curse’ is an intellectual extension of foreign policy executed as an
organizational apparatus that disrupts, and prevents, foreign national development
from becoming a potential competitor.
Today, the United States, Britain and Japan are world leaders in advanced
technologies services and, along with up and coming India, and China is leading
the east as the world leader in manufactures all of which amounts to a economic
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restructuring on a world-wide scale in the 21st century. Noting that the current
uptick in commodities, initiated at about year 2000, has resulted in a reversal in
the decline of trade terms. Bonini posits that, “a China-centered regime of
accumulation would be more similar to the British regime than to the U.S. regime,
and therefore complementary to raw material producers” (62). In the sense that
China’s manufacturing sector is decentralized and non-monopolizing of the
supply chain in that regard, and as it specializes in consumer goods manufacturing
becoming the new ‘workshop of the world’ it will “likely require liberal trade
policies on raw material imports to secure adequate supplies of raw material
inputs for the economy” (62). By far the most important similarity between a
Chinese-led regime and the British-led regime is the complementarity of their
respective interests relative to raw materials exporters. For instance, Britain’s
wealth was not threatened by the development of countries specializing in
extraction since it was linked to manufactures, commercial and financial activities
(57) whereas unlike the U.S. strategy of wealth creation, “China’s wealth does not
depend on its ability to crowd out raw material producers” (63) but instead creates
the demand necessary for social overhead capital developments (SOC) per
Rosenstein-Rodan as well as access to capital loans, foreign exchange, and cheap
manufactured goods. In this Bonini gets to the heart of Sachs-Warnerian
narrative of the ‘resource curse’, in that CNR maintains that the most likely
explanation for the ‘resource curse’ is some variant of crowding out (SW,
2001:835) and BP demonstrates the ways reverse-crowding out, what I referred to
as the hyper-performance of Dutch Disease, effects the effectiveness of carrying
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out the US industrial policy of “crowding out other raw materials producers”
(Bonini, 2012:64). She asserts that when hegemonic regimes shift so do the
opportunities for development of peripheral nations in accordance with the
industrial strengths of the incoming hegemon, therefore,
“Theories and policies based on the assumption that
raw materials production is equivalent to
peripheralization in the world-system, or that there is a
“resource curse” whereby countries that produce
manufactured goods will always outcompete countries
that produce raw materials incorrectly assume that the
structural conditions within which countries compete
are static” (64).
That the theories and policies assume static conditions is evident in the optimized
model of an industrial economy in BP where the conditions are formalized as
assumptions governing labor mobility, sectoral production, and the relationships
between profits and the potential spread of industrialization, as well as profits and
the level of sectoral productivity that would incentivize entrepreneurs. The
monopolization of the technological advantage is among the assumed conditions
as well since restricted access to technology keeps the prices of the cottage
industry low allowing for the continued outperformance of industrial firms
operating with advanced production technologies when the profit maximizing
price is not lower than the competitive fringe and thus their presence cannot
simply be ignored in the marketplace (SW, 1999:53-54).
In regards to they way in which SW’s model represents both the
sustainability of the structural interest and a problematic facet of the structural
process, where northern firms monopolize the technological advantage, Sachs and
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Warner’s views on crowding out remain focused on the crowding out of northern
firms via sovereignty movements; though since the north controls the access and
retains the technological advantages of managing the value chains, such
endogenous shifts frustrate the applicability of the industrialization assumptions.
Blocked from technological access this leaves resource abundant governments in
a position to become rentier-states, since without the internal development of
SOC the rents would have no hard infrastructures to be channeled through, that is,
this may explain the claim of rentier-statism since these governments might know
how to collect a check but not how to technologically develop a competitive
economy, irrespective of a desire to do so.
The presence of China as an economic superpower is changing this. A
striking example of the effect that China is having on the opportunities of
resource-abundant countries and on the resource curse determination itself is the
case of Zambia. Recall that Zambia was one of the prototypical cases of was
made a prototypical example of the ‘resource curse’ by its inclusion in Richard
Auty’s seminal work, Sustaining Development in Mineral Economies: The
Resource Curse Thesis (1993). While both Auty and Bonini acknowledge that
Zambia’s copper mines were in decline throughout the 1990s, Auty suggested the
mines would not support development as they were nearing depletion while today
Bonini writes, “China now offers a growth market and Zambian mines are
thriving” (63). Such a report would indicate more about trading relations than it
does about mineral depletion. Ultimately, Bonini demonstrates that the trade
regime of the economic hegemon has a role in determining the development
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opportunities of poorer countries due to its influence on the global economic
structure and therefore “inequalities in the wealth of nations cannot be addressed
by merely transitioning low income countries out of raw material industries” (65).
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Chapter 7:
Concluding the Sub-set Analysis
Now the two guiding questions of this thesis can be answered: When did natural
resource abundance become ‘bad’ for development and why? In terms of
hegemonic power the evidence indicates that resource abundance became ‘bad’
for development with the rise of U.S. economic supremacy and that the negative
association of natural resource abundance and economic growth is demonstrative
of a highly restrictive timing and classification scheme that parallels this rise of
power based on market access and the monopolization of the value chain; such
that resource-led development was not always considered an inferior economic
activity. Indeed as Bonini points out, “ the widely accepted linkage between raw
material production and peripheralization seems to be related to the twentieth
century world-economy and does not seem to be a generalizable relationship
outside of this particular time period” (Bonini, 2012:55).
While the literature is clear that radical structuralists in the post-war era,
such as Prebisch, Singer, Rosenstein-Rodan and other theorists of what Paul
Kruger refers to as the high-development era, heralded the coming of a paradigm
shift in the esteem toward natural resources as a development pathway, the
mainstream literature on the ‘resource curse’, in the face of the Sachs-Warnerian
narrative, caricatures the notion that resource-led development would trap poor
economies in obsequious poverty. High development theorists pushed not purely
against resource-led development but instead for a structurally sensitive long-run
view of natural resources as a measure of sovereignty from the economic tyranny
of U.S. industrial policy. Prebisch links the beginning of the end of development
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opportunities, associated with a largely cooperative British regime of
accumulation, to the gold standard in the 1930s; another factor of resourcedevelopment and autarkic rationale largely ignored by the Sachs-Warnerian
narrative. Prebisch explains that at the helm of the global economy the United
States managed its growth through
A tenacious retention of gold, to the
detriment of the dynamic forces of the rest
of the world…[who] were obliged to adjust
their relationship with that centre in order
that they might be able to continue
developing, in spite of the unfavorable
influence of the centre and its great
absorption of metal
The Economic Development of Latin America and its
Principal Problems (Prebisch, 1950:18)
Thus this thesis on the Sachs-Warnerian narrative calls into question three
conduits of intellectual activity regarding the proliferative ‘resource curse’: (1) its
diagnosis (2) its avoidance and cooperative remediation by host countries and (3)
the aim of supra-national leadership to ameliorate the effects of the ‘resource
curse’ to the extent that related policy prescriptions are self-serving, structural
executions of a competitive double standard in the promotion of economic growth
more pointedly for the hegemonic U.S. - U.K. economic relation currently in
decline.
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7.1 Concluding The Sachs-Warnerian Narrative
Economic Reform and the Process of Global Integration is the backbone of the
Sachs-Warnerian narrative on the ‘resource curse’. It reflects the ideological
foundation as well as the empirical framework iterated throughout the following
papers characterizing the central corpus of the ‘resource curse’:
Economic Reform and the Process of Global Integration (1995a)
Natural Resource Abundance and Economic Growth (1995b)
Natural Resource Abundance and Economic Growth (1997R)
The Big Push, Natural Resource Booms and Growth (1999)
The Curse of Natural Resources (2001)
A contribution of this thesis is that the geopolitical context and socio-cultural
impact is less fully appreciated absent the consideration of Economic Reform and
the Process of Global Integration (1995a) as the grand theoretical framework of
the set. Many of the claims of bias can be traced back this paper and its methods.
While it is cited more often than Natural Resource Abundance and Economic
Growth, I failed to find Economic Reform cited in the much of the resource curse
specific literature. Its inclusion in an analysis of a set of Sachs-Warner papers
would integrate the contemporary rendition of the ideological underpinnings of
the ‘resource curse’ as well as the foundational methodology behind the
determination of a ‘resource curse’ and the larger implications for the application
of the resource curse as economic reform. While a close reading of the mentioned
works supports an assertion that the authors crafted empirical results around an
ideological bias, a foundational premise of that argument is that Sachs and
Warner’s Economic Reform and the Process of Globalization (1995a) is the most
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appropriate point of departure for a foray into the authors ideological leanings
with the added benefit of historical confirmation. Many of the same issues
commonly associated with skeptical views of the ‘resource curse’ such as
selections bias, omitted variable bias, and unobserved heterogeneity are present,
asserted contemporaneously by their peers, and addressed by the authors in
Economic Reform as the grand theoretical frame for their ‘resource curse’
narrative. As noted in the introduction, while several authors have analyzed a subset of Sachs and Warner papers (Tilton, 2013; Lederman and Maloney, 2002;
Heinrich (2011) refers to a SW-subset), mainly on grounds of econometric overexuberance, none found initiate their analysis with Economic Reform, which
shares the same econometric approach and its faults.
The rhetorical analysis in concert with the socio-historical contextualization and
the world-systems perspective reveals that Sachs and Warner’s development and
application of the ‘resource curse’ was knowingly founded on biased intellectual
premises and modeling then proliferated throughout developing nations as an
affliction for which trade reform as a proxy for “…other parts of the reform
agenda” (Sachs and Warner, 1995:106) was the prescribed advice. This led to an
imposed condition of more rigorous competition, altering the political economy,
constraining the government's macroeconomic policies and manipulations in the
economy, and subjecting institutions that want access to international markets to
the scrutiny and conditionality of the international environment” (Sachs and
Warner, 1995:106), which is known to act punitively toward those countries who
would make their path to a free-market regime in a sovereign way. History shows
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that acquiescence is the solution more unlikely to lead to the assignation of a noncompliant leader. Further, if the resource curse is proven a biased intellectual
apparatus the grounds for international intervention of sovereign nations on the
basis of preventing the resource curse effects via transparency regulations are
unfounded, breeches of sovereign autonomy, the effects of which are patently
hazardous to the health and well-being of the affected nations’ populations. To
this degree, the resource curse may be less about reducing poverty, or even
rectifying poverty-ridden conditions by combatting corruption and increasing
transparency, than it is about securing access and effective ownership of natural
resources amid an energy-driven geopolitical and social evolution where some
countries are reduced to squeezing oil from sand in order to increase supplies and
market-share.
While the analytical content of this thesis has been largely qualitative, the
‘resource curse’ is typically handled in a very quantitative way and this more
often than not obscures the true complexity of populations, power, and parity. I
have strived to weave these issues together, by no means to the exclusion of the
great mass of econometric effort, but to highlight to the larger sociological picture
of the resource curse including an analysis of its rhetoric. I end this work with a
very revealing econometric review of a series of Sachs-Warner papers that takes
into account the responsibility of scholars and the institution of scholarship.
7.2 Replicating Sachs and Warner: The 1997 Working Paper
Most studies that refer to Sachs-Warner data are referring to the 1997-updated
version of Natural Resource Abundance and Economic Growth that includes
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additional tests of robustness. Davis (2012) runs both a ‘pure replication’ and a
‘statistical replication’ of the all 33 of the regressions presented in the 1997 paper
and find unsettling results. Davis focuses on pure and statistical replication in his
study as he asserts that the two must certainly precede scientific replication,
defined as, “different sample, different population, and perhaps similar but not
identical model” (Davis, 2012:3), in order to differentiate between any sampling,
population or modeling errors and a problem in the original work.
Where ‘pure replication’ is defined in Davis, 2012 as “to make or do
something again in exactly the same way” (Davis, 2012:3). He was able to
replicate the findings with great difficulty as he explains; “The replication attempt
took longer than it should have because of the many inconsistencies between the
reported regressors in the paper and the actual regressors in the STATA file.
Without the STATA file the replication may have been impossible” (Davis,
2012:9). Still the SW results supporting the resource curse were reproducible
given that “SW’s results can be exactly purely replicated once the countries
included in the regressions are determined and the errors in the paper’s reported
regressors are corrected […] There is no doubt that the SW data allows them to
measure a resource curse in the 1970s and 1980s that is robust to various sets of
conditioning variables” (Davis, 2012:9).
In contrast, when it came to a statistical replication defined as, “different
sample, but the identical model and underlying population” (Davis, 2012:3), very
different outcomes surfaced concerning the inconsistent sampling by regression of
the full country list which biased the results to the extent that of the 211 country
302
database only 22 of these countries are used across all 32 regressions while some
regressions use some of the countries but not others. These selections decisions
are not immaterial. For instance, Davis reports that the inclusion of Botswana
would have strengthened the resource curse while the inclusion of Somalia,
Tanzania, Barbados, Haiti, and Myanmar might well weaken the correlation
(Davis, 2012:10).
Also, in several regressions the resource intensity coefficient went from
being statistically significant to statistically insignificant in one fell swoop. This
affected the conjecture that the resource curse might be operating through Dutch
Disease, which was then weakened by the removal of 9 countries; the authors’
claim, introduced in Economic Reform, that there is a U-shaped relationship
between resource intensity and trade openness and that the heavily resourceintensive economies are less protectionist than the less resource-intensive
economies was weakened by the removal of 13 countries; and their proposition
that higher resource intensity is related to poorer institutional quality, and that this
is part of the reason for slower growth, was also weakened by the removal of at
least 10 countries for the sample (Davis, 2012:10). These omissions were the
basis of key evidence supporting Sachs and Warner’s assertion that natural
resource production negatively impacted institutional quality and industrialization
so that while the negative correlation between resource production and economic
growth could be replicated and is robust to different country samples the results
giving the specific evidence regarding institutional quality and industrial output
was not to be replicated similarly.
303
The research covering the relationship between institutional quality and
resource production has been particularly rich and continues to be so. Davis
reports on the results of Stijns (2005) and Mehlum et al. (2006) as well as his own
2011 work; because of the many studies published after SW 1997a, only these
three began with pure replications of the relevant SW data. In researching the
general idea that the quality of institutions determines susceptibility to the
resource curse, Mehlum et al. (2006) added a missing interaction coefficient for
resource curse/institutions to the replication of the SW regression testing
institutional quality and growth. They reported that poor growth could be the
result of poor institutional quality or poor quality could be retarding growth so
that the relationship between natural resource abundance and institutions is far
more complex than SW could have accounted for in their regression. Ultimately
this result means that, “SW’s lone institutional quality variable becomes
insignificant once the interaction term is added to the regression” (Davis,
2012:11). Mehlum et al. (2006) maintains that these results hold across different
country samples, periods of analysis, and measures of institutional quality. When
Davis replicated Mehlum et al.’s regression he found that 65% of the time where
a single country is randomly omitted from their 71-country SW sample their
interaction effect was insignificant at the 5% level so that their results were
contingent on the pure luck that everyone of their samples had complete data and
could be included (Davis, 2012:11).
Of particular interest is Sachs and Warner’s treatment of the direct effects
of resource booms and busts on economic growth measurements. While the
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authors take terms of trade effects into account to control for these cycles Davis
points out that this would only address price-led peaks and troughs, not those that
are quantity-led. By using his own calculation with data that would have been
available to the authors at the time of their study Davis finds that the resource
curse is diminished or even reduced to zero when changes in mineral and energy
production are taken into account. The result holds when SW’s resource intensity
measure is substituted into the calculations enabled by available data. Why Sachs
and Warner did not use this data is not entirely clear as, “…this lack of scientific
replication is not a result of scientific progress or improved econometric methods”
(Davis, 2012:11).
Regarding other variables for resource abundance, Davis reports that there
has been some feedback that natural resource specialization is driven by
underdevelopment rather than being a response to underdevelopment, so that the
SXP (Share of primary products exports) variable is more sensitive to patterns of
asymmetrical trade relations than physical endowments (Lederman and Maloney
2007b, Alexeev and Conrad 2009, Mehlum et al. 2006)189. It would appear that to
avoid this less econometric implication, the resource curse is generally associated
with mineral and energy production so that SNR (mineral and energy production)
is the preferred indicator of resource abundance, though others such as land area
per capita (LAND in 1971) and ratio of primary exports to total exports (PXI70 in
189
Alexeev, Michael, and Robert Conrad (2009), The elusive curse of oil, Review of Economics and Statistics
91(3): 586-98; Lederman, Daniel, and William F. Maloney (2007b), Trade structure and growth, in Natural
Resources: Neither Curse nor Destiny, Daniel Lederman and William F. Maloney, eds. Washington, DC: The
World Bank. Pp. 15-39; and Mehlum, Halvor, Karl Moene, and Ragnar Torvik (2006), Institutions and the
resource curse, Economic Journal 116 (January): 1-20.
305
1970) are used as well. When Davis replicated each of the 9 SW resource curse
regressions with mineral and energy production as the independent variable
(instead of SXP) and the purchasing power-adjusted GDP of the economically
active population as the dependent variable he found a minimal difference in
statistical significance between the two variables in each regression is under both
the original sample of 91 countries and also under the full country sample with
growth data for 10 countries added. This was also the case when using the
resource intensity variables LAND and PXI70 instead of SXP, though with the
ratio of primary exports to total exports became statistically insignificant under
the 91-country sample.
Also Davis found that as growth increased, mineral production per worker
decreased, irrespective of controlling for initial level of per capita income. He
found that this result was significant at the 5% level. This would imply that
mineral production alone does not support convergence, in the sense of wealth
distribution.
7.3 Concluding Comments
Davis’s commendable work yields courageous conclusions, which are disturbing
to say the least, since most replications of the Sachs-Warner results are not
derived from pure replication of the original SW dataset, though as he explains
this is not an easy task. Only through an admittedly trying and near impossible
execution of pure replication was Davis able to garner a successfully aligned
resource curse outcome in that “countries with intensive primary resource
production as of 1970 grew more slowly from 1970 to 1990 than equivalent
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economies that did not have large primary resource sectors as of 1970” (Davis,
2012:11). While the concerns of sample and omitted variable bias have been
stated before by authors of scientifically and statistically replicated papers, this
paper is among others where the replication was pure (Mehlum et al. (2006) and
Davis (2011).
On the statistical side Davis found that the very regressions that define the
operation of the resource curse were not robust causing him to “…suspect that the
paper’s attempt to explain the resource curse via an endogenous growth effect
involving shrinking manufactures is more tentative than even SW suggest”
(Davis, 2012:13). He also point out that the authors’ tests need only be consistent
with the data that they provide, therefore “pure and statistical replication does not
test the validity of the econometric specification that SW use” (Davis, 2012:13).
Here Davis asserts a moral premise regarding the demarcation of social values in
that executing a test consistent with data does not make the method valid, nor
does it validate the specification of certain test values.
Understandably, Davis maintains that the results of the pure replication are
enough to continue supporting the myriad of research, and thus prescriptive
policies, that the original findings spawned. I applaud Davis’s advice that further
studies testing “…for data period, data sample, and variable definition effects
should also begin with replication so that any observed differences can assuredly
be attributed to data differences rather than error in analysis or method” (Davis,
2012:13). In this way a corrective tide might commence so that replicability in
the social sciences represents true observations accessed with a measure of ease
307
once an approach is set forth proclaiming to allow such access. Such is much
preferred to scientific truth or fact as the product of a highly restrictive process of
distillation, such that even seasoned practitioners are at a loss. Without a doubt
Davis’s advice is a way forward, but a step in the right direction should not deter
from the explicit acknowledgement of the wrong one.
The austerity measures and the war-mongering that follow the resource curse
policies are knowingly brutal, but a key conclusion of this thesis is the recognition
that the execution of such lethal policies is firstly an intellectual craft. As Davis
has pointed out, the econometric outcome that is the ‘resource curse’ can only be
replicated under exacting conditions as to assume perfect information. It may be
popular to base a premise for economic warfare on an assumption of perfect
information, but it is commonly understood that in reality there is no such thing as
perfect information. Rather, in truth there is only a satisfactory amount and
diversity of information to justify a path of action. The resource curse exists
under very specific conditions, and by the measure of pure replication those
conditions are exceptionally hard to come by, and most certainly are far from a
natural order. The social sciences are not the physical sciences, for time moves as
quickly as the mind changes and fads fall from frenzy, so to make or do
something again in exactly the same way is to recondition circumstances in the
likeness of that long-gone. In the realm of social sciences, the desirability of a
proposed set of circumstances to return will always be a moral argument subject
to the power of the power hegemon. Sachs and Warner’s Economic Reform and
the Process of Global Integration is unable to escape this. Basing policy on a
308
mirage of perfection is surely a grand mistake, but moving forward as though the
social and economic environment is not of our own making and therefore can be
subject to consciousness-mediated adaptation, is far more lethal a mistake. Not
only is the amenable durability of the natural environment for human survival at
risk but also it appears humanity is at risk of itself. Accepting the resource curse
as real and natural to the end of proceeding with policies that are not actually
addressing the problems from the over-simplification of much older human
conflict, is a type II error all must be responsible for and willing to engage. Or
maybe scholarship is just not that high of a calling. As Donald McCloskey wrote,
“The question is how to converse about this culture-bound conversation of
humanity.” I am instead, hopeful.
309
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