Economic Development Models and Capitalism

The question of “Development Models”
In the post-Communist era now more than two decades old, many people around the world are questioning what is the best economic development model? One reason for such a question is the very deep recession of 2008-present that has thrown many economies into a downward spiral of unemployment, rising public and private sector debt, and lack of rapid growth in the remainder of the decade.  So, what are some models of modern economic development and to what degree do they improve people’s lives, and do economic growth and development alone account for human happiness – with the broader meaning of the latter term?

The mode of production that determines the social order has been capitalism that has evolved from the Commercial Revolution in the 16th century to globalization in the late 20th-early 21st century. Under the world-system of capitalism, there have been different models of development in the history of capitalism, determined to a large degree by the shifts from the primary sector of production (agriculture, forestry, mining and fisheries) to the secondary sector (manufacturing) and to the tertiary (service) and high tech/biotechnology sector.

Before analyzing some models of economic development, it is instructive to consider the following questions about “development economics”.
a) What development model best serves the needs of the people, presumably all people and not just the financial and or political, military, bureaucratic elites?
b) Is it possible to separate politics from economics and speak in terms of pure economics instead of a system of political economy and social structure?
c) Is there such a thing as “the perfect” or ‘ideal’ system that can be applied perfectly in practice as it may appear in theory, whether such a system is market-based, statist, or some model based on a mixture?
d) Different countries would require to adopt variations of different models depending on their natural resources, labor force, level of current development.
e) Change is required to models of political economy to keep up with changes in the real economy and society.”
f) As perfect as they may be in theory for any given  society, economic models in practice do not mean very much, simply because the decision on what policies to pursue are always taken by those who command economic and political power. Add to the equation the factor of corruption and the model is coffee table reading material.
g) There is no such thing as the ideal model in theory that is not in practice a mixture of several theories. For example, is the US  a “free market model” economy when in essence it has been practicing corporate welfare economics for decades? Is Indonesia a neoliberal economy under an Islamic regime, similar to Malaysia, Turkey, and now Egypt and Tunisia? Is China a statist economy or a mixed economy that allows a heavy dose of free enterprise?

Can there be a development model that serves all people based on social justice?
In the 19th century, there were a number of intellectuals from Adam Smith to Karl Marx who believed that it was possible to have an economic system that best served all people. However, Smith was an advocate of free market economic development, while Marx believed only Communism, the natural state of human beings, can best serve the people by eliminating elites, not reinforcing them.

Because people have differing views on what best serves society, that is, best serves every person equally in every respect in institutional terms, most economic models are necessarily based on what best serves interest groups within society. There are of course economic development models that claim to best serve everyone, including Socialist and Communist models, but in practice some sectors and some individuals are better served even by those models, as history has clearly demonstrated in the 20th century, than other groups in society. In short, as Jean-Paul Sartre and many others correctly maintained, there will always be elites in society, and that means that no economic model can possibly be free of that reality. Another way to view this is that there is no such thing as an economic development model that is “objective”, because models are rooted in everything from investment to terms of trade that invariably benefit certain groups and not society as a whole.

Should GDP growth be the sole criteria for human happiness?
It is true that in world public opinion polls the top ten “happiest countries” are those that we consider developed economically, that is, those with diversified economies and high incomes. This is an indication that in the age of materialism where the value system is rooted in wealth and the security provided to maintain it people believe their happiness hinges on things associated primarily with material possessions. However, national economic growth and development do not necessarily translate into individual happiness, if a percentage of the population, anything above 10%, lives in chronic poverty.

Moreover, human happiness is also predicated on spiritual fulfillment for many non-Western societies. In the early 1970s, Bhutan rejected GDP as the sole criterion for progress, asserting that quality of life, social progress and the psychological well being of people are significant indicators to take into account. The Bhutan example became the UN standard as well. Although this is something that can be used as distraction by those trying to justify socioeconomic injustice by arguing why do people need material improvement when they have spiritual fulfillment, it is important to note that we cannot use the Western material criterion alone for it does not reflect the human experience worldwide.

Defining “Development”
The term development in economics does not mean the same thing for an advocate of “dependency theory” as it does for a monetarist. Nor does it necessarily mean the same thing for an advocate of sustainable development in India vs. one in Canada. For this reason, I need to lay some groundwork for this synoptic perspective of what the term means to intellectuals and politicians who do not share common views.

1. Centrally-planed models.
The old Soviet centrally-planned economy from the 1920s until the early 1980s was a model in which the command economy was rooted. The government decided on productivity and investment by sector as well as absorption of the surplus labor force from one sector by the other, not to satisfy consumer demand, but rather to meet the greater societal or national needs as the state defined them. In varying degrees, this model became a prototype for Eastern Europe after 1945, and for Cuba, Vietnam, North Korea, and China under Mao.

Development was measured by the state in terms of meeting production quotas, though in practice, the bureaucracy falsified reports to make productivity appear much better than it was. In the end, such a non-consumption-geared economy did not translate into rising living standards across the board, but it did absorb the surplus labor force and it tried to meet essential needs such as housing, health, and education. Command economies had enormous problems, not only because their civilian economies failed to meet mass consumer demand, but also because of the emphasis on durable goods focus vs. consumer goods, and heavy military spending that absorbed resources otherwise needed for the civilian economy. In practice, the politically-connected elites (the ‘new class’ linked to the Communist Party) benefited, while the broader masses lagged behind and lacked basic freedoms that many of them valued, such as freedom of worship, expression, and others that are common in open societies of the Western World.

2.  Quasi-statist and neo-corporatist models.
Government permits free enterprise, but invests heavily in certain industries and/or subsidizes others even if they show chronic deficits instead of profits, because it deems it is in the ‘national economic’ interest. It is difficult to argue that quasi-statism and neo-corporatism, both of which are inter-related and have many aspects to them, are alike in South Korea as in Brazil, or in Russia as in Argentina and Venezuela. The common denominator is heavy government involvement in investment with the intent to promote certain sectors, trade regulation intended to promote national capitalism and not permit international capital to determine economic planning, and strengthening the state structure so that the private sector, especially foreign capital does not have a dominant role.

After the Second World War, a number of countries, including Japan, South Korea, Taiwan, among others, began to adopt ‘top-down’ development models so they can help build sectors such as steel industry, shipbuilding, and others. This model in varying degrees found expression in Brazil, Argentina after 2001, post-Communist Russia, even Spain in the late 1980s-early 1990s before the wave of neoliberalism swept the EU that had itself aspects of corporatism and quasi-statism as a regional bloc rooted in heavy subsidies of certain sectors.

The quasi-statist model is also operating in a number of countries as different as Norway and Saudi Arabia. There is the Norwegian development model, (to some extent also practiced in other Scandinavian countries) essentially a variation of Keynesian economics, is rooted in a strong state structure that relies on a solid welfare state with a private competitive sector backed by the social-democratic state.
The benefits of this model are that there is a sense of national control over the economy, vs. foreign capital control, thus it is an issue of national sovereignty prevailing in the age of globalization. Another benefit is that the state helps to plan for the country’s future with the intent of long-term development that presumably would meet the needs of the majority of the people. Moreover, the nation retains a strong national capitalist class that is able to compete internationally instead of becoming subservient to exporters from developed core countries.

How well has this model worked? The examples of South Korea, Taiwan, all of the BRICS (Brazil, Russia, India, China and South Africa) indicate that the national economies experience phenomenal growth. This does not mean, however, that the wealth is evenly spread across the population.It is true that South Korea, and Taiwan developed a middle class on the basis of this model and it is also true that the fastest middle class growth is taking place in the BRICS. However, the world’s largest percentage of poor live in the BRICS. With the promise that national economic growth and development will some day in the future translate into individual prosperity the quasi-statist countries can continue to operate as they do until such time as the broader masses rise up and demand results filter down to them.

3. Neo-classical (free enterprise) model.
The classical free enterprise system theory of Adam Smith and its apologists in the 20th century, from the neo-classical advocates (Robert Solow and T. W. Swan) to Milton Friedman and the Chicago School that rejected Keynesian economics in favor of rigid monetarism that is an integral part of the neo-classical movement. Productivity and capital accumulation based on a fiscal system that favors capital, allows maximal freedom of capital movement and investment and limits organized workers’ rights that inhibit capital expansion and accumulation are at the core of this school of thought.

With many variations, the neo-classical school and its advocates ranging from supply side economics to neoliberalism and monetarism as expressed by IMF-World Bank economists as well as purists of the classical theory made a major comeback in the 1980s and they have triumphed ever since. In practice, the theory never worked as its advocates claim, because the state became a vehicle to transfer massive income from the welfare state to corporate welfare, thus a form of statism was part of this model. Moreover, the model in practice proved to have many flaws as it permitted numerous scandals from banking to corporate corruption and investor fraud on which fortunes of the very few were built at the expense of the general economy.

The market-oriented growth and development model is presumably one that takes place under an open, free and democratic society where free market forces trade, invest and consume with minimal government intervention. This is the theory. In reality, the role of government is very heavy in every aspect from monetary to fiscal policy, and society is not nearly as free and open as one would argue in theory. The quasi-police state methods of the US, everything from illegally tapping into the private phone records of millions of people to denying due process to anyone that government has the right to brand terrorist indicate a slippery slope toward authoritarian capitalism. “The National Security Agency and the FBI are tapping directly into the central servers of nine leading U.S. Internet companies, extracting audio and video chats, photographs, e-mails, documents, and connection logs…”

Putting aside the reality that economic models necessarily work within a political system that makes all kinds of lofty claims about what best serves “the people”, let also consider that many people actually believe that if the “national economy” is performing well, so will they, because they identify with the nation-state, even though they as individuals may be in the lower socioeconomic strata and derive no benefits from any growth and development. This is the case in many countries, most notably the US. The latest (June 2013) Department of Labor report shows that labor costs are the lowest since 1947 when the US began keeping records. Hourly compensation continues to sink, most notably in the manufacturing sector that was historically the best-paying sector for workers. This trend of downward socioeconomic mobilization has been a reality for the past three decades, but the US economy continues to develop and grow, though without such development translating into income growth for the middle class and workers.

There are variations of authoritarian capitalist models found in many non-Western countries such as Saudi Arabia but also in a number of African nations. This model allows for free enterprise, it rests on one or very few sources for economic growth and development, and it has a strong state monopolized by authoritarian regimes, invariably more corrupt than countries where there is some semblance of checks and balances. There is the Indonesian, Malaysian, Turkish model of neoliberalism under Islamic regimes; something that is now spreading across other Muslim nations, including Tunisia and Egypt. This model is an integral part of the neoliberal one under globalization.

Clearly, there are models today that result in tremendous GDP growth, but that does not translate to upward socioeconomic mobility and the qualitative and quantitative growth of a middle class. For example, the result of globalization, especially from 2007 to the present, is that the middle class in the US and EU has been shrinking, while it has expanded in Asia and to some degree in Latin America and parts of Africa. Therefore, versions of the neoliberal model of development that the US and EU have been pursuing has resulted in downward socioeconomic mobility for the most advanced nations as well as semi-developed ones in Southern Europe. Nevertheless, more than half of the middle class in in North America and EU, while the vast majority of the poor are in the non-Western world.

According to OECD statistics, “In 2009 the middle class included 1.8 billion people, with Europe (664 million), Asia (525 million) North America (338 million) accounting for the highest number of people belonging to this group. …  The size of the “global middle class” will increase from 1.8 billion in 2009 to 3.2 billion by 2020 and 4.9 billion by 2030. The bulk of this growth will come from Asia: by 2030 Asia will represent 66% of the global middle-class population and 59% of middle-class consumption, compared to 28% and 23%, respectively in 2009…”

One paradox in economics is that it is possible to have growth without development (vertical growth), or growth accompanied by underdevelopment as in the case of African, Latin American and some Asian countries that are relying on one or two export products, while using the proceeds to import everything else. This kind of dependency has been characteristic of the core-periphery divide in the capitalist world system for the past five centuries; for there is a vast difference between an undeveloped country enjoying self-sufficiency and an underdeveloped that one that is financially, commercially and industrially dependent on the advanced capitalist (core) countries. Moreover, there is a vast difference between a country experiencing ephemeral growth owing to the availability of some export product –let us say oil – and sustainable development that leads to diversified economic development and greater self-sufficiency.

Alternatives from the Interwar: Keynes and Polanyi 

The IMF, World Bank, US Federal Reserve, European Central Bank, OECD, banks and corporations, the media and governments have been arguing in the last three decades that there is no alternative to neoliberal policies that have been followed religiously in the postwar era, especially from the Reagan-Thatcher era to the present. The idea that “there is no alternative” to an economic development model implies that God handed it to a prophet down here on earth and all the faithful must obey it in the same manner they observe religion, otherwise they are sinners and must be demonized. Is there anything sacred about the neoliberal model that emerged in Europe during the 1930s but exploded in the 1980s? Is the market system above history, one that always existed, and “natural” thus compatible to human nature and society because it serves people’s interests? Two interwar economists certainly felt otherwise, namely Keynes and Polanyi, though they did not agree on the alternative development model.

In the classic study of capitalist political economy undergoing rapid change during the Industrial Revolution, Karl Polanyi, argued that the “market system” is hardly the norm in human civilization, but instead the exception.   “Previously to our time no economy has ever existed that, even in principle, was controlled by markets . . . gain and profit made on exchange never before [the nineteenth century] played an important part in human economy.” (The Great Transformation: The Political and Economic Origins of Our Time. 1944).

Polanyi’s study points to capitalism as a cruel system that generates “market efficiency” translated into greater concentration of capital at the expense of creating greater misery among people. It is true that this work comes from the experiences of a European intellectual who lived during the Great Depression and saw Europe destroyed during the Second World War. Polanyi was a contemporary of John Meynard Keynes whose economic development model (in the form of the New Deal in the US) was intended to “save capitalism” from its predatory self-destructive tendencies through reforms that entailed deficit financing and greater statism that would act as a pillar of the fragile system.

Unlike Keynes, Polanyi was not interested in saving the system that dehumanized society because it was predicated on uneven and unequal development. Whereas neither Keynes nor Polanyi trusted markets to go unchecked, Keynes wanted the state to play the catalytic role as arbiter so they may thrive and at the same time make sure there is a social safety net that in essence acts both to stimulate the economy through consumption. This would ensure a broad popular base of support for the political system under which capitalism operates. Market manipulation by capitalists necessarily entails rationalizing the system with the state’s regulatory intervention has its limits. Polanyi opted for a clean development alternative that did not aim at saving markets but people, because the goal of markets is indeed to serve the people not to perpetuate themselves through capital concentration and centralization.

While it is understandable that capitalists would have nothing but contempt for Keynes and Polanyi, politicians, the media and many mainstream economists and social scientists followed the lead of the markets. This is not just because there is no reward criticizing those who money and power, but also because the neoliberal model appeared to be gaining ground largely owing to the political failures of Soviet Communism and China’s embrace of capitalism. In short, the markets triumphed, therefore why not let them loose, give them all they want, everything from utility companies and government contracts, to direct subsidies and tax breaks. In the last two decades or so, there have been some who have dared to question the neoliberal model and even bring the works of Keynes and Polanyi.

I do not believe that history repeats itself because it is like a river where the same water is never there. However, the similarities of our times with the Gilded Age (1870s-1900) and with the 1920s are rather striking, especially since we have a decentralized political and economic power structure with East Asia increasingly playing a role in determining global affairs. At the same time, the dwindling middle class in the Western World and the rise of social unrest in many parts of the world has many people wondering about the breaking point in the political economy. While a dose of Keynesianism is always an option for governments in the future that run into sociopolitical trouble, I believe that Polanyi’s alternative of human-based economics is a model on which a real systemic alternative could address social justice issues rather than glorifying market strength for its own sake and to have a few dozen billionaires own as much wealth as half of the earth’s population.


The idea that there is any model that can possibly reflect “human behavior” and its idiosyncratic proclivities assumes that there is such a thing as a “uniform generic model” of human behavior, rather than “atomic action constraints, as determined genetically and by cultural conditioning”. In fact, the reason I argue that there cannot be a perfect model, is because I made certain assumptions about human nature, namely that the irrational tendencies play a far greater role than the rational.

This is a very old argument rooted in the philosophical debates that goes back to the 17th century (Hobbes and Locke) and continuing in the Age of Reason as well as the 19th century when Marx and Mill who relied on the rationalist tradition to formulate significant political theories on which society could build. In short, just as a scientific theory can provide solid and unquestioned answers, similar philosophical models of political economy could do the same, at least this was the assumption. But can scientific certainty be applied to economic models, given that they must in the end apply to human beings that are neither neutrons nor algebraic equations?

Are the domains of economics, political science, sociology and social science as “scientific” as mathematics, chemistry and physics, or are we ultimately dealing with a question of societal structure based on a social contract? To what degree is the social contract itself modeled after rationalist assumptions, as was the case for both Jon Locke and Karl Marx and F. Engels, is a legitimate issue. However, the matter of societal organization, mode of production, is subject to historical dynamics (dialectical materialism, to be sure, but certainly not limited to it).

Is there a single development model that works best to serve the people of all countries around the world; like us say the neoliberal that IMF, World Bank, European Central Bank, US and EU governments are promoting globally as the panacea? Economic development models, whether like that of the US, or regional bloc one like the one of the European Union, are always designed down to the smallest detail to serve and promote the privileged socioeconomic and political elites, within the boundaries of what the middle class and working class will tolerate so there would not be social unrest or revolt.

Development models under capitalism are not intended to foster greater upward socioeconomic mobility, but to further concentrate capital in the hands of the privileged elites that enjoy policy influence. The social safety net, social welfare measures within varying degrees that have been in place in many countries around the world are now threatened by the neoliberal model that encourages the erosion of welfare measures amid an era of downward pressure on wages and limited opportunities for youth suffering high unemployment. These are explosive social conditions that could result in social upheaval if the trend continues.

Lower global poverty, gender equality, basic education and health care, and a sustainable future for all people are desirable goals of many human-centered rather than market-focused people for the past two centuries. The question is which development model can achieve such goals i9f the political economy is structured to serve narrow class interests. Not any time in the near future, or in the next half century do I expect systemic changes in the neoliberal political economy. On the contrary, statistics indicate that there is regression in the areas of social progress. Why? I repeat that people who have economic and political (military/police) power always prevail, while the broader masses of the population, middle classes and workers continue to demand social justice. The social dialectic (Marxian-based “dialectical social theory”) leads me to conclude that concessions will be made to the broader masses only when absolutely necessary to preserve the status quo.

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