Vaggi2018 Book Development

Development
The Re-Balancing of
Economic Powers
Gianni Vaggi
Development
Gianni Vaggi
Development
The Re-Balancing of Economic Powers
Gianni Vaggi
Department of Economics
and Business
University of Pavia
Pavia, Italy
ISBN 978-3-319-54878-4 ISBN 978-3-319-54879-1 (eBook)

https://doi.org/10.1007/978-3-319-54879-1
Library of Congress Control Number: 2018958597
© The Editor(s) (if applicable) and The Author(s) 2018

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Cover credit: © Harvey Loake
This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
This book is dedicated to my wife Franca, for her continuous support
and patience.
The book has been written for my students from the courses in Economics
of Cooperation and Development at the Department of Economics and
Management and in the alike Master program at the University of Pavia.
I have had the privilege of teaching in similar Master’s programs in
Colombia, Palestine, Kenya, and Nepal.
Sharing the classroom experience with the students is a professional
and human gift.
Development is about the future and the future is theirs.
I want to thank Marta Marson, who has greatly helped me

in improving the book. An anonymous reviewer provided very
useful suggestion.
Contents
1 In the Beginning, There Was Economic Growth 1

1.1 Harrod: When the Economic Cycle Becomes a Growth
Theory 2
1.2 ‘Trickle Down’ Growth and Convergence.
The Neoclassical Theory of Economic Growth 5
1.3 Off the Main Track: Dualistic Economies and Technical
Change 10
1.4 The Structures of Capitalist Economies and the
International Division of Labour 15
1.5 Market Efficiency and Rational Agents 20
References 22
2 Towards a Broader Definition of Development 25

2.1 Human Development and the Millennium Development
Goals 26
2.2 Poverty 33
2.3 Beyond GDP 36
2.4 From the Millennium Goals to the Sustainable Ones 37
2.5 Changing Views on International Cooperation 40
2.6 Bridging Empowerment and Ownership 44
References 46
vii
viii Contents
3 The Economy Strikes Back; Convergence, Divergence

and Imbalances 51
3.1 Rising Asia 52
3.2 International Financial Markets 55
3.3 Increasing Inequality 61
3.4 Secular Stagnation: And Three Paradoxes About Savings 65
3.5 Imbalances 68
3.6 Discouragement 71
References 72
4 The Founding Fathers and the Long-Run Visions 75

4.1 The Age of Merchant Capital: Trade and Power 76
4.2 Food, Surplus and Reproduction 78
4.3 Enlightenment; Checks and Balances 83
4.4 Adam Smith and the Productivity of Labour 86
4.5 Ricardo, Free Trade and the Falling Profit Rate 91
4.6 The Capitalist Mode of Production and the Crises 95
4.7 Conclusions 99
References 100
5 Sustainable Reproduction, on Use and Exchange Values 103

5.1 On Reproduction Cycles 104
5.2 Achieving Use Values Through Exchange Values 109
5.3 When Structures Should Change 112
5.4 Neo-mercantilism and Its Features 117
5.5 Financial Mercantilism 119
References 123
6 Making Global Partnership Work 127

6.1 ‘To the Lighthouse’ 128
6.2 Last But Not Least: Sustainable Development Goal 17 129
6.3 Re-balancing: Reducing Distances 131
6.4 Sweet and Sour Trade 132
6.5 Financing for Development 134
6.6 The Road to Dignity 140
6.7 Conclusions 141
References 143
Contents ix
References 147
Index 165
Introduction
The Aim
Too long for a paper, too short for a book, read it as a pamphlet. This is
not a textbook, as it is not exhaustive and cannot go deeply into specific
topics. Endnotes and references might help, but perhaps you should read
it as a pamphlet with two main propositions.
First, development is a process involving the empowerment of people
and countries, which can be either supported or constrained by the social
and economic structures existing around them.
Second, the re-balancing of the economic powers of the different
stakeholders is a necessary condition for a decent development process.
Today, we are in a very convenient position because there is a
wide-ranging consensus that sustainable development should be inter-
preted as a process of empowerment. Since 2015, we have had 17
Sustainable Development Goals, SDGs, with three dimensions of sustain-
ability: the social, the environmental and the economic dimensions.
This book contends that a process of development must take into
consideration the social and economic structures which represent the
landscape in which empowerment should be achieved. Development is
a dialectic process between people’s empowerment and countries’ own-
ership and the surrounding social and economic structures. It is urgent
that we put the view of development as freedom into a broader perspec-
tive that includes social and economic forces, especially considering some
xi
xii Introduction
of the major structural changes that have taken place in the international
economic setting since the 1980s.
The holistic view of sustainable development is replete with many dif-
ferent goals, but in the coming years, development will concern decisions
about technology, trade and finance, three main themes of Sustainable
Development Goal 17, the last one. Who is going to decide and based
on what criteria? Development as empowerment requires the re-balanc-
ing of economic powers regarding those choices. Re-balancing is not the
automatic outcome of a market economy: policy action is needed. The
re-balancing of economic and negotiating powers is the major challenge
that development cooperation will face in the coming decades, particu-
larly in the areas of trade and finance.
The Content
In Chapter 1, we see that in the 1940s and 1950s development was
regarded as an increase in income per capita. From the very beginning,
development economists were not an unanimous group but broadly
divided according to two visions: a mainstream one and a critical one.
The mainstream approach emphasized convergence in income per cap-
ita between rich and poor countries and the ‘catching up’ by developing
countries; moreover, economic growth was to spread to all people of the
country: this is the ‘trickle down’ type of growth.
The heterodox group included authors who emphasized the structural
change/dualistic view of the economy: economists in the Keynesian tra-
dition and the neo-Marxian writers. These economists stressed the role of
social and economic structures and of the international division of labour.
Chapter 2 describes how the notions of development and interna-
tional cooperation have evolved from being equated with economic
growth; development has expanded to include dimensions such as
health, education, natural resources, good governance and human
rights. Three major steps are discussed: the 1987 Brundtland Report,
the first Human Development Report of 1990 and the 2000 Millennium
Development Goals (MDGs). Health, education, environment and gen-
der are important components of the notion of human development.
The 2012 Rio+20 Conference led to the Sustainable Development
Goals, SDGs, with the environmental dimension forcefully entering the
picture. Section 2.4 examines the major novelties of the SDGs with respect
to the MDGs, incorporating some thoughts on the issue of sustainability.
Introduction xiii
Sections 2.5 and 2.6 examine changes in the approach to international

cooperation, which has moved from the donors–beneficiaries relationship
and from the Washington Consensus conditionalities to a broader view
of global partnership. Empowerment and ownership are two concepts
which highlight the changing views on development cooperation.
Chapter 3 discusses two major changes which have characterized the
international economic landscape since the late 1970s. First, the spectacular
economic growth in Asia, in China in particular, which is deeply chang-
ing the international economy and development cooperation. Many Asian
countries are now ‘new donors’, and poverty reduction, Millennium Goal
n. 1, has been achieved thanks to fast growth in China. Should the Asian
growth be a model for all low-income countries?
The second major transformation concerns finance: in 1980, financial
markets were very small; now, they are almost 10 times larger than the
World GDP. A large stock of finance and large number of new financial
tools represent good news considering all the means needed for sustain-
able development. However, financial crises have become a widespread
and recurrent phenomenon, and not only in developing countries: from
Mexico’s default on its foreign debt in 1982 to the 2007 sub-prime crisis
in the USA.
Both changes are structural in nature: they are here to stay.
There are two more changes which characterize the present economic
landscape. The first concerns the worsening income distribution in
high-income countries and in many emerging ones. Income and wealth
are now highly concentrated in the top 10% and top 1% of the popula-
tion. The second change is related to the slowdown in economic growth
in high-income countries since the 2007 financial crisis: this is the issue
of secular stagnation (Baldwin and Teulings 2014). The world economy
is also characterized by two ‘imbalances’ with very few signs of a ten-
dency to redress them; they concern trade relations and migrations.
The ‘facts’ highlighted in Chapter 3 remind us that economic forces
can decisively affect the conditions in which development should take
place. What about development as empowerment and freedom? What is
left of the holistic view of development. A pause and some reflections
might help, and for that, we look for assistance from some ‘Founding
Fathers’ of economics.
Chapter 4 provides a sketchy view of some leading thinkers from the
Mercantilist period to Marx. The chapter follows a chronological order,
but many themes crisscross development debates today: human rights,
xiv Introduction
the role of trade, natural resources and basic needs, labour productivity
and employment, capital accumulation and technology, self-interest and
profitability and crises.
Trade is regarded as a source of wealth by the Mercantilists, but it
is considered as a possible reason for wars during the Enlightenment.
Natural resources and labour occupy centre stage with Petty and
Quesnay, who analyse the conditions for the reproduction of society
and for whom a surplus of food production is at the core of economic
potential. It is not just a question of economic growth, the issue of
human rights and of governance in a non-hierarchical society dates to
the Enlightenment and to Montesquieu’s separation of powers, based on
checks and balances.
In 1776, Smith described how the division of labour increases labour
productivity and how the accumulation of capital leads to better tech-
nology, a sort of embodied technical progress, with the rate of profit
becoming the guide to investment decisions. Smith and Ricardo attacked
Mercantilist doctrines, but their support of free trade was much more
articulated than what appears in the mainstream interpretation. Marx
provided an analysis of the crises of a capitalist economy while also exam-
ining the interplay between the economic forces and the other aspects
of society, what he termed the ‘superstructure’. The classical economists
highlighted the difference between use values and exchange values in the
process of economic and social reproduction.
Chapter 5 revisits the Sustainable Development Goals in the light of sus-
tainable reproduction. The SDGs largely focus on end-goals, which can be
regarded as ‘strategic use values’ to be pursued inside economic and social
structures which are dominated by ‘exchange values’. Section 5.1 examines
the issue of sustainability in different types of reproduction cycles; the uni-
versal, capitalistic, sustainable and financial reproduction cycles combine use
and exchange values in different ways. Secular stagnation is re-examined in
the light of the Marxian analysis of crises. Sections 5.2 and 5.3 present dif-
ferent approaches on how to try to achieve sustainable development within
the capitalist economy. These range from Randomized Control Trials,
RCTs, which focus on micro- and localized experiments, to the analysis of
specific incentives and market games. Another approach recognizes a fun-
damental role of institutions as possible mediators between the micro- and
the macro-levels. Neo-structuralist and neo-Keynesian authors emphasize
the macro-constraints to growth facing developing countries. Views related
to degrowth and to the circular economy focus on the limitation of natural
Introduction xv
resources and favour a different system of production and consumption

in which sustainability requires the abandonment of the idea of economic
growth.
The two final sections highlight the essential features of neo-
Mercantilism, contending that we have entered a period of Financial
Mercantilism whose reproduction cycle moves directly from money to
more money and is completely dominated by the realm of exchange value.
Chapter 6 concludes. There is a widespread consensus on sustainable devel-
opment as a process of empowerment through freedom and ownership,
together with the 17 SDGs and the 3 dimensions of sustainability. The main
challenge in the coming years will be on how to make global partnership
work within social and economic structures characterized by deep-rooted
economic and power imbalances. The path towards sustainable development
may be more important than its definition.
Sections 6.2 and 6.3 highlight some conditions for global partnership,
the topic of SDG 17. Development can only be achieved through negoti-
ations and dialogue, and it must be based on fairness. However, differ-
ent stakeholders have very unequal political and economic powers. The
re-balancing of the negotiating powers among the different partners is the
leading principle to try to move towards global partnership. This partnership
involves some critical issues: finance, technology, trade and capacity build-
ing. Which decisions will be taken and how it is going to impact the future
of sustainable development. Re-balancing means that developing countries,
low-income ones in particular, must have a much stronger voice than in the
past, and they need more policy space. Sections 6.4 and 6.5 provide some
examples of re-balancing in the case of trade and finance. Improvements in
the institutional and administrative capacity of developing countries are the
necessary component of an effective development dialogue. Section 6.6

focuses on development as dignity.
The story of development has started with economic growth, to move
on to empowerment, ownership and freedom and now it ends up with
negotiations and re-balancing. Not a very attractive conclusion, but a
very realistic one if we want to progress with global partnership for sus-
tainable development.
Reference
Baldwin, R., & Teulings, C. (Eds.) (2014). Secular Stagnation: Facts, Causes, and
Cures. London: A Vox.org/CEPR eBook.
CHAPTER 1
In the Beginning,
There Was Economic Growth
Abstract  After World War II, development was regarded as an increase

in income per capita. This chapter reviews the main growth theo-
ries since Harrod’s 1939 model. Solow emphasizes convergence in the
income per capita of all countries and the ‘catching up’ by developing
countries. In neoclassical models, economic growth ‘trickles down’ to
all people and countries. Other authors emphasize different aspects of
development. Lewis underlines the dualistic nature of developing econ-
omies while the structuralist approach stresses the importance of import
substitution and export promotion. The dependency of periphery econ-
omies on the centre is underlined by dependency theorists, who focus
on the role of social and economic structures and of the international
division of labour. A final section analyses the emergence of the market
efficiency hypothesis.
Keywords  Economic growth · Convergence · Structuralism ·

Market efficiency
Once upon a time, there was economic growth. Development was

largely understood as being economic development, which was eco-
nomic growth, and mainly defined in terms of the increases in income
per capita, Y/L, that is, the ratio of the Gross Domestic Product,
GDP = Y, to population L. Economic growth would overcome poverty,
which is identified as a low-income per capita.
© The Author(s) 2018 1

G. Vaggi, Development,
https://doi.org/10.1007/978-3-319-54879-1_1
2 G. VAGGI
With no pretence of comprehensiveness, this chapter presents some

of the most relevant growth models since World War II. These mod-
els are not all unanimous in their analysis of the process of economic
growth, and they imply different policy recommendations. With great
simplification, we can classify growth theories into two broad groups:
the mainstream one, which largely adopts the assumption of neoclassi-
cal economics, and the heterodox approaches, which highlight the role
of social and economic structures. Section 1.2 deals with the first group
while Sects. 1.3 and 1.4 describe the alternative views. The final section
will focus on market efficiency.
1.1 Harrod: When the Economic Cycle

Becomes a Growth Theory
Modern theories of economic growth originate as an answer to two
major historical events. First, the great depression of 1929–1932, which
was followed by Roosevelt’s New Deal. The central issue concerns the
conditions which determine the level of output and employment. The
second event is the reconstruction of the economies of Western Europe
and Japan after World War II, which had a very important impact on the
growth models of the forties and fifties.
A 1939 paper by Roy Harrod can be regarded as the starting point of
the theories of economic growth (Harrod 1939). Seven years later, an
American economist, Evsey Domar, independently arrived at very sim-
ilar conclusions, and quite often we hear of the Harrod-Domar growth
model (Domar 1946). The most influential contribution to modelling
economic growth is Robert Solow’s 1956 paper (Solow 1956), which
has led to several misunderstandings about Harrod’s contribution,
including ascribing to him a notion of equilibrium which was developed
by Solow.1
Harrod is not concerned with long-run growth but with the trade
cycle, and in particular, with the low phase of the cycle and the impact
this has on employment, along Keynesian lines (Harrod 1939: 16).2
1 On this point, see Halsmayer and Hoover (2016). For a comprehensive view of
Harrod’s contribution to economics, see Besomi (1999).

2 References to the trade cycle and its phases are in Harrod (1939: 28, 30). In 1936, he
published The Trade Cycle (Oxford: Clarendon Press).

1 IN THE BEGINNING, THERE WAS ECONOMIC GROWTH 3
The focus on the stock of capital as the main constraint in the determi-
nation of income growth is quite understandable in the historical condi-
tions of the late thirties.3
Harrod does not explicitly mention a production function but makes
some assumptions:
A1. Technology is characterized by a fixed ratio of capital to output: the

capital–output ratio C, K/Y, where ‘C stands for the value of the cap-
ital goods required for the production of a unit increment of output’
(Harrod 1939: 16)4;
A2. Capital goods last forever, as there is no wear and tear;
A3. The output Y can either be used for consumption, or it can be saved
and invested;
A4. s is the propensity to save, call it the saving ratio; that is, total savings
S divided by total output, s = S/Y; s is given and constant;
G is the growth rate of output, ΔY/Y. With a fixed C, economic growth

depends on the amount of new capital available, ΔK; that is, net invest-
ments, I = ΔK. If ex-ante investments are equal to the available savings,
then I = S, in which case Harrod derives what he calls the ‘fundamental
equation’:
Gw = s/C = (S/Y)/�K/�Y = �Y/Y (1.1)
Gw is the warranted rate of growth: that is, ‘that rate of growth which,
if it occurs, will leave all parties satisfied that they have produced neither
more nor less than the right amount’ (ibid.: 16). However, in general
the actual growth rate G is not equal to Gw, and, above all, there is no
built-in market tendency for the actual growth rate to move towards the
warranted one (ibid.: 30).
The actual growth rate G depends on four ‘fundamental conditions’
(ibid.): long-run capital expenditures; the capital coefficient, ΔY/ΔK;
the propensity to consume and the current account balance. Each
amount has a stimulating effect on economic growth (ibid.).
3 Since Harrod’s paper, all models of economic growth have focused on capital accumula-
tion, which is not necessarily only physical capital.

4 C can also be represented in terms of changes in both capital and output, the ICOR, or
incremental capital–output ratio, ΔK/ΔY.

4 G. VAGGI
Apart from the second condition, which is concerned with technol-

ogy, the other three refer to the typical Keynesian components of aggre-
gate demand in an open economy: consumption, investments and net
exports. Aggregate demand plays an essential role in the determination
of the actual growth rate of the economy.
However, Eq. (1.1) is often used as a supply-side model of long-run
growth; this misinterpretation of Harrod’s contribution depends on the
fact that Eq. (1.1) is considered as if it referred to the actual growth rate
and not to the warranted one. The misreading of Harrod’s contribution
is due to the failure to appreciate the fact that he adopts the Keynesian
distinction between ex-ante and ex-post investments (Harrod 1939: 19).
The former are investments as they are planned by business people, while
the latter are investments which include inventories from unsold output;
investments are equal to overall savings just as in the case of an account-
ing identity.
This misinterpretation of Harrod’s contribution removes the role of
demand in the determination of economic growth and misses what he
feels are the reasons the actual growth rate can permanently diverge from
the warranted one.
Halsmayer and Hoover remind us of ‘Harrod’s major longer-term
concern with the constitutional tendency of the economy to slip into
recession when saving rates were relatively high’ (Halsmayer and Hoover
2016: 587), a point on which we will come back in Sect. 3.4 below. In
the final pages of the paper, Harrod discusses the role of active poli-
cies (Harrod 1939: 31–33). Harrod indicates that a low rate of interest
might have a ‘depressing influence’ on savings (ibid.: 32).5 However, he
is sceptical about the effectiveness of monetary policy to sustain growth;
it would be better ‘to reserve suitable public works for use against the
cycle’ (ibid.: 32, italics in the original). An active fiscal policy is needed
to support income and employment during the slowing down phases of
the economic cycle.
Harrod also defines a natural rate of growth, call it Gn: ‘the maximum
rate of growth allowed by the increase of population, accumulation of
capital, technological improvement and the work/leisure preference
schedule, supposing there is always full employment in some sense’
5 Debates about ‘secular stagnation’, that is to say the slowing down of economic growth
during the last decades, highlight the role of the savings glut, which brings down the rate
of interest to very low values, see Sect. 3.4 below.
(ibid.: 30). However, ‘there is no inherent tendency for these two rates
[warranted and natural] to coincide’ (ibid.).6
The two rates could be equal by a fluke, but this is an unstable equi-
librium sometimes referred to by the metaphor ‘knife-edge’ since, if
the growth rate of the economy slips away from its equilibrium level, it
will go on diverging more and more. However, Harrod never uses the
expression ‘knife-hedge’, which appears in the opening page of Solow’s
1956 work (Solow 1956: 65).
1.2 ‘Trickle Down’ Growth and Convergence.

The Neoclassical Theory of Economic Growth
1.2.1 Equilibrium Growth

Robert Solow’s 1956 model is the best-known model of growth and
the basis for the neoclassical theory of economic growth. Contrary to
Harrod’s model, Solow’s leads to a stable equilibrium growth rate at
full employment level.7 Some of the theoretical conclusions and policy
implications derived from Solow’s approach are extensively used in devel-
opmental debates. Let us mention two of them. First, all countries will
converge to the same level of income per capita since, with perfect com-
petition for the factors of production, low-income countries will grow
faster than high-income ones. Free markets lead to the best growth out-
comes for all partner countries and allow the poorest countries to catch
up to the wealthiest ones. Second, all economies reach a stationary state
where income per capita can no longer increase, unless there is a con-
tinuous technical progress. Convergence depends on the assumptions
Solow makes about the type of technology adopted in production and
the competitive working of the capital and labour markets.
6 Harrod distinguishes between an old country, which we could call a high-income econ-
omy, and a young country, a developing one. According to him, an old country has no
interest in importing more capital, while this would be good for a young country where,
thanks to high population growth, the natural rate is likely to be higher than the warranted
rate (ibid.: 31, note 1).
7 In the same year, Trevor Swan writes a paper directly linking economic growth to cap-
ital accumulation (Swan 1956). Some of the results of the Solow–Swan model have been
anticipated by Frank Ramsey in 1928 (Ramsey 1928). According to Ramsey, the propen-
sity to save depends on choices of agents regarding the allocation of consumption through
time.
6 G. VAGGI
Technology is such that there is perfect substitution between the

two inputs, capital and labour. Output Y can be produced with any
capital–labour ratio, K/L. Y can be produced with a certain K/L
or with any other ratio either slightly smaller or slightly higher; the
ratio is chosen by the entrepreneurs in perfectly competitive input
markets. Harrod’s fixed capital–output ratio C, with no substitution
between capital and labour, becomes a special case of a more general
technology characterized by a fully flexible capital–labour ratio, K/L.8
Markets are fully competitive; labour and capital can move every-
where across sectors and countries, and the same is true for technical
innovations.
Two more assumptions are essential to the working of the model.
First, net investment is the increase in the stock of capital through
time, dK/dt, and it is always equal to the overall savings; hence,
dK/dt = I  = S, which is an ‘identity at every instant of time’ (ibid.: 66).
Second, the output Y consists of one commodity which is completely
fungible and can be used either as a consumption or as an investment
good.9
Thanks to the four assumptions, there is a mechanism which guaran-
tees that the entrepreneurs will adopt a capital–labour ratio, K/L, which
corresponds to the full employment of the two factors (ibid.: 67 and 68).
In the long-run, there is a stable equilibrium in which the natural rate of
growth, Gn, will always be equal to the warranted rate, Gw.
But how does the stability mechanism work?
Suppose that, due to high population growth, the natural rate is
higher than the warranted one, Gn > Gw. In the labour market, this leads
to competition among workers and to a decreasing wage rate. The entre-
preneurs find it convenient to produce the same output Y with more
labour and less capital, and K/L decreases thanks to the assumption
about the flexibility of the technology. In the opposite case, when Gw
is higher than Gn, there are too many new investments for the existing
8 Solow considers a typical neoclassical production function of the Cobb–Douglas type
with two factors of production, K and L (Solow 1956: 66–67, 70) Y = F (K, L), homo-
geneous to degree one, with constant returns to scale. On the flexibility of the capital–
output ratio and the standard representation of the neoclassical growth model, see Hahn
and Matthews (1969: 9-ff).
9 This is a recurrent assumption in macroeconomics, but its role in the neoclassical model
is much more relevant.

labour force; the price of capital decreases and the wage rate increases,
hence the entrepreneurs substitute capital to labour and K/L rises.
The adjustment mechanism assumes flexible technology and a com-
petitive market. The proper combination of capital and labour depends
on the relative prices of the two factors. If r is the interest rate and w is
the wage rate, an excess supply of labour reduces the wage rate while an
excess supply of capital reduces the interest rate. Starting from any capi-
tal–labour ratio which is not at full employment equilibrium, the changes
in r/w determine opposite changes in K/L. In Solow’s words: ‘the real
return to factors will adjust to bring about full employment of labour
and capital’ (ibid.: 68). Wages are low because there is too much labour,
profits are high because there is not enough capital, and vice versa; the
functional distribution of income depends on the relative scarcity of the
two factors.10 The stability of the equilibrium depends on the fact that in
the market for each factor of production there is an inverse relationship
between the quantity demanded of the factor and its price. The input
demand curves are downward sloping, an assumption which has received
strong theoretical criticisms.11
Solow is aware of the theoretical limitations of his model and is quite
cautious to draw policy recommendations. The opening line of the 1956
paper reads: ‘All theory depends on assumptions which are not quite
true’ (Solow 1956: 65), and in footnote 7, he recognizes that his model
requires perfectly competitive markets, all made up of ‘identical firms’,
and that it is impossible to introduce conditions of monopolistic com-
petition (ibid.: 79–80). At the very end of the paper, where he mentions
‘Uncertainty’, Solow writes: ‘No credible theory of investment can be
built on the assumption of perfect foresight and arbitrage over time’
(Solow 1956: 93), which basically means that ex-ante investments cannot
be assumed to be always equal to the ex-post ones.
Notwithstanding Solow’s cautiousness, the neoclassical growth model
still enjoys large support.
10 The remunerations of the factors of production depend on their marginal productivity;
Solow’s function shows decreasing marginal productivity.

11 Piero Sraffa shows that an inverse relationship between the amount of capital and its
rate of return, the profit rate, only exists under very restrictive conditions (Sraffa 1960). In
1966, this result was also acknowledged by Paul Samuelson at the end of a famous debate
(Samuelson 1966). In 1953, Joan Robinson had already provided an early critique of the
neoclassical production function (Robinson 1953–1954).
8 G. VAGGI
1.2.2 Convergence
Solow’s model leads to some very important conclusions, some more
pleasant than others. On the pleasant side, we see that the model implies
the convergence in income per capita by all countries. Solow’s original
model describes a relation between capital per worker K/L on the hori-
zontal axis and its rate of change over time on the vertical one (Solow
1956: 70–71). However, the model can be easily transformed into a rela-
tionship between K/L and Y/L, the output per worker on the vertical
axis, which is the most well-known presentation of Solow’s theory (Ray
1998: 64–65; Weil 2005, Section 3.3). Assuming constant returns to
scale, this model can be represented by the following equation:
Y/L = F(K/L, 1) (1.2)
With decreasing marginal productivity, lower values of income per capita
and of capital per worker are associated with higher profitability. Given free
mobility of capital and profit maximization by capitalist entrepreneurs, cap-
ital will flow from high- to low-income economies where it is scarce and
hence it yields higher returns. This will contribute to capital accumulation in
the poor countries and close the income per capita gap with the rich ones.
If this view were correct, the best way to achieve rapid economic growth
in poor countries would be to secure unlimited freedom for capital flows.
If convergence did work, there would be no need for specific development
theories, nor for cooperation policies. International cooperation would con-
fine itself to the mitigation of the unwelcome phenomena which might arise
in the short-run during this long-run process of economic growth. Several
empirical studies have tried to examine whether or not some sort of con-
vergence does exist, but the results are not very conclusive: in the end, they
depend on the type of countries and on the period chosen: South East Asia
could support the closing of the gap story, while other areas much less so.12
1.2.3 The ‘Steady State’ and the Technical Progress Puzzle

Another implication of Solow’s model is not very attractive: the growth
rate of income per capita tends to a slow down, and all countries end
up in a ‘stationary state’, or ‘steady state’, where the growth rate of
12 On different definitions of convergence and on some empirical studies, Ray (1998: 74–82).
the economy is equal to that of population, with no improvements in

income per capita.
Capital accumulation exhausts its power and income per worker stops
growing even if more capital per worker is available, not a very pleasant
conclusion for a growth theory. Solow introduces what he calls ‘Neutral
Technical Change’ (ibid.: 85).13 Technical progress spreads uniformly
to all production processes, and small firms employing a low amount of
capital per worker are affected in the same way as firms with highly ‘capi-
tal intensive’ production processes.
Capital accumulation and technical progress are the two main pillars
of economic growth, but the second pillar is the driving force. However,
technical progress is fully exogenous to the process of production, and
Solow does not explain how it is generated.14
The success of Solow’s model is also due to the fact it can be tested
with figures derived from national accounting. In 1957, Solow published
another paper which was to become the backbone for a new technique,
the so-called growth accounting. This methodology tries to measure how
much of the economic growth rate is explained by the contribution of
either capital or labour. In principle, total output growth should be com-
pletely explained by the increases in the quantities employed by the two
factors of production and by their contributions as measured by the two
marginal productivities.15
However, Solow himself finds that more than 80% of productivity
growth in the U.S. is accounted for by exogenous technical progress
(McCombie and Spreafico 2016: 11–19). Income growth cannot be
entirely ascribed to the increase in the quantities of capital and of labour;
there is a residual.16 ‘Solow’s residual’ is quite often explained in terms
of Total Factor Productivity, TFP, an improvement in the growth rate
13 This type of technical progress implies that for each value of K/L at present, labour is
10% more productive than before and Y/L is 10% higher. Solow writes of “blowing up”
the production function’ (Solow 1956: 85).
14 Solow’s model implies that technical progress is free for all firms and countries; thus,
new technologies will equally benefit all countries, independently of the country of origin.
15 See Weil (2005, Section 3.3). On the application of the growth accounting technique
to developing countries, Thirlwall (2011a: 158–162).

16 On the role of exogenous technical progress in explaining post-war growth rate dif-
ferentials, see Denison (1967). On Total Factor Productivity and growth accounting, see
Easterly and Levine (2001).
10 G. VAGGI
of the economy which cannot be ascribed to the increases in the quan-

tities employed of capital and labour. TFP is regarded as an indicator of
the dimension of technical progress, but it does not tell us what it is and
above all how it can be generated: technological progress, the driving
force of economic growth, is still unexplained.
1.3 Off the Main Track: Dualistic Economies

and Technical Change
Since the fifties, there have been some very critical approaches in
response to the neoclassical model of economic development.
This section presents three contributions which offer more articulated
views of the process of economic growth and try to address the condi-
tions of developing countries. They include Lewis’s analysis of dualistic
economies, Kaldor’s explanation of technical progress and Dudley Seers
and the International Labour Office on employment and basic needs.
1.3.1 Lewis: The Dualistic Structure and Surplus Labour

In a famous 1954 paper, Lewis presents a model of economic growth
based on the dualistic structure of many developing countries, in which
a traditional sector and a more advanced one coexist. By and large, the
traditional sector can be identified with agriculture and the production
of subsistence goods, while the modern sector is a capitalistic one that
includes not only manufacturing but also modern, commercial agri-
culture. The two sectors differ because of the availability of capital: the
modern sector is a fully capitalistic sector with a high level of capital
available per worker, while the traditional sector is characterized by very
little capital and by an excess of workers. Dualism and a surplus of labour
in the traditional sector are the typical conditions of developing countries
in the early stages of development.17
The two sectors have different conditions regarding the labour mar-
ket: in the capitalistic sector, wages are determined by the marginal pro-
ductivity of labour, which is positive and explains the downward sloping
demand curve, much like in the neoclassical model. In the traditional
sector, wages are at mere subsistence level and the marginal productivity
17 Following Rostow’s stage theory, we can think of the conditions of a developing coun-
try before the ‘take-off’ stage (Rostow 1960).

of labour is lower than the wage because there are too many workers;
this is a situation of ‘disguised unemployment’.
Lewis’ model describes a process of economic growth based on the
transfer of labour from less productive to more productive sectors, rep-
resenting a kind of ‘extensive growth’; the growth of the modern sector
and the expansion of employment continue until all surplus rural labour
is absorbed in the modern sector. This outflow of workers does not affect
the quantity of output in the traditional sector because of ‘disguised
unemployment’. This is very important because the traditional sector
produces food for the whole economy.
The process of labour transfer and the growth of employment in the
modern sector are driven by the expansion of output in that sector and
by the wage difference between the two sectors, thanks in part to the
population growth rates of the countryside, which are higher than those
of the cities. When there is no longer any surplus labour left in the tra-
ditional sector, the two wage rates become similar and the mechanism
comes to a standstill.
According to Lewis, investment and capital accumulation in the capi-
talistic sector could generate an increase the productivity of labour, and
in employment.18 However, he also recognizes that in many developing
countries the firms in the capitalist sector are too small to make large
investments in order to generate technical progress.
Contrary to Solow, Lewis maintains that technical progress is the
outcome of capital accumulation, and he introduces the notion of dual-
ism to describe a possible growth path for developing countries. Lewis
adopts several concepts derived from classical political economy: the
notion of productive and unproductive sectors, the idea of surplus and
the crucial role of the subsistence sector, which will be further dealt with
in Chapter 4.
1.3.2 Kaldor and Technical Progress

In the late fifties and early sixties, Kaldor, a pupil of Keynes, tried to
explain the source of technical progress. According to Kaldor “the
rate of shift of the production function due to the changing state of
18 Lewis has been criticized because it is very difficult to apply the notion of the marginal
productivity of labour to the traditional agricultural sector, where output is the outcome of
a collective activity at the household and village levels.
12 G. VAGGI
‘knowledge’…depends upon the rate of accumulation of capital itself”

(Kaldor 1961: 207). Improvements in income per worker are linked to
the accumulation of capital, and Kaldor presents the ‘technical progress
function’ in which output per worker increases with the amount of avail-
able capital per worker.19 Thus, the accumulation of capital is back to
centre stage and investment decisions by the capitalists are the engine of
economic growth.
Not only is technical progress not exogenous to the production
process, but it is not necessarily the same in rich and poor countries.
Following Kaldor’s approach, Thirlwall concludes that “rich and poor
countries are simply not on the same production function” (Thirlwall
2011a: 166).
Kaldors’ 1961 paper presents similarities to a 1962 paper by Arrow,
both works bringing to the fore the role of increasing returns to scale
in economic growth. There is a positive size effect: a larger size of the
manufacturing sector leads to an increase in labour productivity and to
greater competitiveness of the whole economy. Kaldor’s approach differs
from Arrow’s in three fundamental ways.
First, in an economy characterized by increasing returns it is very
unlikely that competitive markets could lead to a stable general equilib-
rium (Kaldor 1972).20
Second, Kaldor examines an economy which has two main sectors:
agriculture and manufacturing. Increasing returns to scale apply mainly
to manufacturing but not to agriculture, as technical progress does not
have the same effect on all the sectors of the economy.
Third, Kaldor relates the existence of increasing returns to scale in
manufacturing to the size of the demand for manufactured products,
in this way opening the way to an analysis of the impact of aggregate
demand on economic growth (Kaldor 1966).
Kaldor emphasizes the role of demand by using Verdoorn’s law, pre-
sented in a 1949 paper by the Dutch economist Petrus Verdoorn. This
law maintains that there is a direct relationship between the rate of
increase of labour productivity and the rate of growth of output.21
19 On the various versions of Kaldor’s technical progress function and the analytical prob-
lems they generate, McCombie and Spreafico (2016).
20 The problems caused by increasing returns to scale in neoclassical general equilibrium
theory appear also in Arrow and Hahn (1971).

21 According to several estimates, a one per cent faster growth of output could lead to
productivity increases in the order of 0.5% (Targetti and Foti 1997).

Kaldor’s view of economic growth integrates three elements: increas-

ing returns in manufacturing, capital accumulation and demand for man-
ufactures. The combination of the three elements can explain the process
of growth through ‘cumulative causation’; an idea developed in Myrdal
(1957) and adopted also by Kaldor (1981) and Thirlwall (2011b:
308–309).
In the poorest countries, the largest share of output comes from
the primary sector, where there are decreasing returns to scale; hence,
they can only grow through a process of industrialization. If they fail to
industrialize, they will be kept in a vicious circle (Targetti 2005: 1191).
Developing countries which try to change their economic structure
face an obvious limitation; quite often domestic demand is too small to
allow the manufacturing sector to reap the benefits of increasing returns
to scale. Firms cannot achieve the level of output at which productivity
increases foster competitiveness. Therefore, developing countries must
try to take advantage of foreign demand; Kaldor’s approach is similar to
an export-led growth model.
However, this does not imply the simple opening up of the economy
and free international trade. According to Kaldor, the state must play
an active role in the process of economic growth with a combination of
industrial, trade and taxation policies which support the process of indus-
trialization. Protectionist measures should not remain forever; however,
developing countries need a period during which their infant manufac-
turing sector can grow large enough to reach the stage in which it can
benefit from increasing returns. In many ways, Kaldor’s indications are
quite similar to the development policies adopted by many Asian coun-
tries since the seventies and provide useful policy indications to develop-
ing countries (see Sect. 6.4 below).
Export-led growth can be a useful approach for a developing country,
which must also maintain a balance between exports and imports in
order to avoid the accumulation of foreign debt; thus, its growth poten-
tial is limited by its balance of payments. A number of ‘balance of pay-
ments constrained growth’ models show that in an open economy the
rate of growth is positively influenced by the rate of growth of exports
and negatively affected by the income elasticity of demand for imports
(Thirlwall 2011b: 323–324).22
22 The ‘current account’ of the balance of payments includes items such as profit repatria-
tion, international aid and, above all, remittances which for many countries are a substantial
part of financial inflows (Vaggi and Capelli 2016).
14 G. VAGGI
1.3.3 Beyond Economic Growth: Basic Needs and Employment

In a 1969 seminal paper, Dudley Seers criticizes the tendency to take
national income as the only measure of development, which should
instead imply ‘the realisation of the potential of human personality’
(Seers 1969: 3). Seers indicates some of the basic components for the
realization of this human potential: food and other basic needs, such as
shelter, jobs and employment (ibid.: 3–4). Seers acknowledges that ‘pov-
erty and unemployment are associated …. with per capita income’, but
‘a rise in per capita income…can be accompanied by, can even cause,
growing unemployment. The direct link between per capita income and
the numbers living in poverty is income distribution’ (ibid.: 4). Poverty,
unemployment and inequality are the three main factors to be examined
to evaluate whether or not there is development. If all three decrease,
then we can say that the country is going through a process of develop-
ment, but if one or two of these factors increases ‘it would be strange to
call the result ‘development’, even if per capita income doubled’ (ibid.:
5). Seers anticipates sustainable goals numbers 8 and 10.
In 1976, the International Labour Office, ILO, focused on both
employment and basic needs, which included the fundamental necessar-
ies of life, such as food, shelter and clothing (ILO 1976); and in June
of that year, the ‘Tripartite World Conference on Employment, Income
Distribution and Social Progress and the International Division of
Labour’ took place. Later in 1976, Richard Jolly underlined the impor-
tance of incorporating the notion of basic needs into the development
debates (Jolly 1976).23
Thirty years later, the debate on full employment and decent work
came back to the fore (Ocampo and Jomo 2007), and in 2015, decent
works appears in SDG number 8, which reads: ‘Promote sustained,
inclusive and sustainable economic growth, full and productive employ-
ment and decent work for all’ (UN 2015: 19). The ‘basic needs’ did
not appear in the 2015 United Nations resolution, but they did appear
in The Report of the High-Level Panel of Eminent Persons of May 2013
(UN-HLP 2013: 18, 33).24
23 Basic needs and the fight of poverty gained relevance during Robert Mc Namara presi-
dency of the World Bank between 1968 and 1981.

24 The notion of human basic needs has evolved to include other aspects of life, such as
aspirations and opportunities (Gough 2015).

1.4 The Structures of Capitalist Economies

and the International Division of Labour
In this section, we find authors who are highly critical of the capitalistic
economy and of the international division of labour.
Underdevelopment in the ‘South’ is often regarded as the necessary
consequence of capitalistic economic growth in the ‘North’. Fast growth
in the ‘South’ requires a process of industrialization, but this process is
hampered by the economic relationships between rich and poor coun-
tries (Amin 1974). We consider the approach: of the ‘structuralist econo-
mists’, that of Myrdal, and some ‘neo-Marxian’ views.25
1.4.1 The Structuralist Approach in Latin America

In 1949, Raùl Prebisch published a paper on the economic develop-
ment of Latin America which can be regarded as the starting point of
the structuralist school (Prebisch 1950). In 1950, Prebisch became the
Executive Director of the Economic Commission for Latin America and
the Caribbean, ECLAC or CEPAL, established by the United Nation in
1948.26 In the 1950s, ECLAC became the centre of the Latin American
school of structuralist economics.
Prebisch introduced the notions of ‘centre’ and ‘periphery’, stressing
the idea that developing countries are part of a system of international
economic relationships characterized by the fact that the economic struc-
ture and dynamism of peripheral countries is constrained by the ‘cen-
tre’. Industrialized countries are favoured by their central position and
by having been the first to adopt new technologies, so that they have
‘organized the system as a whole to serve their own interests’ (Prebisch
1984: 176).
According to Prebisch, in the international division of labour the
‘periphery’ produces primary goods to be exported to the ‘centre’,
while the centre produces manufactured goods that are exported to the
25 The present selection does not cover some important authors, such as Gianni Arrighi,
Fernando Cardoso, Albert Hirschman, Ragnar Nurske, Paul Rosenstein-Rodan and

Immanuel Wallerstein. Sunna and Gualerzi (2016) provide an extensive presentation of the
structuralist school. For the neo-Marxian approaches, Blomstrom and Hettne (1984).
26 In 1964, Prebisch became the first Secretary General of UNCTAD, the United
Nations Conference on Trade and Development.

16 G. VAGGI
‘periphery’. Prebisch emphasizes inequalities between exporters of manu-

factured goods and of primary commodities, challenging Ricardo’s prin-
ciple of static comparative advantage (see Sect. 4.5 below).
The productive structure is dualistic, and only one part of the econ-
omy is competitive.27 While the demand for primary commodities is
inelastic with respect to income, demand for manufactured goods,
expressed by people belonging to the competitive part of the system,
tends to increase and cannot be met by domestic production; thus, con-
sumer goods are imported. Revenues from exports are largely spent on
imports instead of being used for capital accumulation.
Orthodox recipes recommend the control of fiscal deficits, inflation
and wages, along with devaluation, in order to promote exports. On
the contrary, in the 1950s and 1960s many Latin American countries
experimented with policies based on import substitution through the
protection of infant industries, import duties and export subsidies for
manufactured goods.
Celso Furtado is another important representative of the Latin
America structuralist approach and is among the champions of
import-substituting industrialization. Furtado is worried about the eco-
nomic and social heterogeneity which characterizes developing countries,
a heterogeneity that results in hybrid structures that make industrializa-
tion much more difficult. According to Furtado, developing countries
are different from high-income ones and neoclassical marginal analysis
should not be applied to them. Developing economies are different from
high-income ones in being characterized by the coexistence between a
few sectors with advanced and rapidly changing technologies and tradi-
tional sectors which employ old production techniques. In this dualistic
structure, there are fundamental discontinuities and gaps in the overall
production structure, which makes it impossible to accept the assump-
tion of the marginal substitutability of capital and labour. According to
Furtado, when it comes to comparing, for example, manual agricultural
production with mechanized agriculture, some combinations may be
simply missing, so that there is no tendency to equate marginal produc-
tivities, and thus incomes, across sectors (Furtado 1956).
Furtado also highlights the fact that underdeveloped countries are
characterized by small and slowly growing domestic markets and unequal
27 If modern technology penetrates activities connected with primary exports, raising
productivity and wages, primary export-oriented production is part of the modern sector.
income distribution patterns. Some minority groups can diversify their

consumption patterns, but this does not generate large mass con-
sumption for the new products. Therefore, the modernizing sec-
tors suffer from diseconomies of scale. At the level of the firm
they can be partially offset through subsidies, but for the whole
economy they are translated into higher costs’. These problems
can only be solved through active state intervention to facilitate
the process of capital formation and through public investments
(Szmrecsanyi 2005).
The structuralist authors bring to the fore the historical and social
dimensions of developing countries: as Prebisch writes, these approaches
‘enlarge the scope beyond purely economic theory’ (Prebisch 1984: 184)
to encompass political, institutional and social issues.28
1.4.2 Gunnar Myrdal: Circular Cumulative Causation

Myrdal presents a model in which there is no tendency towards income
per capita convergence between rich and poor countries; on the con-
trary, there are persistent imbalances. He describes both a virtuous and a
vicious circle, which result in self-reinforcing positive feedback and pov-
erty traps, respectively.
Myrdal’s analysis is based on two assumptions. First, investments
depend on the size of aggregate demand. Second, increasing returns to
scale play a key role at the level of countries and regions. Under these
assumptions, the best and most qualified workers tend to move to devel-
oped areas because they are attracted by a high labour demand, thereby
triggering a virtuous cycle of development. On the contrary, poor areas
and countries suffer because of a lack of agglomeration due to the pro-
cess of outmigration and the reduction in domestic demand, which lead
to a major loss in productivity.
Myrdal calls this dynamic process ‘circular cumulative causation’
(Myrdal 1957: 31–38), which is characterized by the interplay of what
he calls ‘backwash’ and ‘spread’ effects. ‘Spread’ effects describe the pos-
itive impact of growth on nearby localities when jobs, population and
wealth spill over into these communities. ‘Backwash’ effects consist of
the adverse effects when growing areas and regions attract people and
28 These authors have been criticised because they do not offer adequate formal alterna-
tives to the neoclassical growth model (Krugman 1994).

18 G. VAGGI
economic activity away from poor areas. ‘Backwash’ effects prevail in

underdeveloped countries. Quite often ‘spread’ effects are limited to the
neighbourhoods of highly developed areas (1957: 31–33).
Circular cumulative causation challenges the idea of convergence in
income per capita; ‘in the absence of counteracting policies inequalities
would tend to increase, both internationally and within a country’ (Myrdal
1984: 152). The mobility of the factors of production does not modify
this conclusion, and Myrdal noticed that it is the workforce rather than
capital that tends to move towards the areas with better economic activity.
1.4.3 The Marxian Approach and the International Division

of Labour
‘Neo-Marxist’ scholars consider underdevelopment as an aspect of the
evolution of the capitalist system. Underdevelopment is not a primitive
stage a country can start from to reach the following stages, as it is in
Rostow’s view. Dependence theorists analyze the economic relationships
which have been established between countries, which are unequal part-
ners, and there are forces which preserve and reinforce the predominance
of the more powerful countries. The historical relation between rich and
poor countries is that of colonialism, but decolonization recreates the
exploitative relationship, which continues through the commercial domi-
nance of the former colonial powers.
André Gunder Frank focuses on Latin America, but according to him,
the underdevelopment of this region is not due to the survival of archaic
institutions; on the contrary, it is the result of the long participation by Latin
America in the process of world capitalist development. In Frank’s view, the
conditions of the underdeveloped countries are the product of the continu-
ing economic and extra-economic relations with developed countries.
Inequalities of income and differences in culture have led many
observers to describe the relationship between developed and underde-
veloped countries in terms of ‘dual societies’. Frank rejects this notion,
since it implicitly assumes that contact with the ‘centre’ will generate
positive outcomes; the part of society closer to the external capitalist
world modernizes and develops, while the other part remains depressed
and isolated. The ‘dual society’ thesis is false, and the resulting policy
recommendations perpetuate the very conditions of underdevelopment
they are supposed to overcome.
While rejecting the ‘dual society’ thesis, Frank proposes a model

of a ‘metropolis-satellite’ relationship that somehow combines the
notions of ‘dual society’ and ‘centre-periphery’. This model allows
for various degrees of dominance and exploitation. For instance, the
capital city of an underdeveloped country can play both the role of a
‘satellite’ of a northern country and that of a ‘metropolis’ for other
parts of its own country. This is a very integrated system on a global
scale, in which each ‘satellite’ ‘serves as an instrument to suck capital
or economic surplus out of its own satellites and to channel part of
this surplus to the world metropolis of which all are satellites’ (Frank
1966: 7).
In the ‘metropolis-satellite’ structure, ‘the metropoles tend to develop
and the satellites to under-develop’ (ibid.: 9). In contrast to the develop-
ment of the world metropolis, which is no one’s satellite, the develop-
ment of the national and other subordinate metropoles is limited by their
satellite status.29
Samir Amin tries to generalize the Marxist law of accumulation to
a global scale by analyzing the global capitalist economy as a coherent
unit. The globalized law of value generates ‘distortion by virtue of the
fact that workers in the peripheral countries are paid at a lower rate than
equally productive workers in the metropolitan centres’ (Amin 1998:
77). This is an unequal exchange because one hour of productive work in
central countries is exchanged for many hours of productive work in the
periphery. In the capitalistic system, polarization leads at the same time
to dominant centres and to dominated peripheries.
Amin challenges the view of economic growth as a universally pos-
itive process: ‘Whereas at the centre growth is development - that is,
it has an integrating effect - in the periphery growth is not develop-
ment’ (Amin 1974, Vol. 1: 18). The recipe for Third World societies is
to ‘delink’ themselves from the logic of the global capitalistic system.
Delinking is a cultural process, but also an economic one, related to the
trade and financial relationship. ‘Without a genuine delinking of internal
29 Frank also advocates for the inclusion of human capital among the factors of pro-
duction, believing this is the main determinant of growth in developed countries (Frank
1960). On the Latin American dependency approach and on the neo-Marxian views, see
Blomstrom and Hettne (1984).
20 G. VAGGI
relative prices from those of world market, the rewards for peasant
labour remained lower than those for urban labour’ (Amin 1994: 154).
While this does not imply autarchy, it requires a clear view of domestic
priorities.
Amin proposes to give priority to agricultural development, which is
different from agribusiness activities, which are dominated by decisions
taken at the centre. According to Amin, an autonomous development
strategy overcomes the import substitution and structural change debate.
Industry must evolve by considering the needs of the agricultural sector.
‘[This] implied, therefore, industrialization at the service of agricultural
development, which left behind the spurious bourgeois debate: import
substitution or export industries’ (ibid.: 160).
1.5 Market Efficiency and Rational Agents

The last two sections have presented some unorthodox approaches to
economic growth that take a broader view of development and recom-
mend active industrial policies and growth strategies by developing coun-
tries. However, these alternative views have been marginalized by some
important evolutions in economic theory that took place in the seventies
and would have a major impact on development economics and policies.
Two works, which both appeared in 1976, describe this transforma-
tion very well. The first is a famous article by Robert Lucas that opened
the way to the ‘rational expectations revolution’ (Lucas 1976). The sec-
ond is a book by Bacon and Eltis, two Oxford economists, who wanted
to explain the reasons for the sluggish growth in England since World
War II (Bacon and Eltis 1976).
The ‘rational expectations revolution’ had already been anticipated by
John Muth in 1961, but it is with Lucas that there is a real breakthrough
in the way in which economics looks at the decisions of individuals and
the working of markets. In a very simplified way, the rational expecta-
tions approach states that people, who are now economic agents, do
know the way in which the markets work; they know the model which
guides the economy and make their decisions accordingly.
Economic agents can make mistakes, but these individual mistakes
have no real impact on the economy itself, because over time individu-
als’ decisions are correct ‘on average’; agents do not all get it wrong in
the same direction, a point we will need to return to in Chapters 3 and 5
when talking about finance. Collectively, economic agents behave in a way

which corresponds to the actual working of markets.
This leads to the so-called microfoundations of macroeconomics. The
rational expectations approach is closely related to the ‘efficient market
hypothesis’, which assumes that markets, financial markets in particular,
incorporate all necessary information. Of course, efficient markets must
be transparent and prices must only reflect the decisions by the economic
agents. All prices from those of financial assets to those of the factors of
production are the signals which synthesize this information and transfer
it to people so that they can make decisions.
These individual decisions lead to the best possible macroeconomic
equilibrium, with no need for any state intervention. This approach has
very important implications for macroeconomic policy, which becomes
irrelevant, if not dangerous. People know better than institutions, they
have all the necessary information, and on average, they use this informa-
tion in a rational way. State intervention could disrupt the functioning of
the markets and thus temporarily alter the working of the economy. This
would complicate life for economic agents but not lead to any perma-
nent improvement in any macroeconomic measure: from GDP growth
to unemployment.
In 1976, Bacon and Eltis explain that England’s economic problems
derive from too much state intervention. The major cause of England’s
poor economic performance is the excessive role of the state in the econ-
omy, in particular the large size of the public sector compared to the pri-
vate one.
The authors base their thesis on the distinction between productive
and unproductive activities, a terminology which dates to classical polit-
ical economy (see Chapter 4). According to Bacon and Eltis, all mar-
ket-oriented activities, by which they mean those of the private sector,
are productive while the economic activities organized by the state are
unproductive. Private activities pass the test of economic viability, while
the public sector is fundamentally inefficient and hence unable to com-
pete on the market without explicit and implicit state subsidies. To
achieve higher growth rates, England must reduce the role of the state
in the economy and let private business take care of the production of
goods and services, including the public ones.
The idea that the state is inefficient in taking care of economic activi-
ties opened the way to the Washington Consensus policies of the eight-
ies and nineties and to the Structural Adjustment Programs, which were
22 G. VAGGI
supposed to restore the economic viability of developing countries after

the debt crises of the eighties (see Chapter 2). The ‘rational expectations
revolution’ and the ‘market efficiency hypothesis’ led to deregulation
and market liberalization programs, which would dominate the policy
debates from the eighties onwards.
References
Amin, S. (1974). Accumulation on a World Scale: A Critique of the Theory of
Underdevelopment (2 vols.). New York: Monthly Review Press.
Amin, S. (1994). Re-reading the Postwar Period: An Intellectual Itinerary. New
York: Monthly Review Press.
Amin, S. (1998). Spectres of Capitalism. New York: Monthly Review Press.
Arrow, K. J., & Hahn, F. H. (1971). General Competitive Analysis. Edinburgh:
Oliver and Boyd.
Bacon, R. W., & Eltis, W. (1976). Britain’s Economic Problem: Too Few Producers.
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now Pearson Education Inc.
CHAPTER 2
Towards a Broader Definition

of Development
Abstract  Since 1980, the notion of development has expanded to

include dimensions such as health, education, natural resources, good
governance and human rights. Major contributions have been the 1987
Brundtland Report, the 1990 Human Development Report and the
2000 Millenium Goals (MDGs). Development involves a wider notion
of well-being and of poverty. An international debate led to the 17
Sustainable Development Goals of 2015 (SDGs), which underline the
three dimensions of sustainability. This chapter examines the major nov-
elties of the SDGs with respect to the MDGs. The approach to interna-
tional cooperation has moved from being a donor–beneficiary relationship
and from the Washington Consensus conditionalities to a broader view of
global partnership. Empowerment and ownership are two concepts which
highlight the changing views on development cooperation.
Keywords  Human development · Sustainable Development Goals ·

International cooperation · Empowerment
Nowadays, development is no longer defined in terms of income per capita

only, but as a multifaceted phenomenon and a continuously evolving pro-
cess. Towards the end of the eighties, a consensus emerged on a broader
definition of development (Vaggi 2016). This evolution owes a lot to

https://doi.org/10.1007/978-3-319-54879-1_2
26 G. VAGGI
the work of Amartya Sen, who has provided some decisive contributions

to extend the vision of development beyond the borders of economics.1
The broadening of the view of development has been stimulated by
the fact that during the eighties many developing countries experienced
a prolonged crisis. Except for some countries in East Asia, there was no
convergence of low-income countries towards the living standards of
high-income economies. After some improvements between 1960 and
1980, the debt crisis in developing countries in 1982 led to the ‘lost dec-
ade’ of the eighties and to the sluggish recovery (if any) of the nineties:
two decades were lost.
Given the uneven progress and the economic crisis in many countries,
it was necessary to take a new view towards development. Moreover, sev-
eral experiences showed that economic growth alone did not guarantee
sustainable development. There were rapidly growing economies where
social hardship increased and new forms of poverty arose; other coun-
tries improved human development and the quality of life despite slow
growth. The international community searches for a decoupling between
economic growth and human development.
Development policies have also been deeply influenced by the debt cri-
sis of the eighties; the mood has moved from the standardized economic
recommendations known as Washington Consensus towards global part-
nership. However, the policy debate is quite fierce and still going on,
which is not surprising; it is much easier to agree on broad development
goals than on the concrete actions to be taken to achieve them.
2.1 Human Development and the Millennium

Development Goals
We will examine three major contributions to a broader view of devel-
opment: the 1987 Brundtland Report, the 1990 Human Development
Report and the 2000 Millennium Development Goals.
2.1.1 The Brundtland Report, 1987

In the early eighties, Gro Harlem Brundtland, a former Prime Minister
of Norway, was asked by the UN Secretary General Perez de Cuellar
to organize and chair a World Commission on Environment and
1 See Sen (1981, 1985, 1999).
2 TOWARDS A BROADER DEFINITION OF DEVELOPMENT 27
Development. In October 1987, the Commission presented a lengthy

report entitled Our Common Future (United Nations 1987) containing
an initially approved definition of sustainable development.2
Sustainable development is development that meets the needs of the pres-

ent without compromising the ability of future generations to meet their
own needs. (ibid.: Chapter 2, point 1)
Since this report appeared, both the environmental dimension and the
idea of sustainability have become essential aspects of the notion of
development; however, the focus on natural resources has obscured the
fact that the report takes a much broader and critical approach to the
issue of development.
Following the above definition, there has been a specification of the
two key concepts the notion of sustainable development incorporates:
• ‘the concept of “needs”, in particular the essential needs of the

world’s poor…. and
• the idea of limitations imposed by the state of technology and social
organization on the environment’s ability to meet present and
future needs’ (ibid.).
The first concept reminds us of the basic needs approach to development

(see Sect. 1.3 above).
The second phrase puts environmental sustainability into broad social
perspectives and highlights a rather neglected aspect of the Brundtland
Report. The limits posed by natural resources depend upon the preva-
lent technology and on the organization of societies. Both elements are
not at all ‘natural’ but imply some specific social and economic setting.
Natural resources are not a gift of nature; their availability and utilization
depend upon the social and economic conditions, in particular on the
way in which different stakeholders have the power to make decisions
about investments in research and technology. Section IV of Chapter 3
of the Report is about A Sustainable World Economy, posing the question
of to what extent the international economy is geared to fulfil the sus-
tainable development challenge, a point we will return to in Chapter 5.
2 The Report is organized in three parts entitled: Common concerns, Common chal-
lenges and Common endeavours.

28 G. VAGGI
To the two key concepts included in the notion of sustainable devel-

opment, I would add a third one, which has also gone unnoticed:
• generations.
This concept brings up the question of rights: future generations have

the same rights as the present generation, and it also highlights the time
element: a generation is roughly twenty-five years. Decisions about sus-
tainable production and consumption patterns should be guided by
long-run perspectives and not by short-run profitability. In Chapter 6,
we shall see that this is still the main challenge for the coming years.
The final chapter, 12, describes the institutional and legal changes
which are necessary to pursue sustainable development. Even if the
main focus is on environmental matters, this chapter anticipates many
of the themes which will reappear in the 2015 Sustainable Development
Goals: the need for new aid and cooperation policies, the necessity to
involve the private sector, the role of science and the financial means of
implementation.
The Report takes a holistic approach to development; the paramount
concern is the limitations of natural resources, but there are very impor-
tant pages on technology, food security, population, industrial produc-
tion, cities, peace and security and, above all, poverty. The report opens
with the issue of poverty (ibid.: Chapter 1, Sect. 1), making clear that
the needs of the poor are at the forefront.
The Brundtland Report laid the groundwork for a large UN
Conference on Environment and Development, held in June 1992
in Rio de Janeiro. The conference, sometimes known as the Earth
Summit, produces two main documents: the Rio Declaration, a docu-
ment with 27 general principles, and Agenda 21, whose name is meant
to indicate the challenges for the twenty-first century. Agenda 21 is a
comprehensive document organized into four sections, and it is not
only devoted to the environmental dimension of development. The
opening section is dedicated to the ‘social and economic dimensions’
and highlights the need to fight poverty in developing countries, while
Sects. 3 and 4 discuss the possible partnerships and the means of imple-
mentation, respectively.3
3 Following the Rio Conference, the Commission on Sustainable Development was
established in December 1992 by the UN General Assembly.

2.1.2 The Human Development Report, 1990

Two years before the Rio Conference, the UNDP published the first
Human Development Report, HDR, with the Human Development
Index, HDI, a composite index which includes three dimensions:
income, education and health.4 The opening pages of the HDR clarify
the purpose of the whole project and the vision behind it; Chapter 1
opens with the following words: ‘People are the real wealth of a
nation…. This may appear to be a simple truth. But it is often forgotten
in the immediate concern with the accumulation of commodities and
financial wealth’ (UNDP 1990: 9).5
The main goal of the human development approach is to put people
at centre stage. The initial pages of the Report highlight the fact that the
consideration of human beings as an end and not as a means is not a new
approach: ‘This way of looking at human development is not really new’
(ibid.: 10). This concern is shared by some philosophers of the calibre of
Aristotle and by many important thinkers, from Kant to Smith to Marx
(ibid.: 9). The report states that to have a sounder view of human devel-
opment it is necessary to go back to these masters, something we will do
in Chapter 4.
The formal definition of human development appears on page 10:
Human development is a process of enlarging people’s choices. The most

critical ones are to lead a long and healthy life, to be educated and to enjoy
a decent standard of living. (ibid.: 10)
This sentence highlights the three fundamental spheres where people

should have more opportunities and choices. Economic growth is only
one of the three spheres; it is ‘necessary but not sufficient for human
development’ (ibid.: 11).
The HDI is a composite index made up of three indicators, or sub-
indexes, which capture the average conditions of health and education
and the economic possibilities of the people of a country. In the present
composition of the HDI, life expectancy is the indicator for the health
dimension, while the mean years of schooling and expected years of
schooling, respectively, which refer to the education of the existing adult
4 The Human Development Report derives also from the collaboration between Amartya
Sen and his friend Mahbub ul Haq, when the latter was Special Adviser to UNDP.
5 For an analysis of the first twenty years of the report, Alkire (2010).
30 G. VAGGI
population, as resulting from historical patterns, are the two indicators

used for the educational dimension.
The economic dimension is not meant to portray the value of an
economy but to capture the standard of living of people; hence, in the
HDI the figures of GDP per capita are in terms of Purchasing Power
Parities. PPP ‘provide better approximations of the relative power to
buy commodities and to gain command over resources for a decent liv-
ing standard’ (ibid.: 12). The ‘PPPs can thus be used to convert the
cost of a basket of goods and service into a common currency while
eliminating price level differences across countries’; in other words,
the PPPs equalize the purchasing power of currencies in a certain con-
sumption basket. The per capita GDP in terms of PPP describes the
ability of the people of a country to satisfy their own needs in a better
way than would the average income per capita of the country expressed
in US dollars. The possibility to buy goods and services and to have
access to resources depends upon the composition of the consumption
basket and on the prices of the items included in it; therefore, to know
the PPP it is necessary to know the prices of the same type of goods in
different countries.6
Each country is part of a ranking which ranges from low to high
human development, the maximum value being 1; the closer to 1 the
better, since each of the three sub-indexes describes how far away each
country is from the best existing situation.7 The HDI and its three com-
ponents use the notion of ‘distance’ to measure human development; for
instance, the farther away the country’s life expectancy is from the high-
est value, the lower is the value of the health sub-index. This approach
highlights the size of the gap each country is facing.
The Report emphasizes that ‘the expansion of output and wealth
is only a means. The end of development must be human well-being’
(ibid.: 10). The notion of well-being is superimposed on that of income,
which will lead to the search for possible definitions of well-being.8
6 Prices are obtained through the International Comparison Program (ICP) coordinated
by the World Bank and are revised every 6–7 years (http://www.worldbank.org/en/pro-

grams/icp). The income per capita in PPP is taken in a logarithmic form.
7 For the full definition of the original HDI, see the technical notes in UNDP (1990).
8 The discussion had already been opened by Sen in his (1986) book on the standard of
living.
The notion of human development is related to Sen’s capabilities

approach and to the human rights-based approach to development;
in fact, the 2000 Human Development Report is dedicated to human
rights (UNDP 2000). In the opening pages of the 1990 Report, we read
that in addition to the three dimensions of human development peo-
ple should be able to decide about other important aspects of their life.
‘Additional choices include political freedom, guaranteed human rights
and self-respect – what Adam Smith called the ability to mix with others
without being “ashamed to appear in public”’ (UNDP 1990: 10).
Political freedom highlights the fact that human development has an
important social dimension, and we also read that ‘social arrangements
must be judged by the extent to which they promote “human good”’
(ibid.: 9). This sentence is in the opening page of the report, but its
implications are often overlooked. Human good is not only the outcome
of development policies and of international cooperation; it is largely
determined by the social, economic and political features of a coun-
try and by the international environment. These factors determine the
conditions which either favour or constrain people’s capabilities.9 The
importance of social arrangements is also underlined by the fact that
human development is not only a level but also a participatory process
(ibid.: 10). The problem of partnership has become a key attribute of
any type of development policy.
In 2010, the Human Development Index was modified in part
because of some critical remarks. The HDI was the arithmetical mean of
three sub-indexes—the three values were added and then the sum was
divided by three. Thus, a country with very poor records on health and
education could partly compensate for this with a high income per cap-
ita, thanks, for instance, to the sales of its natural resources. Since 2010,
the HDI has become a geometrical mean, in which the three sub-indexes
are multiplied among themselves. Thus, if one of the three values is very
low, it drags down the HDI, making it more difficult to improve the
HDI thanks to only one of the three dimensions.10
The HDI has also been criticized because each sub-index is, in fact,
an average which covers the entire population; however, this does not
9 The expansion of output is not a sufficient condition for human development, but it is a
necessary one (UNDP 1990: 11).

10 The education sub-index has also changed: the literacy rate is no longer included, and
secondary education is now more relevant.

32 G. VAGGI
properly capture the more marginalized groups. To partially overcome

the problem, the 2010 Human Development Report has introduced the
Inequality-Adjusted Human Development Index, IHDI. The IHDI is
adjusted for the inequality in the distribution of each dimension across
the entire population (Alkire and Foster 2010).
2.1.3 The Millennium Development Goals, 2000

In September 2000, the United Nations General Assembly approved the
Millennium Declaration, which includes the Millennium Development
Goals, MDGs. The first MDG is about reduction of so-called extreme
poverty (Section 2.2): one goal is dedicated to the environment, one to
education, one to gender and three to health. The final goal, number 8,
is about global partnership.
It might seem strange that at a time in which the definitions of devel-
opment and poverty are being enlarged and enriched, the first MDG
refers to the economic dimension of poverty. This apparent paradox can
be explained by the fact that from 1980 to 2000 three macro-regions of
the world, Latin America and the Caribbean, the Middle East and North
Africa and Sub-Saharan Africa, had no increase at all in income per capita,
with many countries experiencing a significant drop. It is no surprise that
in the year 2000 income poverty was regarded as a priority.
In the mainstream approach to economic development, growth is
regarded as the best way to fight poverty. The paper ‘Growth is Good for
the Poor’ by Dollar and Kraay (2002) is a clear example of this; market
forces lead to an efficient allocation of resources, which implies a high
growth rate that, in turn, will benefit all people, including the poorest
ones. This is an example of a ‘trickle down’ type of growth with no spe-
cific analysis of income distribution and equity.11 Though MDG1 does not
directly tackle this view, it asks for more direct policies to fight poverty.
Some features of the MDGs must be mentioned.
First, the 2000 Millennium Declaration does not introduce a unique
indicator and a single measure of development, such as income per
capita and the Human Development Index. The MDGs adopt a holis-
tic approach to development, a way to look at development through a
multitude of indexes and goals, without trying to synthesize the various
aspects into a single number. This is the so-called dashboard approach,
11 For alternative pro-poor growth theories, Gore (2007).

which indicates a menu of options and has become very successful in the
twenty-first century.
Second, the MDGs do not require a ranking of countries, which
are not directly compared one with the others; in a sense, each coun-
try competes with itself because the focus is on the improvements made
to achieve the goals. In fact, the Monitoring Reports of the progress of
countries towards the MDGs analyse whether countries are on track to
achieve the goals or are lagging behind. The MDGs focus on some basic
human needs and on the outcome of the policies put in place to move
along the path leading to the achievement of the targets.
Third, three of the eight goals refer to health, which reflects the
importance of health conditions from human development perspective.
However, this fact has also to do with the HIV pandemic, which the
international community became aware of in the mid-eighties, and the
large losses in life expectancy, especially in Sub-Saharan Africa, during the
nineties. During the nineties, some countries lost almost ten years of life
expectancy, which fell from sixty to fifty years of expected life: an enor-
mous setback. Due to the enormous human costs of AIDS as well as its
reverberations in the media, in the beginning MDG 6 was dedicated to
the fight against the HIV infection only. Now MDG 6 reads: ‘Combat
HIV, malaria and other diseases’; among the latter is tuberculosis. Malaria
and tuberculosis have been introduced because many African countries
made it clear that AIDS was not at all the first cause of death; other dis-
eases were much more widespread and affected millions of people.
Fourth, in the international development community the issue of gen-
der was already an important component of the idea of development, but
in MDG 3, gender is now explicitly identified as a major universal goal.12
Fifth, all the goals, perhaps with the exception of the last one, have
been devised mainly in view of the conditions of developing countries.
This is much less true for the 2015 Sustainable Development Goals.
2.2 Poverty
The MDGs have played a very important and useful role in highlight-
ing the major challenges confronting developing countries and the entire
world, but MDG 1 about extreme poverty is the goal which has received
more attention. The idea of reducing by half, between 1990 and 2015, the
12 MDG 3 focuses in particular on the educational opportunities of girls.

34 G. VAGGI
number of people living on less than one dollar a day was a huge challenge,
but it also has had an enormous impact through a powerful but very easy
to understand message. How was the one-dollar-a-day story born?
The so-called extreme, absolute, international poverty line derives
mainly from the work of Martin Ravaillon and was first exemplified
in the 1990 World Development Report (World Bank 1990: 27–29).
The international poverty line is not the income per capita of a coun-
try but refers to the cost of a minimal consumption basket and is
meant to indicate a threshold below which people cannot afford basic
subsistence.13
Of course, each country has its own national poverty line, which dif-
fers from country to country. The international poverty line is a thresh-
old which aims at highlighting the purchasing power of very poor people
all around the world. These people are defined as the citizens who, in
1990, could not afford to buy a basket of goods and services larger than
what a US citizen could buy with one dollar a day. The one dollar refers
to daily income measured in terms of Purchasing Power Parities; thus, it
takes into account the local prices of basic commodities.
The one-dollar-a-day line has never been exactly $1: in 1990, it was
$1.01; between 1990 and 2001, the international poverty line was
moved up to $1.08 and then to $1.25 in 2009 at 2005 PPP prices. In
principle, the poverty line should be constant in real terms and its mod-
ifications should reflect only the price changes of basic goods in devel-
oping countries with respect to the dollar prices for the same goods in
the USA.14 An update took place in 2015, and in 2018, the threshold is
$1.90 a day, at 2011 PPP prices.15
Poor people and poor countries do not necessarily overlap. Most of
the people who are poor according to the absolute poverty threshold live
in middle-income countries, even if this is largely accounted for by India,
Pakistan and Indonesia (Sumner 2013; Sumner and Lawo 2013).
13 On the methodology for building the international poverty line, World Bank (1990:
27–29) and Ravallion et al. (2009).

14 Ferreira et al. (2012) provide a detailed analysis of the update from $1.25 to $1.90. As
Ferreira writes: ‘$1.90 in 2011 buys approximately the same things as $1.25 did in 2005 in
poor countries’.
15 In order to change the poverty threshold, it is necessary to know the PPP, which are
updated every 6–7 years and become available 2 or 3 years later. The total number of peo-
ple in extreme poverty does not change much when moving from the $1.25 line with 2005
PPP prices to the $1.90 line with 2011 PPP prices.
Poverty is often considered to be the opposite of development; how-

ever, the concept of poverty has evolved parallel to that of development.
Poverty is no longer defined only in terms of income, but more in gen-
eral as deprivation and exclusion, the lack of capabilities, in the sense of
the lack of the possibility to decide and to choose regarding one’s life.
Since 2010, we have the Multidimensional Poverty Index, MPI
(Alkire 2007; Alkire et al. 2013). Deprivation is the leading view of
poverty adopted in this approach. MPI is a sort of negative measure of
well-being, capturing how much poverty, in its different dimensions, is
widespread and deep-rooted in a society. The index includes ten different
indicators of poverty which refer to the basic needs of households: from
child mortality to electricity, cooking fuel, school attendance. For each
indicator and for the whole index, the MPI highlights the intensity of
poverty and the depth of the deprivation; that is, the distance of the poor
from the conditions which would enable them to satisfy the specific need.
The MPI shows how many dimensions of well-being people lack, that
is, are deprived of, and by how much. People are regarded as being ‘mul-
ti-dimensionally poor’ if they experience deprivation based on 33% or
more of the indicators. Each year the index is available in the Human
Development Report and represents a very useful policy tool, since it
shows which are the typical deprivations in each country.
A final note on poverty. The opening pages of the first Human
Development Report mention Adam Smith’s view that people may not
feel suitable to society (UNDP 1990: 10). Smith looks at poverty from a
very interesting perspective. He has an ample definition of the necessar-
ies of people, which include ‘not only the commodities which are indis-
pensably necessary for the support of life, but whatever the custom of
the country renders it indecent for credible people, even of the lowest
order, to be without’. Necessaries include also the conditions for which
‘the poorest creditable person of either sex would be ashamed to appear
in public without them’ (Smith 1776: V.ii.k.3).16
Smith defines necessaries as a basket of basic goods, but he also offers
a more general criterion of poverty: shame, humiliation and embar-
rassment at not being able to share the type of life which is regarded
as decent according to the customs of the country. Poverty as exclu-
sion is more than the shortage of basic goos; poverty as the lack of dig-
nity implies a judgment about what is regarded a decent standard of
16 A few lines before this passage there is another very similar sentence.
36 G. VAGGI
life. Poverty as the lack of dignity is also a feeling by an individual about

whether or not she is adequate to a specific human setting.
2.3 Beyond GDP

Income per capita is no longer regarded as an appropriate indicator of
development, as the notion of well-being has now come to the fore. This
tendency has been strengthened in recent years. In 2007, the European
Commission and other organizations promoted ‘The Beyond GDP confer-
ence’ in order ‘to explore how to improve the measurement of progress, true
wealth and the well-being of nations’.17 (European Commission 2007: 1).
In 2008, a famous report by Stiglitz, Sen and Fitoussi appeared on the meas-
urement of social progress (Stiglitz et al. 2008). The Report focuses on the
notion of well-being, highlighting its many dimensions, clarifying limitations
to GDP and reviewing various alternative indexes; however, it does not dis-
miss GDP in favour of any single alternative. The main message is probably
the need for awareness of what is measured and cautiousness in using data.
The Human Development Index and the Multi-Dimensional Poverty
Index are two well-known examples of composite indexes which blend
together different dimensions of development, progress and well-being.
Some other examples are the World Happiness Report, which owes a
lot to the work by a team led by Jeffrey Sachs at Columbia University
and which first appeared in 2012 (Helliwell et al. 2013). The Inclusive
Wealth Index (IWI), proposed by the UNU-IHDP and UNEP, is meas-
ured in monetary terms, like GDP, but advocates for a wealth-based
approach, i.e. stocks instead of flows, to capture the different dimensions
of the sustainability of societies (Dasgupta and Duraiappah 2012).
A multidimensional notion of well-being is also at the core of the
OECD Better Life Initiative of 2011, which has given rise to the Better
Life Index with eleven dimensions of well-being, classifying 38 countries,
mainly from the OECD (http://www.oecdbetterlifeindex.org). In 2014,
the Social Progress Imperative, an international coalition of philanthropic
foundations, consulting and financial firms proposed the Social Progress
Index, which is a simple average of the three dimensions: Basic Human
Needs, Foundations of Well-Being and Opportunity, which are further
divided into 12 specific components, each measured by numerous indi-
cators aggregated through multivariate data analysis (Porter et al. 2014).
17 We must also recall the work on economic growth by Nordhaus and Tobin (1972).
Several works describe the story of GDP and the reasons for its relevance (Coley 2014;
Fioramonti 2013; Phillipsen 2015).
2.4 From the Millennium Goals

to the Sustainable Ones
2.4.1 The Road to the SDGs

The SDGs arose from the above debates on the multidimensional nature
of development, but instead of looking for a single composite mag-
nitude, they broaden the view; as the MDGs, the SDGs adopt a ‘dash-
board’ approach to development, in which various aspects of development
are part of a list.18 The SDGs are the outcome of a specific process which
originated during the preparatory works of the 2012 Rio+20 conference,
thanks to a proposal by Colombia and Guatemala (Loewe and Rippin
2015: 2, 4). The Rio+20 conference led to the formation of the Open
Working Group for Sustainable Development Goals, OWG, with the par-
ticipation of many development actors, including civil society organiza-
tions. The aim was to have a participatory debate about the post-2015
goals. This process generated many documents; let us recall a few of them.
In May 2013, the United Nations published the report of the High-
Level Panel of Eminent Persons on the Post-2015 Development Agenda,
containing 12 goals, 54 targets and a new time horizon: 2030 (UN-HLP
2013). This report was the outcome of the work of the UN Secretariat
with the support of some international personalities. The report stressed
‘five transformative shifts’: leave no one behind, sustainability, jobs and
inclusive growth, peace and institutions and global partnership.
The five shifts do not appear as such in the final UN Resolution of
September 2015, also known as Agenda 2030 (UN 2015), which,
however, incorporates many important aspects of the 2013 Report.
For instance, ‘leave no one behind’ has become a leading expression in
Agenda 2030. The shift concerning jobs and inclusive growth appears in
SDG 8, the one regarding peace and accountable institutions highlighted
the need for a broader view of institutions and is partly represented in
SDG 16. Shift is in SDG 17 on global partnership, the topic of Chapter
6 below.
In July 2014, the Open Working Group for Sustainable Development
Goals presented its final report with 17 goals and 169 targets
(UN-OWG 2014), which is almost identical to the final UN Resolution
18 Since 2016, an ‘SDG index and dashboard report’ has been published (Sachs
et al. 2018).
38 G. VAGGI
of September 2015. It is immediately clear that the OWG report has sev-
eral problems: in particular, there were too many goals and targets, many
goals overlap with each other, and some goals are extremely ambitious:
zero poverty by 2030?19 The OWG report was the outcome of long
negotiations in which it was necessary to accommodate different sensi-
bilities, but the High-Level Panel report appears less confused and more
focused.
However, reducing the number of goals and targets has proven to
be impossible, and in December 2014, the UN Secretary General deliv-
ered a Synthesis Report with the beautiful title: The Road to Dignity by
2030. The report states that the UN is in favour of ‘maintaining the 17
goals and rearranging them in a focused and concise manner’ (UN-SG
2014: 15). The 17 goals are clustered into six essential elements: dignity,
people, prosperity, planet, justice and partnership (ibid.: 16–19).
There are still some overlapping and confusion, but the emphasis
on human dignity is extremely important, and the six elements provide
some sort of guidance in implementing the SDGs.
On 11 August 2015, the UN published a new document,20 which,
with very minor changes, has the same 17 goals and 169 targets as the
July 2014 Open Working Group report. The August 2015 text became
the UN General Assembly Resolution adopted on 25–27 September
2015, in which the 17 goals are preceded by a declaration consisting of
59 points and followed by 32 points dealing with the means of imple-
mentation, global partnership and the follow-up (UN 2015: 24–29).
In the final Resolution, the six elements of the UN Secretary General
Synthesis Report are reduced to five ‘areas of critical importance to
humanity and the planet’ (ibid.: 2): people, planet, prosperity, peace and
partnership: the five Ps. The element called ‘justice’ in the Synthesis Report
became ‘peace’ while the other four elements kept the original name.
Although the first element ‘dignity’ is missing, the word dignity appears in
several paragraphs at the beginning of the declaration (ibid.: 2–3).
A list of 241 indicators has been presented by the UN statistical com-
mission in March 2016 and is being always updated (UN 2018, May 11).
The SDGs are organized into three layers: goals, targets and indi-
cators, very much like the Millennium Goals, but I suspect that the
19 See, for instance, Maxwell (2014) and Engel and Knoll (2014).
20 This is the ‘Draft outcome document of the United Nations summit for the adop-
tion of the post-2015 development agenda’; see https://sustainabledevelopment.un.org/,
where it is possible to find all the documents related to the SDGs initiative.
SDGs will give more emphasis to the indicators and the focus will be on
measurement.21
The fact that there is no single magnitude to express the develop-
ment stage of a country/region does not mean that measurement is
not important, quite the contrary. Each goal/aspect of development
has its own set of indicators, most of which are expressed in terms of
a numerical target. It is only by measuring the indicators and how they
move through time that it is possible to assess whether there is progress
towards a certain goal.
2.4.2 Old and New Goals

What is new in the SDGs with respect to the MDGs? Following the
2012 Rio+20 Conference, the environmental dimension entered full
force into the new goals (Evans and Steven 2012: 11). Moreover, in
November and December 2015 in Paris, a Conference on Climate
Change was held, the so-called COP 21 since it was the 21st session
of the United Nations Framework Convention on Climate Change
(UNFCCC), which had been established in 1992 at the Rio Summit.22
The MDGs are much more focused on human development and on
extreme poverty. The Millennium Declaration is the outcome of the
human development vision and of the human rights approach to devel-
opment. Most of the MDGs focus on the basic conditions of life and on
basic needs: hunger, poverty, maternal and child death and primary edu-
cation. In 2000, the focus was on poor countries and on the conditions
of the most destitute people.
The SDGs have many more goals, with a very long list of targets and
indicators. However, the focus is now on sustainability, which received a
broad definition not limited to the environmental aspect.23 Agenda 2030
highlighted ‘the three dimensions of sustainable development: the eco-
nomic, social and environmental’ (UN 2015: 2). Moreover, the SDGs
are for all countries and for everyone.
21 The indicators are still being updated. Note that the original 241 indicators are, in fact,
232 since ‘nine indicators repeat under two or three different targets’ (https://unstats.
un.org/sdgs/indicators/indicators-list).
22 It was also the 11th session of the parties which in 1997 signed the Kyoto Protocol.
23 The notion of sustainability has already been investigated; see, for instance, Daly and
Cobb (1989) and Sachs (1999). However, it is in the 2030 Agenda that it takes centre
stage in development debates and policies.
40 G. VAGGI
Table 2.1 Old and new goals and the five Ps
MDGs Area SDGs
1–6 People 1–5

7 Planet 6, 7, 11, 13, 14, 15
Prosperity 8, 9, 10, 12
Peace, inclusive societies, justice 16
8 Partnership, global one 17
Table 2.1 presents a simple classification of the old and new goals.

The human development and poverty goals are now found in the ‘peo-
ple’ area. There are many more and more specific goals in the ‘planet’
area, but the novelty is also represented by the goals in the ‘prosperity’
area. These four are the ‘structural’ goals, since they refer to the work-
ing of economic forces and the structures and conditions which exist in
the international economy. Two of these goals are particularly impor-
tant: number 8 on full employment and decent work and number 10 on
reducing inequalities.
Peace and justice also represent a new entry, while global partnership
was already in the MDGs. The three areas, ‘people’, ‘planet’ and ‘pros-
perity’, refer to the social, environmental and economic dimension of sus-
tainability, respectively; however, all goals and targets should incorporate
all three dimensions, which is of course a very challenging requisite.24
2.5 Changing Views

on International Cooperation
Different views of development complement different ideas about how

to promote it.
2.5.1 The Washington Consensus and Conditionality

The term Washington Consensus has been coined by John Williamson
to indicate ten major points of the Structural Adjustment Programs
(SAP) of the IMF and the World Bank (Williamson 1990). The ten
24 Goals can be organized into 4 different clusters (Vaggi 2016: 47–48), but there are
other ways to group the goals; see, for instance, Loewe and Rippin (2015: 4) and OECD
(2015: 48).
points recommended a set of economic reforms which were meant to

speed up economic growth and were based on two main ideas. First,
the reduction in the role of the state and the opening up of the econ-
omy would boost economic growth. Second, economic benefits would
‘trickle down’ to the entire society. As we have seen in Sects. 1.2 and
1.5, both ideas dominated the views about economic development in
the seventies and eighties. The Washington Consensus policies included:
privatizations, liberalizations of the capital account and macroeconomic
stability, in other words, low inflation and a small state budget. These
policies were regarded as necessary and even sufficient to trigger eco-
nomic growth.
The dominant idea is that there are no alternatives to the Washington
Consensus policies, both in theory and in practice, but international and
civil society organizations could intervene with programmes of ‘social
safety nets’ to mitigate the negative impact of Structural Adjustment
Programs on the poorest people. The Structural Adjustment Programs
included the conditions that the developing countries had satisfy in order
to receive the support of the International Monetary Fund during the
financial crisis, but they were also the prerequisites for obtaining aid by
international organizations.
In the second half of the eighties, many research works condemned
the policies based on the Washington Consensus. First, the Structural
Adjustment Programs are a typical case of ‘one recipe fits all’, because
they are supposed to be effective in countries which have very different
economic characteristics, and in many cases, they do not restore growth
(Rodrik 2007). Second, these policies ask for a small role from the state
and require a reduction in subsidies and social expenditures, thus causing
deep human suffering (Cornia et al. 1987).25
The idea of a ‘post-Washington Consensus’ derived from a famous
paper by Joseph Stiglitz (1998a). Stiglitz advocated the need for more
articulated and less economic-focused policies, while also highlight-
ing the fact that development has to be interpreted in terms of broader
goals, not just as an increase in income per capita.
The collaboration between Stiglitz and James Wolfensohn, then
President of the World Bank, led to the proposal for a new approach
25 For an analysis of the evolution of development policies since the time of the
Washington Consensus Gore (2000) and Kanbur (2008). For the making of the
post-Washington Consensus, see Fine (2001: Chapter 8).
42 G. VAGGI
to international cooperation. In January 1999, the Comprehensive

Development Framework (CDF) was proposed as a new way of look-
ing at development policies (Wolfensohn 1999). The CDF is a holistic
approach to development offering a rich taxonomy which covers many
aspects of the development process, from the strictly economic ones
to those more related to the human, political and social dimensions.
Efficient policies can only be achieved by considering the interrelations
of the different aspects of development. No goal or target can progress
in isolation, and there is no single development model good for every
country.
The CDF proposes a new methodology to deal with development
policies, which must take into account the role and the actions of many
different actors: nation states, international organizations, civil society
and the private sector. With the help of a double entry table, the CDF
tries to identify the actors that are likely to be more efficient in pursu-
ing each development goal. The CDF is no longer very well-known,
but it anticipated some of the most relevant indications for development
and cooperation policies that would emerge from the various high-level
forums of the 2000s.26 Moreover, CDF tackles the issue of partnership
for development, which is the topic of the last goal both in the 2000
Millennium Declaration and in the 2015 Sustainable Goals, numbers 8
and 17, respectively.
2.5.2 From Aid Effectiveness to Global Partnership

Aid is an essential component of development policies, and since 1960,
the Development Assistance Committee (DAC), which is in charge of
coordinating aid policies among the OECD countries, the ‘old donors’,
has operated. Following the presentation of the MDGs, there have been
many initiatives and documents on the role of aid and on aid effectiveness.
Between 2002 and 2017, there were at least ten major international con-
ferences on development: four High-Level Fora on Aid Effectiveness, four
conferences on Financing for Development and two High-Level Meetings
of the Global Partnership for Effective Development Co-operation.
The first two decades of the new century have been characterized by
intense debates on the means necessary for appropriate cooperation
26 The World Bank website provides information on the CDF (http://web.worldbank.
org/archive/website01013/WEB/0__CON-3.HTM).
for development. The means refer to the financial requirements to first

achieve the MDGs and then the SDGs, but above all these meetings have
dealt with the procedures and practices of development cooperation.
The central topic of all these high-level fora was aid effectiveness. The
first High-Level Forum on aid and international cooperation took place
in Rome in 2003, resulting in the ‘Rome Declaration on Harmonisation’
of cooperation practices. The second forum was held in Paris in 2005 and
led to the ‘Paris Declaration’ on aid effectiveness, which highlights five
principles: ownership, alignment, harmonization, managing for results and
mutual accountability. All these principles emphasize the need for effective
coordination of development policies by all the partners. Alignment and
harmonization require the traditional donors to coordinate their aid pol-
icies, while managing for results and mutual accountability focus on the
outcome of aid and on the transparency in the use of funds.
Ownership stresses the central role of developing countries in manag-
ing their policies and strategies and their own development work on the
ground. The idea of country ownership was reinforced in the third forum
in 2008 in Accra with the Accra Agenda for Action, which underlines that
donors must accept the development priorities and development strat-
egies of countries. The Accra Agenda for Action insists on the need to
involve new players in development policies, including the private sector
and civil society organizations, in order to achieve more effective results.
In 2001, in Busan there was a shift in focus from aid effectiveness
to global partnership, the theme which characterizes the following
meetings. The first High-Level Meeting of the Global Partnership for
Effective Development Co-operation took place in Mexico City in 2014
and the second one in Nairobi in 2016.
Between 2002 in Monterrey Mexico and 2017 in Doha, four major
conferences on Financing for Development took place. The second con-
ference took place in Doha in 2008, and the third one was held in 2015
in Addis Ababa, in preparation for the September UN General assembly
that approved the SDGs (UN-AAAA 2015). All these conferences con-
cluded that to achieve the SDGs more resources must be committed.
Since the seventies, the recommended aid target has been at least 0.7%
of income for each donor country, a figure met by only five countries.27
27 In 2017, among DAC countries Norway, Sweden, Denmark, Luxembourg and the UK
have met the target of 0.7% of GNI, while the Netherlands and Germany were just below
it. Among non-DAC members the United Arab Emirates and Qatar destinate more than
1% of the GNI as aid.
44 G. VAGGI
2.6 Bridging Empowerment and Ownership

The debates of the last four decades have provided a detailed view of
what development is and how it should be achieved. We know the main
aspects of development and are aware of the procedures and the policies
which all the partners should adopt in order to pursue it. Development
is not just about economic growth; it is a multifaceted phenomenon in
which different aspects are linked to each other. We know ‘what’ to do.
Similarly, we are aware that cooperation policies should be coor-
dinated, coherent and, of course, that aid should be effective and
results-oriented. Cooperation should build a real partnership, aim at sus-
tainability and lead to country and people ownership. We know ‘how’ to
do it.
The overabundance of the targets and indicators in the SDGs could
give the impression that sustainable development is just about adding
new goals. The new dimensions are important; however, development
is a process of empowerment and ownership. Development as empow-
erment underlines the fact that neither the input-approach, how many
funds are employed, nor the outcome-approach, which focuses on the
end results alone, give a satisfactory description of development.
The way in which the goals are pursued is an essential component.
Sustainable development is a process of transformation which is valued
in a positive way by the people and which implies major economic, social
and political changes. Development is a way to remove some of the con-
straints which determine the deprivation and the exclusion of some peo-
ple, groups and countries.
Empowerment and ownership describe very well the outcomes of the
debates on development and cooperation. The World Bank has produced
several studies on the issue of the empowerment framework, also in rela-
tion to the Poverty Reduction Strategy Papers (PRSP) linked to the debt
relief initiative known as Heavily Indebted Poor Countries (HIPC), an
initiative of the early 2000s. ‘Empowerment is the process of enhancing
the capacity of individuals or groups to make choices and to transform
those choices into desired actions and outcomes’ (Alsop et al. 2006:
10).28
All the SDGs imply some element of empowerment. This is clear for
the goals and targets related to education, health and gender; in other
28 On the measurement of empowerment, see Alsop and Heinsohn (2005).

cases, the impact is less direct and requires changes in the social and eco-
nomic conditions, sometimes called ‘opportunity structures’ (ibid.).
Empowerment is not just the improvement of some indicator; even
if, these improvements might support the process of empowerment.
Empowerment is also different from sustainability; most likely, empow-
erment implies sustainability, but the opposite is not necessarily true.
Development programmes which comply with the three dimensions of
sustainability (see Sect. 2.4 above) may support the process of empow-
erment, but it might be that the people and groups involved in the
programmes are still far away from achieving the awareness and self-con-
fidence the empowerment process implies. Empowerment is the possi-
bility to enlarge one’s opportunities, which requires the ability to decide
among a set of choices and the possibility to put choices into action.
Ownership is often indicated as ‘country ownership’, and it is
prominent in both the Paris Declaration and in the Accra Agenda for
Action; however, it is also strongly emphasized in the Comprehensive
Development Framework and in all the World Bank documents related
to it (see Sect. 2.5). Ownership is the ability of a developing country
and of its people to lead the development process, In a popular quote
by Stiglitz: ‘the degree of ownership is likely to be even greater when
the strategies and policies are developed by those within the country
itself, when the country itself is in the driver’s seat’ (Stiglitz 1998b: 17).
Ownership includes elements such as power, responsibility and capacity
(Watson-Grant et al. 2016: 8).
Ownership requires the involvement of all the national stakeholders,
which means local governments, civil society organizations, communi-
ties, etc. which must participate in the formulation and implementation
of development strategies. Country ownership means that there is suf-
ficient political support within a country to implement its developmen-
tal strategy (World Bank 2005: 19–21), but of course, local elites might
gear the development policies and in particular foreign aid towards their
own interests (Angeles and Neanidis 2009).
Ownership is a political concept because it has to do with power
(Watson-Grant et al. 2016: 8). Country ownership is meant to overcome
the old donor–recipient relationship in which decision-making power
is largely in the hands of the funding institutions. Notwithstanding all
the international conferences and documents, power is still unequal, and
it is not easy to achieve a country-led partnership (World Bank 2005:
24). There are still very large power differences in negotiations on
46 G. VAGGI
development; in order to have less unequal partners, these differences

must be rebalanced.29
To achieve a more balanced relationship in development strate-
gies, it is necessary to improve the institutional capacities of developing
countries at all levels, from central governments to local organizations.
Ownership is linked to empowerment. Empowerment, ownership, pow-
er-sharing, capacity building: this is the challenge for global partnerships
(see Chapter 6 below).
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Transforming All Lives and Protecting the Planet (Synthesis Report of the Secretary-
General on the Post-2015 Sustainable Development Agenda). New York.
Vaggi, G. (2016). Making the Sustainable Development Goals Work.
International Journal of Cooperation & Development, 3(2), 34–58. http://dx.
doi.org/10.21500/23825014.2778.
Watson-Grant, S., Xiong, K., & Thomas, J. C. (2016). Country Ownership in
International Development, Toward a Working Definition (MEASURE
Evaluation, Working Paper). Chapel Hill: University of North Carolina.
Williamson, J. (1990). What Washington Means by Policy Reform. In J.
Williamson (Ed.), Latin American Adjustment: How Much Has Happened.
Washington, DC: Peterson Institute for International Economics.
Wolfensohn, J. D. (1999). A Proposal for a Comprehensive Development
Framework (A Discussion Draft). Washington, DC: The World Bank.
World Bank. (1990). World Development Report Poverty. Washington, DC:
Oxford University Press.
World Bank. (2005). Enabling Country Capacity to Achieve Results, Vol. I, 2005 CDF
Progress Report, Vol. I Overview. Washington, DC: World Bank. http://web.
worldbank.org/archive/website01013/WEB/IMAGES/ENABLING.PDF,
http://web.worldbank.org/archive/website01013/WEB/0__CON-3.HTM.
CHAPTER 3
The Economy Strikes Back; Convergence,

Divergence and Imbalances
Abstract  Major changes have characterized the international economy

since the ’70s. Asian growth, in China in particular, is changing the
economic relations and development cooperation, with many emerg-
ing countries now becoming ‘new donors’. International finance has
boomed to a level almost 10 times larger than world GDP; however,
financial crises are a recurrent phenomenon. Income distribution has
been worsening in many countries: income and wealth are highly con-
centrated in the top 10% and top 1% of the population. Since the 2007
crisis, economic growth has slowed. Is this a secular stagnation? Large
trade ‘imbalances’ and protectionist policies have emerged. Developing
countries are experiencing huge migration outflows. All these economic
forces can affect the long-run progress towards sustainable development.
Keywords  Asian growth · International finance · Inequalities ·

Secular stagnation · Economic imbalances
The debates of the last four decades have provided a very rich view of
what development is and of how it should be achieved. Development
is not just about economic growth but a multifaceted phenomenon.
International cooperation should foster a global partnership, with

https://doi.org/10.1007/978-3-319-54879-1_3
52 G. VAGGI
coherent policies among the various stakeholders, and lead to country

and people ownership. The economic component of development has
become less and less relevant.
However, since the eighties, some major economic changes have
taken place in the world economy, two of which have a long-run struc-
tural nature and are here to stay:
1. the economic growth in Asia;

2. the rising role of international finance.
There are two more changes for which it is difficult to say if they will
become long-run features of the capitalist economy, but they will cer-
tainly exert a major influence on development processes:
3. the worsening of income and wealth distribution;

4. the slowing down in the world growth rate, the so-called secular
stagnation.
Powerful economic forces cannot be ignored. But are distances among

countries increased or reduced in terms of development? Is there a con-
vergence within and among countries, the topic of SDG number 10? Or
are there growing imbalances?
The next four sections briefly deal with the four changes, while the final
one addresses two major imbalances related to trade and to migrations.1
3.1 Rising Asia
The twenty-first century will be the century of Asia. Since the 1980s,
many countries in Asia have experienced sustained economic growth. This
phenomenon has involved countries which thirty years ago were regarded
as being ‘developing’ and even ‘low income’. Economic growth is still
spreading across East Asia, though at different speeds and in different
ways. This fact can be regarded as an example of convergence in income
per capita among rich and poor countries, which provides some support
to mainstream growth theory, according to which low-income economies
should grow faster than high-income ones (see Sect. 1.2 above).
1 On five imbalances UNCTAD (2017: 152).

3 THE ECONOMY STRIKES BACK … 53
There are several explanations for Asian economic successes. Different

interpretations refer to different economic models and to different the-
ories. This is not irrelevant since the Asian experience can be used to
assess how far the economic growth models we have examined in the
first chapter contribute to the understanding of such a far-reaching phe-
nomenon. With a drastic simplification: is Asian growth the outcome of
market forces and of Washington Consensus policies or is it instead the
outcome of the pervasive intervention by the state?
The 1993 The East Asian Miracle (World Bank 1993) by the World
Bank highlights the fundamental role of trade openness, high savings
and incentives to private investment; market competition appears to be
a decisive push factor. The picture is more nuanced in the UNCTAD
Trade and Development Report of 1996, which also ascribes a decisive
role to capital accumulation, emphasizing that it results from policies
meant to favour export industries (UNCTAD 1996).
According to UNCTAD, there are two fundamental links which
have favoured the high growth rate in many Asian countries. First the
export-profit nexus in which the state supports export industries and sec-
tors; second, the profit-investment nexus, in which policies favour profit
reinvestment by the exporting firms. Firms receive these bonuses in so
far as they are successful in selling abroad. This model requires a strong
coordination between the state and the leading capitalists; the Japanese
Ministry of International Trade and Industry (MITI), now Ministry of
Economy, Trade and Industry (METI) was an early case of strict collab-
oration with the big transnational groups, the keiretsu. Something similar
has taken place in South Korea with her large corporations, the chaebol.
This pattern seems to have been applied in the most successful econ-
omies of East Asia, including Japan, and the first tier of NIES, Newly
Industrializing Economies: South Korea, Taiwan, Hong Kong and
Singapore, the four tigers. The last two tigers are probably special cases,
but what is definitely remarkable about East Asia is that strong economic
growth has not been limited to one or two economies only. The 1996
UNCTAD Report adopted a beautiful metaphor to describe this fact: the
‘flying geese’ model, borrowed from the Japanese economist Akamatsu.2
One country takes the role of the leading goose while the other geese
follow in an inverted V formation, all flying in the same direction.
2 For a history of the ‘Flying Geese’ model, see Kasahara (2013).

54 G. VAGGI
Governing the Market (Wade 1990) helps to better understand the Asian
economic success stories. The title illustrates what has come to be known
as the developmental role of the state; a set of policies by which the gov-
ernment bolsters the export-oriented firms. Domestic markets are man-
aged and governed with fiscal, credit, exchange rate and labour regulations
which are designed to support the two nexuses above. But the key issue
is that of ‘going up the ladder’: to prop up a process which modifies the
composition of both GDP and exports in such a way as to move towards
products with a higher technological content and a higher value added.
This structural change is the only guarantee to avoid being stuck in export-
ing either low wage/low technology products or primary commodities.
In the early 1970s, most Asian countries were still in the low-income
group, but by now many East Asian economies are either middle or high
income. The notion of emerging markets did not exist twenty years ago,
nor did we have the BRICS.3 East Asia is the only region to have experi-
enced strong economic growth since 1980, notwithstanding the 1997–
1998 financial crisis.
China is part of this story, but because of her size it is also a case in itself.
It is important to recall some of China’s performances. First, China is a
very strong competitor: since the year 2000, it has a current account sur-
plus, mainly due to the export of goods. Second, the ratio of investments
to GDP has been in the range of 35% since the late eighties, and from
2009 it has exceeded 45%. Third, since 2000 there has been an exponential
growth in both the Gross Expenditures in Research and Development and
in the number of patent applications. China is ‘going up the ladder’.
The Asian success model is a combination of export-led growth based
on capital accumulation and of structural change. There is no space to
discuss these aspects here, but two major questions arise. Can the Asian
story be replicated in other developing countries? What is the impact of
Asian and Chinese growth on developing countries, and on Sub-Saharan
Africa in particular (Kaplinsky 2013)?4
Asian growth and the emergence of some middle-income economies
have some implications.
3 Emerging markets are important players in the world economy and in international
cooperation, where they also constitute the main block of the so-called new donors.
4 The emergence of new economic powers, or ‘new donors’, not members of the OECD-
DAC, implies that many countries in Sub-Saharan Africa have the possibility to move
beyond the economic relations of the post-colonial period, during which they maintained
major economic links with the former colonial powers and with a limited number of other
high-income countries.
At the world level, Millennium Development Goal number 1, halving

the number of those living in extreme poverty, has been achieved largely
thanks to economic growth in Asia, China in particular. The very good
economic performances of China and India mean that, at present, most
poor people live in middle-income countries (Sumner 2013: 1).
There are more players on the ground and, even with all the diffi-
culties and complications, there are more possibilities for South–South
cooperation.5 The world economy is now much more interconnected
than it was forty years ago, but it is also going through a period of pro-
found changes in the international division of labour. The so-called
South now includes some global powers, China and perhaps India, and
some regional powers, Brazil, South Africa and Russia. The five BRICS
have quite different economic characteristics, but the old divisions into
rich and poor countries and the tri-partition into first, second and third
world need to be replaced by a more articulated geography; there are
more players in the economic arena.
This situation presents opportunities but also challenges for low-in-
come countries. Between 2000 and 2010, Sub-Saharan Africa (SSA)
grew on average around 5% a year, with peaks close to 7%, which is
regarded as the necessary increase to guarantee a decent improvement
in income per capita; population in SSA is growing around 2.7%. Since
2010, the GDP growth rate has been slowing down to less than 4%.
The issue is whether African economies will be able to sustain economic
growth over a long period, say a generation. During the coming years,
these countries will also have to try to achieve the SDGs.
3.2 International Financial Markets
3.2.1 The Bright and the Dark Sides of International Finance

In 1985, the overall notional value of financial derivatives was slightly
more than $1 trillion; in 2007, at the beginning of the subprime crisis
in the USA, it exceeded $600 trillion. Since then it has kept on growing,
stabilizing around a proportion of 9–10 times the world GDP.6
5 Between 1995 and 2012, South–South exchanges doubled their share in world trade.
6 The incredible amounts achieved by financial markets have been called ‘The dance of
the trillions’ (Palma 2009: 833).
56 G. VAGGI
The massive increase of international finance dates to the end of the

Bretton Woods system based on the dollar-exchange standard and to
the financial liberalization process, which has taken place since the early
eighties (see Sect. 1.5 above). On 15 August 1971, Nixon ‘closed the
gold window’ and the dollar floated and from the mid-seventies to the
late nineties the foreign exchange market, where currencies are traded,
boomed. In the Bretton Woods system, bonds were largely issued in
domestic markets, but since 1971 they began to be increasingly traded in
international markets. Between 1970 and the mid-nineties, overseas sales
of USA and UK bonds rose exponentially.
There is a bright side to finance. Since the nineties, we have been
going through a period of abundant financial means and a variety of
financial instruments. This seems to be good news for developing coun-
tries, in particular low-income countries which need funds both for eco-
nomic growth and for the SDGs and have limited domestic sources of
financing (Chang and Grabel 2004, Chapter 9).
The last two decades have seen major changes in North–South finan-
cial flows. Since 1998, private flows to developing countries have become
increasingly important. Foreign Direct Investment and remittances rep-
resent the largest financial flows to developing countries, accounting in
2017 for around $600 and $450 billion, respectively.7 In 2017, interna-
tional aid has been around $140 billion (OECD 2018: 19). Private phi-
lanthropy and Sovereign Wealth funds have also increased enormously in
the new millennium. A lot of money is now available and at cheap rates.
International financial markets also have a dark side: repeated cri-
ses, both in developing and in developed countries.8 Since the eight-
ies, developing countries have experienced repeated financial crises; to
recall just the major ones: the debt crisis of 1982 with Mexico’s default,
Mexico (again) in December 1994, and the Asian Crisis of June 1997
(Vaggi 1993, Chapter 3). Between July 1998 and December 2000,
Russia, Brasil, Turkey and South Africa were hit by various types of crisis,
and Argentina had to devalue in December 2001.
7 Remittances include only the officially registered ones, while hundreds of billions are
assumed to enter developing countries in an unofficial way.

8 More on this topic can be found in Vaggi (2018).
More than 30 countries were involved in the 1982 debt crisis9 and
in most of the economies in Sub-Saharan Africa, in the Middle East and
North Africa, and in Latin America and the Caribbean, income per cap-
ita stagnated for almost twenty years. It was the period of the so-called
lost decade, though, in fact, the impact on the real economies continued
until the late nineties.10
A reasonable solution to the crisis emerged only with the heav-
ily indebted poor countries Initiative (HIPC) of 1996. Fourteen years
after the outbreak of the crisis, this initiative at last was taking into
account the fact that most of these countries, in particular the weak-
est African ones, were not able to pay back debts. The growing foreign
debt was due to arrears on previous payments. Thanks to an advocacy
activity, the HIPC initiative was enhanced at the Cologne G7 of 1999.
Unfortunately, the procedures to obtain the partial cancellation of for-
eign debts were very cumbersome and could take as long as six years.
In 2005, the World Bank and the IMF introduced the Multilateral Debt
Relief Initiative (MDRI), which implied debt cancellation.
Debt cancellation has been very effective, but the improvements
in the debt ratios were concentrated in the 2000s. Following the ini-
tial reductions, both the debt to GNI ratios and the debt service ratios
have stabilized without any further improvements. After some quiet
years, in 2015 Puerto Rico encountered major sustainability problems
on its external debt, subsequently defaulting. Since 2016, Mozambique
has gotten into serious repayment troubles. Another debt crisis can-
not be ruled out, especially in the least developed countries (Eurodad
2014: 16).11
9 The countries hit by the debt crisis of the eighties were: Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela, Costa Rica, Jamaica, Cote
d’Ivoire, Nigeria, Sudan, Yugoslavia, Poland, Hungary, Turkey, Algeria, Egypt, Morocco,
Bangladesh, India, Pakistan, The Philippines, South Korea, Indonesia, Malaysia, Thailand
and Portugal (Vaggi 1993).
10 In Sub-Saharan Africa, the average GNI per capita declined from 1278 US$ (constant
2010 prices) in 1984 to 1123 US$ in 1998 (World Bank, World Development Report 1986
and 1999/2000).
11 There are many similarities between some African countries today and some Latin
American and Asian countries in the eighties and nineties, respectively.

58 G. VAGGI
Another major crisis took place in September 1992. The British

pound, the Italian lira and the Spanish peseta were forced to aban-
don the peg to the German mark, which led to the tearing apart of the
European Monetary System (EMS). This currency crisis was certainly
due to some misalignments inside the EMS countries, particularly dur-
ing a time of diverging inflation rates; thus, the EMS was not an optimal
currency area.
This time the crisis did not hit some poor African country or some
Latin American country prone to economic crises but three high-income
countries of Western Europe. Financial markets proved to be more pow-
erful than three important central banks in Europe, including the Bank
of England, established in 1694, the second oldest central bank in the
world.
The three central banks found themselves short of ‘ammunition’,
reserves, to defend their currencies, and the markets were now able to
demand many more German marks than the reserves available in the
coffers of each of the three banks. In the preceding years, between
1977 and 1992, the financial derivative markets had increased from a
negligible value to around $10 trillion and by 2007 it had increased
more than 40 times to more than $520 billion. The 1992 EMS crisis
showed the growing dimension and power of the international financial
markets; the ratio of global official reserves to the daily turnover in the
foreign exchange markets had decreased from almost 15 to less than
2.12
3.2.2 Financial Markets and Developing Countries

Either no lessons have been learned from the 1982 and 1992 crises or
the growing power of financial markets is difficult to keep in check.
Finance is characterized by systemic risk; the best description of this sit-
uation is in the work by Hyman Minsky, the author who foresaw the
potential damage of an uncontrolled financial system. His contributions
date back to the mid-seventies, when the overall market for derivatives
was still negligible and the consequences of abandoning the Bretton
Woods system were not yet clear (Minsky 1974, 1975).
12 The story of the 1992 EMS collapse is more complicated than this; only the essential
elements are highlighted here. On the financial crises, see also Moro and Beker (2015).
The massive increase in the markets for financial derivatives occurred

between 1985 and 1995 and eighty per cent of the transactions are
OTC, over-the-counter, since they do not take place in regulated mar-
kets; therefore, there is a lack of transparency and most contracts are not
known to any financial authorities. This is also due to technological inno-
vations, which have resulted in new types of contracts and favoured the
increase in the number of transactions in which each financial operator is
involved.
In most of the crises, currency depreciation led to an improvement in
the external account and restarted economic growth; the most successful
case has been South Korea. The Asian countries were accused of keep-
ing their currencies pegged to the dollar instead of letting the exchange
rate fluctuate. A 45% depreciation of the South Korean won between
November 1997 and April 1998 and a fall of 8% in GDP in 1998 were
followed by a growth rate in the range of 5% in 1999, only slightly lower
than before the crisis. By the end of 1999, Korea was already paying
back the funds received by the IMF.13 It was a typical V crisis, deep but
short-lived.14
Most of these crises were related either to defaults on commercial
loans and on sovereign bonds or to financial bubbles. All the crises were
preceded by large capital inflows mainly because of the high interest rates
for local bonds and the high expected returns on equity investments.
However, these flows reversed direction because of changes in external
conditions, such as an increase in real interest rates, a fall in commodity
prices in international markets or the bursting of a financial bubble, as
in East Asia in 1997. Following the crises of the eighties, many authors
advised developing countries to beware of easy borrowing and to focus
on means and policies to try to lock-in capital inflows. A high share of
short-term loans, the main component of ‘hot money’, in the overall for-
eign inflows and a current account deficit represent a very dangerous sit-
uation which could easily lead to liquidity problems. In any event, even
with flexible exchange rates it is not possible to insulate emerging econ-
omies from financial crises originating in the global financial cycle (Rey
2013).
13 However, the share of investments in GDP decreased from 35 to 25%.

14 Thanksto large devaluations, most countries recovered rather fast; Malaysia, Thailand
and the Philippines followed patterns similar to the Korean one, although the crisis was
much deeper and longer in Indonesia (Vaggi 2002).
60 G. VAGGI
3.2.3 The Temptation of Cheap Money

There are a lot of funds in international financial markets and borrow-
ing looks cheap. Between 2012 and 2017, interest rates have been
decreasing in high-income countries, reaching very low levels because of
an expansive monetary policy in the USA and in Europe, the so-called
quantitative easing, QE. The search for higher yields has led capital
flows towards emerging markets and developing countries. In this type
of ‘carry trade’15 financial operators can borrow at low rates in high-in-
come countries and lend at higher rates to developing countries.16
Hence, investement funds have also bought bonds of emerging coun-
tries, but bond prices are very sensitive to changes in interest rates. In
2014, we have already seen financial outflows from emerging markets
due to the gradual abandonment of QE by the US Federal Reserve, the
so-called tapering, which has led to expectations about interest rates
rises.17
There are two main components of nominal interest rates on the debt
of developing countries:
• the nominal rates on the benchmark type of assets, for example, US

Treasury bonds
• the spread element, which largely reflects the country risk
Nominal rates on developing country debts are strongly influenced by

the spread element. Low rates favour foreign borrowing, but any unex-
pected event might cause a run on domestic deposits, and capital flights
might trigger a ‘flight to quality’ type of phenomenon with higher inter-
est rates, even in a situation of abundant savings at the world level. The
financial integration of economies with very asymmetric and unbalanced
financial systems could lead to more financial crises in emerging markets
(Martin and Rey 2006).
15 The expression carrying trade can be found in the Mercantilist literature, where it
refers to the physical transportation of commodities (Rubin 1929: 50–51).

16 In the second part of the nineties, this mechanism already played an important role in
bringing large capital inflows into emerging markets, namely, into Latin America.
17 Blanchard et al. expect no major changes in nominal rates in the coming years, but
they also stress the fact that forecasts of future global rates are very tricky (Blanchard et al.
2014: 106).
Since 2000, the world overall debt, both private and public, has
grown, and after the 2007 crisis the debt to GDP ratios of many high-in-
come countries have increased beyond the 100% of GDP threshold. In
the coming years, a lot of countries will need to refinance their debts,
and tensions could easily generate higher interest rates.
Notice that low interest rates do not necessarily imply low returns on
financial investments; on the contrary, there seems to be a decoupling
between the level of interest rates in the bond markets and the ability
of financial institutions to generate high returns. Low rates and abun-
dant money favour investments in the stock exchange and the returns
on equities, but they may also lead to a bubble. Moreover, in a period of
low rates large-scale financial operators intensify their buying and selling
of financial products, and volatility tends to rise (see Sect. 5.5 below).
3.3 Increasing Inequality

One of the most famous relationships in economics is the ‘Kuznets’
curve’, according to which, in the process of long-run economic growth
the relationship between income per capita and inequality has an
inverted U shape; inequality increases during the initial phases of eco-
nomic growth but then decreases (Kuznets 1955, 1963). In Kuznets’
paper, there is no graph or curve; inequality is described by quintiles of
income distribution and by average income levels over a long period of
time, which he calls ‘secular incomes’ (Kuznets 1963: 2, 6). Kuznets
observes that inequality is higher in underdeveloped countries than it is
in the developed ones (ibid.: 20–24), but he does not draw any specific
trend as if it were a universal law. Moreover, he is well aware that the
data set is quite small and very cautious not to generalize his conclusions
(Kuznets 1955: 3–6), to the point of writing in the concluding remarks
that perhaps the paper is ‘95 per cent speculation’ (ibid.: 26).
Nevertheless, Kuznets’ view has been adopted as a general law that
accompanies the processes of economic growth. The idea is that in the
initial phases of economic growth the concentration of income in the
hands of the rich people supports capital accumulation and economic
growth. At a higher level of income per capita, the entire society begins
to benefit from the larger ‘cake’. First growth, then sharing!
This view has a reassuring implication that goes hand in hand with
the idea of the ‘trickle down’ mechanism of economic growth (see
Sect. 1.2 above). In the end, economic growth benefits all sections of the
62 G. VAGGI
population, and high-income economies should be characterized by an

equitable distribution of income, which is part of that decent and inclusive
society which is the aim of Agenda 2030 and of SDG 10, in particular.
However, since the seventies, income distribution has worsened in all
high-income economies, thereby reversing a pattern of increasing equal-
ity which had taken place in the first seventy years of the twentieth cen-
tury, above all during the ‘golden period’ between 1945 and 1975. Piketty
shows that between 1970 and 2010 in high-income countries the distribu-
tion of income has worsened (Piketty 2014: 24), contrary the popular inter-
pretation of Kuznets’ work. Other studies have confirmed that since the
mid eighties there has been a very fast concentration of income and wealth
(Deaton 2013; Bourguignon 2015; Milanovic 2016; Atkinson 2015).
The rediscovery of the issue of income distribution has contributed
to the inclusion of the problem of inequality in the SDGs, in particular
in SDG 10, which concerns inequality among countries but also within
countries.18
According to Piketty, the worsening of income distribution depends
on the concentration of wealth/capital in the hands of a few people
and to the fact that in many countries the average annual rate of return
on capital, r, has been higher than the growth rate of the economy, g
(Piketty 2014: 25).19
Piketty has a very broad definition of capital, a term he uses also as
synonymous of wealth, including all types of assets which can be accu-
mulated and passed on to heirs (ibid.: 46–48).20 Capital includes real
estate as well as financial assets, and international finance provides a lot
of opportunities to amass a fortune. People with large amounts of capital
can earn higher returns because they have more choices in their portfolio
allocation (Atkinson 2015: 165–167).
The top 10% of the wealthiest individuals largely coincides with the
owners of capital, and thus both the functional and the personal dis-
tribution tend to worsen. Piketty calls r > g the fundamental force for
divergence (Piketty 2014: 25); this is a long-run tendency of modern
capitalism, which he calls ‘patrimonial capitalism’ (ibid.: 173). When the
growth rate is lower than the average rate of return on large fortunes,
18 The combination of the two ‘inequalities’, among and within, determines the so-called
global inequality (Milanovic 2012, 2016).

19 A criticism of the weak theoretical grounds of Piketty’s analysis is in Garbellini (2018).
20 For a comment of Piketty’s book, see Milanovic (2014).

the ratio of capital to income, β, increases since the share of those who
live only on their annual income is squeezed. Patrimonial capitalism is
characterized by the decisive role of accumulated wealth, which takes us
back to a ‘society of rentiers’ (ibid.: 276, 418).
This is a worrying trend because in many high-income countries the
social achievements of the golden period are in danger and the welfare
system is under threat. This system still guarantees decent minimal con-
ditions and a certain equality of opportunities in education and health
to a large section of the population. It would be very difficult to move
towards the inclusive society, which is the aim of SDG 16, with a very
polarized distribution of income and wealth. According to Duménil and
Lévy, the concentration of wealth into the ends of few is a strategic fea-
ture of capitalism (Duménil and Lévy 2011).
Preventing the concentration of income distribution requires the
intervention of the state and, in particular, an active fiscal policy. A pro-
gressive income tax would help, but Piketty and Atkinson focus on the
taxation of capital and wealth, since this is the way to counteract the
increasing wealth and power of the new rentiers in the system of pat-
rimonial capitalism. Piketty asks for a global taxation of capital (Piketty
2014: 515-ff.), while Atkinson insists on progressive taxation, and spe-
cifically a tax on inheritance and wealth (Atkinson 2015:179, 192, 199).
The active role of the state is not limited to the taxation side of fiscal
policy; the state must play an active role in guaranteeing an effective social
security system as a means of improving equality but also as a fundamental
component of a decent society. Both Atkinson and Piketty highlight the
importance of a social state and of social security for all (Piketty 2014,
Chapter 13; Atkinson 2015, Chapter 8). Atkinson presents fifteen propos-
als to reduce the extent of inequality within and among countries, includ-
ing the idea of high-income countries increasing their share of official
development assistance to 1% of GNI (Atkinson 2015: 237–238).
Piketty criticizes the Kuznets’ curve predictions (Piketty’s 2014:
13–14) because rich countries do not seem to be in the downward slop-
ing part of the curve where income distribution improves; but what
about developing countries and the upward sloping section of the curve?
In general, when working on large data sets, both in terms of time and
number of countries, there is no clear relationship between increasing
income per capita and worsening income distribution.
Asian economic growth, especially regarding the four first-tier NIEs, has
been accompanied by a decrease in the share of people in absolute poverty and
by improvements in human development indicators: namely, life expectancy.
64 G. VAGGI
The relationship between inequality and liberalization depends on the

structure of the GDP and on the composition of the labour force. Low
skilled workers tend to suffer from trade openness because of competi-
tion from the cheap labour of other countries, while skilled workers may
exploit better opportunities by moving across borders.
Financial liberalization, which usually goes hand in hand with the
opening up of the financial account to capital movements, easily leads
to an increase in inequality (Furceri and Loungani 2015). But the most
important element to counteract the concentration of income and wealth
has to do with the quality of institutions and the existence of active pol-
icies in favour of the redistribution of income, which can be quite effec-
tive.21 Globalization and liberalization per se do not necessarily produce
higher growth rates, and economic growth does not automatically
‘trickle down’ and benefits all (Stiglitz 2006).
In former socialist countries, economic growth tends to worsen
income distribution; and the distribution of income among different
regions of the country becomes much more unequal. This same phe-
nomenon can also be detected in many developing countries.22
In 2011, Gabriel Palma also stated that there was no empirical ground
for ‘Kuznets curve’, since many countries have a similar distribution of
income even at very different levels of income per capita.23 Palma goes
on to offer an alternative way to measure income distribution: the Palma
ratio, which focuses on the distributive trade-off between the top 10%
and the bottom 40% of income distribution.24 Needless to say, the top
decile has the power and the tools to bend distributional policies to its
21 Active fiscal policies can reduce ‘net inequality’, after taxes and transfers, with respect
to ‘market inequality’, before state transfers; net inequality is positively correlated with eco-
nomic growth (Ostry and Berg 2014). In Latin America, some successful policies have con-
tributed to a decrease in inequality (Cornia 2014).
22 In China, some regions along the coast have incomes per capita which are almost three
times higher than those of internal regions.

23 As Palma writes ‘about 80 per cent of the world’s population now live in regions
whose median country has a Gini not far from 40’ (Palma 2011: 2, 10–12).
24 This is the ratio of the first decile to the bottom 40% of the population, which derives
from the observation that the share of income accruing to the five deciles from 5 to 9 is
rather uniform across different countries (Palma 2011: 19).
interests (ibid.: 45–47). According to the Palma ratio the population in

the intermediate income groups seems capable of defending its income
share, but there is also a debate going on about the vanishing middle
class (Temin 2017).
3.4 Secular Stagnation: And Three Paradoxes

About Savings
Since the outbreak of the 2007 financial crisis, economic growth has
been quite weak in many high-income economies despite very low inter-
est rates. This has led to a debate on the secular stagnation hypothesis,
following Larry Summers’ reappraisal of this term.25 Many explanations
of this phenomenon focus on the relationship between savings and
investment and on the fact that, due to an excess of savings, the ‘savings
glut’, the real interest rate needed to equate investments and savings at
the full employment level, might be negative. In this situation, mone-
tary policy becomes ineffective because, due to low inflation, there is a
floor for nominal rates, thezero bound level, ZBL (Baldwin and Teulings
2014: 2), which makes it impossible to reach negative rates.26 To put it
in Keynesian terms, it is as if the liquidity trap had become a permanent
feature of the economy (Krugman 2014: 15).
Major explanations for the increase in savings are related to demo-
graphic trends and to ‘the required stock of savings to smooth lifetime
consumption’ (Baldwin and Teulings 2014: 11, 12, 14). The ageing of
the baby-boomer generation and the increase in life expectancy, com-
bined with the lower population growth rate, have led to the ‘ageing
society’. There has been an increase in the dependency ratio because of
the raising share of pensioners. An older population requires more sav-
ings and investments in financial markets as a way of trying to guaran-
tee future incomes (ibid.: 14). Hence, there is an increasing competition
among pension funds to achieve high returns and attract more clients.27
25 On the various explanations for secular stagnation, see Baldwin and Teulings (2014).
Backhouse and Boianovsky (2016) describe the origin of the term.

26 Galbraith (2017) presents alternative views on the determination of the interest rate.
27 Many contributors to the secular stagnation book by Baldwin and Teulings have
remarked that low interest rates in the financial centres and for highly rated types of assets
can easily lead to financial bubbles because of the search for high yields in emerging and
marginal markets.
66 G. VAGGI
The decline in the growth rate of high-income economies is not a

recent phenomenon; the growth rate has been continuously decreasing
since the sixties. Between 1961 and 1970, the average growth rate was
higher than 5%, went down to less 4% in the seventies and eighties, and
during the nineties stayed around 3%, decreasing again to less than 2%
between 2001 and 2015.28
The ‘savings glut’ and demography are not the only explanations
of the slowing down of growth rates in high-income economies, as it
is also important to look at the demand side. With the exception of
some East Asian economies, in many countries savings exceed invest-
ments because of the lack of the latter magnitude. Nonetheless, both
high- and low-income economies need huge investments, above all
in infrastructures (Caballero and Farhi 2014: 118–119) and (Wolff
2014: 146).29
There are three paradoxes related to abundant savings.
Paradox 1: In Harrod’s model a higher saving ratio, s = S/Y, leads to a

higher warranted growth rate. In Solow’s version, with savings fully
invested, a higher s implies a higher income per capita in the steady
state (see Sects. 1.1 and 1.2 above). High savings should be good for
growth, but now it seems this leads to a growth slowdown.
Paradox 2: China, Japan and continental Europe are the three countries/
areas which save the most, while the USA is the country which saves
the least (Blanchard et al. 2014: 104). However, the US is now growing
faster than Europe and Japan.
Paradox 3: In East-Asia, economic growth has been explained by a com-
bination of export promotion, industrial policies and the accumula-
tion of physical capital. Capital accumulation and high investments
have been based on self-financing and on domestic savings through
reinvested profits, a process which has bypassed international financial
markets.
28 Some emerging economies are now experiencing a decrease in their growth rates;
Brazil, Russia and South Africa have had very low rates since 2012. Growth is slowing
down in Indonesia, Turkey and in other emerging countries in East Asia.
29 Gordon explains ‘secular stagnation’ in terms of the slowing down of the growth
rate of labour productivity, which in turn is determined by a declining pace of technical

progress, thereby generating a reduction in potential output (Gordon 2015).
These paradoxes lead to two questions. Are savings good or bad for
growth? What is the role of international financial markets?30
Let us first consider savings. In a very interesting section entitled
Beyond Bubbles: Low Growth, High Saving, Piketty concluded that during
the period 1970–2000 a higher saving ratio s did not lead to a higher
growth rate g (Piketty 2014: 173–175).31 Piketty’s explanation is not
related to a theory of economic growth but is a long-run tendency of
the capitalist economy, which he calls ‘the second fundamental law of
capitalism’: β = s/g (ibid.: 166–169).32 If a country saves too much in
relation to its growth rate, then inevitably its capital/income ratio β will
increase.33
Sluggish growth generates more inequality because it gives more
power to accumulated incomes than to the income which is annually
produced. The possessors of wealth/capital have more power than the
people who live only on their salaries.
It is less well known that Kuznets was also worried by ‘the concentra-
tion of savings in the upper-income brackets’ (Kuznets 1955: 7). This
fact leads to ‘an increasing proportion of income-yielding assets in the
hands of the upper groups - a basis for larger income shares of these
groups and their descendants’ (ibid.: 7, italics in the original). This is a
natural tendency that seems at odd with a reduction of income inequal-
ity; in fact, Kuznets dedicates a section to the ‘Factors Counteracting the
Concentration of Saving’ (ibid.), where he says that ‘legislative interfer-
ence and “political” decisions’ (ibid.: 8) play a major role in limiting the
accumulation of property and assets, mainly through inheritance taxes,
capital levies and also by keeping artificially low interest rates on govern-
ment bonds (ibid.: 8).34
30 According to Solow, it is ‘time to rethink the way the credit mechanism medi-
ates between savers and investors and puts credit to productive use’ IMF Finance and
Development of June 2011: 51.
31 Piketty compares the USA and UK, countries with low saving ratios (just above 7%),
with Japan, whose saving ratio was close to 15%.

32 Piketty seems to support the view that increased savings are due to demographic trends
and to the so-called ageing society (Piketty 2014: 175).

33 Remember that Piketty’s notion of capital is not physical capital as in Harrod (see
Sect. 1.1 above) but includes all types of assets and is similar to wealth.
34 Other counteracting factors are demography and technological change (Kuznets 1955: 8–9).
68 G. VAGGI
Contrary to Piketty, Kuznets does not make explicit the link

between high savings and low growth rates, and in general he thinks
that the counteracting factors are typical of a dynamic economy
(ibid.: 11).
Now the second question: What is the role of international finan-
cial markets? In principle they should favour a better allocation of
resources at the world level. Free movements of capital and a large
set of financial instruments should help to allocate capital in the most
efficient way. Financial markets should bring savings where they are
lacking and hence most needed and where they can also generate
higher returns. All this derives from the ‘efficient market hypothesis’
(see Sect. 1.5 above).
International financial markets should increase the average world
growth rate and speed up the convergence of low-income economies
towards those with high levels of income per capita; however, there
are serious doubts that more finance implies more growth (see Arcand
et al. 2012). It is difficult not to agree with Hélène Rey who writes: ‘it
is hard to ascertain or measure the real gains from financial openness and
freely moving capital….trillions of dollars have crossed borders, and yet
despite our best efforts and hundreds of studies, it has been extraordi-
narily difficult for economists to identify any benefits from these flows’
(Rey 2015: 6).
High savings and the enormous dimension of international finance go
hand in hand, but they do not seem to enhance investments and growth.
3.5 Imbalances
The four changes above do not seem to lead the world economy towards
an equilibrium situation. There are two more aspects which denote
major imbalances: trade and migrations, which are movements of com-
modities and of people respectively.
There are large deficits/surpluses in the trade and current accounts of
most regions and countries. There is a surplus in East Asia, in the Gulf
countries and in the Eurozone, and a deficit in the USA and the UK.35
35 Both in the USA and in the UK, the goods balance is much more negative than the
trade balance and the current account, because both countries are very strong exporters of
services, namely financial services.
For several years, the Eurozone had a very large surplus in the current
account, more than 3 of the GDP, mostly due to the German surplus.36
Current account imbalances also increase household indebtedness in
deficit countries (Kumhof et al. 2012: 9–10).
Low and lower middle-income countries have structural deficits, with
exceptions for the producers of commodities when their international
prices are high.
According to the ‘efficient market hypothesis’, competitive mar-
kets should eliminate these imbalances, at least in the long run, all the
more so with free capital movements and flexible exchange rates. Capital
should flow from deficit countries to surplus countries, thus lowering the
value of the currency in deficit counties and increasing it in the surplus
countries; a mechanism pointed out by David Hume in the eighteenth
century (see Sect. 4.3 below).
Exchange rate movements should reduce the imbalances in the trade
and current accounts, yet this adjustment does not seem to take place.
The exchange rate level does affect the current account but not in a deci-
sive way. The trade surpluses of the Euro area, Japan and China have
been there for many years, even when their currencies were strong and
the dollar weak, and Germany’s current account surplus has been grow-
ing since 2002.
High income and emerging countries implement policies to be suc-
cessful in international trade. A reduction of the trade deficit is regarded
as a positive occurrence and a surplus is even better.
This goal can be pursued with a mixture of deflationary policies:
– a balanced fiscal budget, to be achieved by increasing taxes and

reducing expenditures
– the deregulation of labour markets
– the fostering of exports
These are the typical measures of fiscal austerity which lead to the restric-
tion of domestic demand.
36 There are large differences within the Euro area: in 2018 in Germany and the
Netherlands the current account surplus is close to 8 and 10% of GDP, respectively; other
countries have either much smaller surpluses or small deficits. Between 2010 and 2018,
Greece has been going through a financial crisis which bears many similarities to that of
developing countries during the eighties.
70 G. VAGGI
Since 2010, most high-income countries have reduced their overall

budget deficits, and the primary budgets, net of interest payments, are in
surplus. These policies, however, endanger the social conditions achieved
in these countries since 1945. The welfare system is under threat, even
though this system still guarantees decent minimal conditions and a cer-
tain equality of opportunities in education and health to a large section
of the population. Health and education are the two pillars of the notion
of human development.
The above policies restrain domestic demand, which means that
all countries rely on exports to sustain growth. The increasing com-
petition in the export markets leads to protectionist strategies which
generate trade conflicts; these policies have a neo-mercantilist fla-
vour (more in Sects. 4.1 and 5.4 below). The constraint of domes-
tic demand in high-income countries reduces the export possibilities
of low-income countries, in particular the Least Developed ones. It is
difficult to see how these countries could pursue the very demanding
SDGs agenda.
A second imbalance to which we must briefly refer relates to peo-
ple, the first of the five areas of critical importance in the SDGs, espe-
cially concerning migrations. The economic growth rates in many
developing countries are higher than in the nineties, but young peo-
ple cannot find appropriate employment. The situation is particularly
severe in the Middle East and North Africa (MENA) region, from
Morocco to Lebanon, which should generate almost 3 million new
jobs every year to absorb all the people entering the labour market.
The uprisings which exploded in the region in 2011 are a clear sign of
this problem, which of course is also related to the concentration of
wealth in the hands of local elites. Economic growth does not neces-
sarily lead to more employment or to the number of jobs required by
a population composed of many young people (ILO 2014). Recall the
emphasis on employment by Dudley Seers and ILO back in seventies
(Sect. 1.3 above).
One of the most worrisome imbalances is the ‘mismatch’ between
the number of qualified people holding secondary and tertiary degrees
and looking for a job and the capacity of the economies to absorb them;
quite often the result is outmigration. The problem is not just that of
having better educational systems in vocational training.
Education is a fundamental component of human development, a spe-

cific value in itself. Anticipating Chapter 5 below we can say that education
is a fundamental use value, the core of SDG 4, and the enhancement of
human capacities is at the forefront of Agenda 2030 (see Sects. 2.1 and 2.4
above). It is a goal which should be pursued in any case, but the exchange
value the reward for the years spent in education is not necessarily there.
Thus, if developing countries invest in education, they have a high prob-
ability of suffering from a ‘brain drain’ and of losing many skilled work-
ers. A weak demand for labour can force skilled workers to migrate, and it
inhibits the opportunities for innovation and growth. It is a vicious circle
in which the brightest people have a strong incentive to leave. The devel-
opment process is hindered by the existing economic conditions, which do
not encourage the improvement of people and institutional capacities.
3.6 Discouragement
This chapter has examined four changes: the rise of Asia, the growth of
international financial markets, increasing inequality, and secular stagna-
tion, and two imbalances in trade and migration. All six facts are related
to each other (Palley 2016). For example, the increasing role of the finan-
cial sector has contributed to increasing the income share of the top 1%
of the population (Palma 2009: 850–852). These 4 + 2 ‘facts’ demonstrate
the enormous power of economic structures and of capitalist market forces.
If societies are dominated by economic structures, are there policies and
means which can realistically be implemented to pursue the SDGs? The
changes and imbalances described in this chapter represent the background
for the economic environment in which sustainable development is sup-
posed to be pursued and in which international cooperation will necessarily
have to navigate. Both the weakest individuals and the weakest countries
are constrained by economic structures and by powerful market forces.
These considerations are quite depressing; the holistic view of devel-
opment and international cooperation described in Chapter 2 looks like a
dream. Before moving to the final chapters of the book we need to pause;
we need to take a longer perspective, a breathing space in the history of
ideas, to help us better understand the interplay between human progress
and economic structures in the history of mankind. Chapter 4 takes us back
to the long-run visions of the Founding Fathers of economic thought.
72 G. VAGGI
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CHAPTER 4
The Founding Fathers

and the Long-Run Visions
Abstract  Classical political economy highlights notions which are very

useful today in development debates. Foreign trade is the source of
wealth for the Mercantilists. Land and labour occupy centre stage with
Petty and Quesnay; agricultural surplus is the core of reproduction
and economic growth. Human rights and Montesquieu’s separation
of powers emerge during the Enlightenment. Smith emphasizes a new
source of wealth: the division of labour and higher labour productivity,
which depend on the accumulation of capital. Smith and Ricardo attack
Mercantilist doctrines, but their support of free trade is much more artic-
ulated than what appears in the mainstream interpretation. Marx analyses
the crises in a capitalist economy. The classical economists highlight the
difference between use values and exchange values in the process of eco-
nomic and social reproduction.
Keywords  Mercantilism · Enlightenment · Capital accumulation ·

Labour productivity · Crises
A quick review of some episodes in the history of economic ideas will

put the debates about development into a broader historical perspective.1
These few pages will greatly simplify the contributions of the ‘Founding
1 The Founding Fathers belong to the Western tradition, an obvious limitation
(Rist 2003).

https://doi.org/10.1007/978-3-319-54879-1_4
76 G. VAGGI
Fathers’, with apologies to the historians of ideas. The aim of this chap-
ter is very much oriented to a few authors and periods which might shed
some light on debates today in the development area.2 The chapter is
organized in chronological order, but it can also be read by following
some specific issues: free trade and protectionism, basic needs and repro-
duction, economic growth and technical progress, human rights and jus-
tice, labour productivity and income distribution, capital accumulation
and crises.
4.1 The Age of Merchant Capital: Trade and Power

1492–1521, 29 years which changed the world. From the discovery of
the West Indies by Columbus to Magellan’s death in the Philippines,
after navigating from the Atlantic into the Pacific Ocean. Geographical
discoveries outline the economic relationships between Europe and the
outside territories; these relationships lead to colonization and open the
way to the Mercantilist period.
Mercantilism is not a uniquely structured theory; most of the contri-
butions consist of pamphlets and are written by merchants who advocate
policies in favour of their interests. To the Mercantilists, national wealth
must be measured by the stock of precious metals, gold and silver, in
the coffers of the country. They are not naive fans of money: gold is an
internationally accepted currency that has a purchasing power which
secures command over goods and people. With gold, a country can pro-
vide employment, pay for an army and build up a fleet. The Mercantilists
want to secure larger control for a nation over material goods (Perrotta
2014) and to demonstrate that the king and the people will benefit from
the merchants’ activities. Precious metals represent the easiest way to
measure the power of a nation.3
Spain and Portugal dominated the sixteenth century. Their wealth
derived from the control over the newly discovered territories, in
Central and South America in particular, and from the gold and silver
which reached Europe. The following century was the century of Britain
and the Netherlands, two small European countries with a minor role
2 Many development economists go back to the thinkers of the Enlightenment in their
works (Lewis 1954; Hirschman 1977; Sen 2009).

3 Today we think of economic power in terms of income or GDP, Gross Domestic
Product, a flow concept, while the Mercantilists’ wealth is a stock concept, similar to
today’s reserves.
4 THE FOUNDING FATHERS AND THE LONG-RUN VISIONS 77
during the Age of Discoveries, but countries that nonetheless would

dominate intercontinental trade for centuries. The British East India
Company was established in 1601, while the Dutch East India Company
appeared in 1602.
How did these merchant companies become rich? In a very sketchy
way, the basic mechanism was to buy cheap and sell dear. The difference
between the selling price, ps, and the buying price, pb, was the profit
upon alienation.4 This difference derived from moving goods in space,
from the colonies to the nation and from the countryside to the cities.
What about national wealth and the interests of the other social
groups? The country was similar to a merchant, its gain or additional
wealth, deriving from the difference between what it sold and what
it bought; the excess of the value of exports over that of imports. This
was the view of Thomas Mun (1623), whose England’s Treasure by
Forraign Trade became the basic text of mercantilist thought.5 In the
seventeenth century, Mercantilism was characterized by the so-called bal-
ance of trade theory, according to which a surplus in the balance of trade
was the source of national wealth, so that a country can grow richer only
by exporting more than it imports.
Foreign trade was completely managed by the big trading companies,
such as the British East India Company, a private joint stock company.
Mun, himself a director of the Company, wanted to convince the gov-
ernment that what was good for the Company was also good for the
nation as a whole, because a prosperous foreign commerce is beneficial
to all social groups.6 The coffers of the Kingdom could benefit from the
higher revenues deriving from duties and taxes on foreign trade.7
The workers should content themselves with job opportunities if
not with higher wages, which would discourage exports. Mun distin-
guished natural wealth, which consisted of primary goods, from artificial
wealth, which ‘consists in our manufactures and industrious trading with
4 For the Mercantilists profit was a difference, while today profit is regarded as a rate, a
percentage; it is this concept of return on capital which permits a comparison of different
investment alternatives.
5 The first edition was lost, but we have the 1664 edition by Mun’s son John.
6 In 1621, Mun published a short pamphlet: A Discourse of Trade from England unto the
East Indies; the subtitle is more explicit: Answering to Diverse Objections Which Are Usually
Made Against the Same.
7 Taxes on income and wealth were not very popular; even today many developing coun-
tries rely on foreign trade taxation for a large part of government revenues.

78 G. VAGGI
forraign commodities’ (Mun 1623: 7 and 71–73). It was more conven-

ient for a country to produce and to sell artificial wealth since this gen-
erated more employment. In modern terminology, we can say artificial
wealth includes more value added.
Mercantilism was the story of a struggle among large merchant com-
panies that looked for the government to support them. The trading
companies were in an oligopolistic competition among themselves and
needed active policies by their nation states, which must control foreign
trade in such a way as to maximize the trade surplus. Protection of home
industry and trade came to the fore. This strategy is sometimes called
Colbertisme, after Jean-Baptiste Colbert (1619–1683), the Controlleur
Générale des Finances under Louis XIV. Forty years after Mun, Colbert
would introduce measures to protect French manufactures.
One of the best examples of mercantilist policies is the Navigation
Act of 1651. This is the first of numerous laws designed to control trade
between England and her colonies, which were forbidden to trade with
other European countries. Moreover, trade with England had to take
place with English ships only. These regulations lasted almost 200 years.
The alliance between big merchant companies and the state was a typical
feature of Mercantilism.
Each country relied on the external markets and on the demand com-
ing from foreign countries to sell its products, as a sort of export-led
growth model, but not all countries could have a surplus at the same
time: the balance of trade doctrine was a zero-sum game.
Mercantilism should not be easily dismissed: it was an important
period in the history of Europe, and mercantilist policies determined the
economic successes of countries such as England and the Netherlands.
Mercantilist views contributed to the formation of the nation states and
they dominated the policy debates until the mid-eighteenth century; in
1776, Smith saw Mercantilism as the rival doctrine regarding the causes
of the wealth of nations.
4.2 Food, Surplus and Reproduction
4.2.1 Physical Surplus

When Colbert was running France, Sir William Petty (1623–1687) was
a founding member of the Royal Society. Petty offered two interesting
contributions which highlight some important aspects of the develop-
ment process.
The first contribution comes from the 1662 Treatise of Taxes and
Contributions:
‘if there be 1000. men in a Territory, and if 100. of these can raise
necessary food and raiment for the whole 1000’ (Petty 1662: 30). This
passage brings to the fore one major feature in the organization of soci-
ety: there must be a surplus of the necessaries of life. Without a surplus
of food and items which can satisfy the basic needs of people, no further
evolution is possible. The society is characterized by the social division
of labour, with people occupied in different activities: the manufactur-
ing sector, the public administration, domestic and foreign trade and the
private service sector. All other 900 people are nonetheless supported by
the surplus of food which originates in agriculture.
The sectors producing the basic necessaries of life are at the core of
society; all remaining economic activities depend upon the productivity
of these sectors. Petty has a view of wealth which is based on the physi-
cal productivity of food producing sectors and not on foreign trade. He
opens the way to Quesnay and Smith.
Petty’s second contribution is his analysis of the value of commodities;
in the Treatise we read: ‘That Labour is the Father and active principle
of Wealth, as Lands are the Mother’ (ibid.: 68). Land and labour are the
two original items in the production process, the original components
of production. Neither capital nor technology is set on the same level.
Today typical production functions include three factors: land, labour
and capital, or even labour and capital alone. Petty sees a major differ-
ence between land and labour, on one side, and capital on the other:
capital goods are themselves the outcome of a production process; they
are produced means of production, while land and labour are not the
result of any productive activity.
In 1755, a similar metaphor occurs in the opening lines of Cantillon
Essai sur la Nature du Commerce en Général: ‘Land is the Source
or Matter from whence all Wealth is produced. The Labour of man
is the Form which produces it: and Wealth in itself is nothing but the
Maintenance, Conveniencies, and Superfluities of Life’ (Cantillon
2015).8 Cantillon goes further, maintaining that the value of a product
could be measured by the amount of land necessary in its production
(Aspromourgos 1997). Not only wealth is an amount of physical prod-
ucts and not money, but land and not money is the best way to measure
private and national wealth.
8 The Essai was published posthumously after Cantillon’s death in 1734.
80 G. VAGGI
Petty’s parenthood metaphor has large implications for today’s view

of sustainable development. The seventeen SDGs are grouped into five
‘areas’ (see Sect. 2.4 above); the first two areas are People and Planet,
quite similar to Petty’s land and labour. Inputs are not all the same: from
a microeconomic point of view, they play a similar role in the production
process, but their nature and above all their role in the social process of
production is quite different. Chapter 5 will further elaborate this point.
4.2.2 Reproduction and the Productivity of Agriculture

In 1756, at the age of 62, Francois Quesnay (1756–1774), the private
doctor to Madame de Pompadour and the founder of Physiocracy,
wrote his first economic article: Fermiers or Farmers for the Encyclopédie
of Diderot and D’Alembert. Quesnay’s problem was that France was a
backward country vis à vis England. Notwithstanding a larger population
and a more fertile territory, France was losing wars, colonies and power.
Why this backwardness, and how to remedy it?
In Farmers, Quesnay answers with the metaphor of oxen and horses
(Quesnay 2005, Vol. I: 128-ff.). Corn can be produced with two differ-
ent techniques: one technique employs oxen to pull the plough with the
wooden spade, the other technique uses horses and the plough with an
iron spade. The second technique is typical of large-scale cultivation and
is adopted in England, and it is superior to the first one, small-scale cul-
tivation which is in use in France. More land can be sown during the day
and the iron spade goes deeper into the ground. The superior technol-
ogy yields higher physical returns per unit of land.
Quesnay focuses on the food producing sector, agriculture, and on its
physical productivity, but his analysis is grounded on a general model of
the working of the economy: the 1758 Tableau Economique (ibid., Vol.
I: 391-ff.). Quesnay describes a society with two sectors, agriculture and
industry, and a third class, the landowners, which includes the King and
the Church, which receive and dispose of the revenues of the Kingdom.
In the Tableau, the circulation of the output must take place to restore
the inputs which have been used and which are necessary to carry out a
new production cycle. An economy is viable if it can reproduce itself and
reproduction requires the replacement of all the physical inputs which
have been used in production.9
9 The Tableau is often regarded as the precursor of circular production models and of
input–output analysis (Leontieff 1951).

Quesnay distinguishes three main macroeconomic magnitudes:

the gross output, the inputs required in its production, which he calls
advances, and the difference between the two, which is the net output.
Agriculture is the crucial sector since it produces the inputs both
for itself and for industry. Moreover, according to Quesnay, agri-
culture is the only sector in which the gross output is larger than the
inputs. It is the existence of a surplus which bestows on a sector the
quality of being productive. Only capitalistic agriculture is produc-
tive, since small-scale cultivation does not yield a surplus. Marx praised
Physiocracy as ‘the first system which analyses capitalistic production’
(Marx 1905, Vol. 1: 49).
A main flaw in Physiocracy is the idea that industry is sterile.
Manufacturing activities transform the inputs they receive from agri-
culture, raw materials and food, without adding any surplus: the gross
output and the inputs have the same value (Quesnay 2005, Vol. 2:
956).10
With this analytical framework, Quesnay is ready to answer the big
question: why French agriculture does not adopt the best technique?
Large-scale cultivation requires a larger amount of capital than small-
scale cultivation, and the choice of the cultivation technique depends
on the amount of capital available, a sort of embodied technical
progress.
The crucial issue is that cultivation with horses is more expensive than
cultivation with oxen, but the two techniques correspond to two differ-
ent methods to cultivate corn. In France, sharecropping prevails; in this
system, the cultivators share the harvest with the landlords. The French
sharecroppers are too poor to accumulate capital and have no incentive
to invest. In England, tenant farmers pay a rent to the landlords for the
leasing of the lands, but then they own the entire output and benefit
from the improvements in agricultural productivity. England’s capitalistic
agriculture is thus more productive than French agriculture, which still
has many features of the feudal mode of production.
Quesnay is no revolutionary: the progress of French agriculture
could be achieved through reforms of the fiscal system and of trade
policies; his recommendations are still relevant for today’s developing
countries.
10 Of course, in agriculture a physical surplus can be more easily detected. Smith criticizes
the idea of the sterility of manufacture but makes use of the distinction between productive
and unproductive labour.
82 G. VAGGI
Let us begin with fiscal policy: the Physiocrats wanted to abolish all
the different types of taxes which affect the French cultivators and which
are typical of a feudal system. The loss of revenue should be covered by
a single tax on rent, which is the main component of the net product of
agriculture (ibid., Vol. 1: 226-ff.). The idea was to switch the tax burden
from productive activities and from consumption to the components of
the value added that are not likely to be reinvested in cultivation.
The second way to favour French agriculture consists in the elimina-
tion of the traditional exclusive privileges of corn merchants, who are the
only ones entitled to buy corn in the provinces and to sell it in the cities.
The local farmers are obliged to sell all their output to these merchants;
Quesnay wanted to break this monopolistic/monopsonistic position
which created a huge gap between the farmgate price of corn and the
price of bread in Paris.11 The farmer should be able to sell his products
wherever he will receive the highest possible price, including foreign
markets where the price of corn is higher than in France (Quesnay 2005,
Vol. I: 150).
The sale of French corn abroad when the country is suffering from
famines looks illogical and absurd, but in the general system of repro-
duction one has to look at the final outcome of a policy rather than its
short-run effect. The foreign demand for corn leads to an increase in its
price; the French farmers would have more purchasing power and could
be more confident about sales, and thus would have good reasons to
reinvest their profits. More capital would allow for the adoption of the
best technique of cultivation, which would yield more surplus, thus gen-
erating the virtuous circle.
According to Quesnay, trade is not a source of wealth, since trade
entails an exchange of value for equal value. Quesnay is not an uncon-
ditional supporter of free trade.12 Quesnay’s quest for the free export
of French corn is similar to a growth model based on the export of the
products of the most relevant sectors of the economy (Vaggi 1987: 109).
In a reproduction system, the reinvestment of the net product is the
road to economic growth, a theme which is still at the forefront in devel-
oping countries. Quesnay left other important legacies to development
11 On price theory in Physiocracy and on Quesnay’s contribution to political economy,
see Vaggi (1987: Chapter 3) and Vaggi (2018).

12 Quesnay was not in favour of unlimited free trade; in fact, he opposed the purchases of
foreign manufactures.
theories: the focus on the primary sector and on the need for a surplus in
the production of food, and the constraint represented by the low pro-
ductivity of agriculture (Lewis 1954).13
The distinction between productive and unproductive sectors has
significant policy implications for the structuralist approach to develop-
ment economics (see Sect. 1.4 above). We can regard as more impor-
tant/productive either agriculture, since it produces basic goods, or the
sectors with higher shares in exports or higher productivity growth, and
so on. If some sectors are more productive than others, they should be
supported with appropriate investment policies.
Sustainable Development Goal 2 seeks the elimination of hunger by
2030, while the doubling of agricultural productivity and of the incomes
of small-scale food producers is Target 2.3 (see also indicators 2.3.1 and
2.3.2). Indicator 1.4.2 mentions the need to have secure tenure rights to
land (UN 2018: 4–5).
4.3 Enlightenment; Checks and Balances

Between 1643 and 1688, the Britain was characterized by four very tur-
bulent decades, which witnessed the civil wars. The conflict ended with
the Glorious Revolution of 1688. The habeas corpus dates back to 1679,
and in 1689 the Parliament issued the Bill of Rights. That same year John
Locke wrote A Letter Concerning Toleration. All this was happening one
century before the US Bill of Rights, part of the first ten amendments
to the Constitution, the French Declaration of the Rights of Man and of
the Citizen, and 259 years before the 1948 United Nations Universal
Declaration of Human Rights. The story of development is closely linked
to that of human rights.
But it was during the 28 years between 1748 and 1776 that many
aspects of modern societies emerged: from the division of powers, to
labour productivity, to the role of capital and technology, to the rate
of profit as a guide to investments. In 1748, Montesquieu published
L’ésprit des lois, Smith’s Wealth of Nations appeared in 1776.
In 1751, the first volume of the Encyclopédie by Diderot and
D’Alembert appeared. The following year, in Scotland, David Hume
published the Political discourses. Back in France, Rousseau’s Discourse on
the Origin and Basis of Inequality Among Men was published in 1754,
13 On agricultural backwardness today, see Bhaduri’s (1983).

84 G. VAGGI
and in 1756 we had Quesnay’s first economic article. Smith was in

France between 1763 and 1766, and on his return to Scotland he began
to write An Inquiry into the Nature and Causes of The Wealth of Nations.
Those 28 years forged a new vision of the state and of the economy
and provided ideas which would help to overcome both Feudalism and
Mercantilism.
In his 1748 book, Montesquieu (1689–1755) gave the first clear
description of the tripartite division (separation) of powers: the
Legislature, the Executive and the Judiciary, which would become a fun-
damental element of the modern view of the state. Montesquieu’s tripar-
tite division was an answer to the issue raised more than two centuries
earlier by Niccolò Machiavelli and also discussed by Thomas Hobbes
in 1651: How could a non-hierarchical society survive and maybe even
prosper without falling apart?
With the separation of powers, Montesquieu wanted to avoid the
concentration of powers in the hands of a few people; checks and bal-
ances were necessary ‘in order to avoid that someone abuses of power’
(Montesquieu 1748, Vol. 1: 162–163). It was not just a new theory of
the state and of what we would nowadays call good governance14; it was
more than this: a matter of rights. Without the separation of powers,
there is no freedom (ibid.: 164). Power imbalances among people can
put human societies at risk.
The France of the ancien régime was still dominated by Feudal polit-
ical, social and economic structures; free trade could represent a way of
limiting the concentration of power in the hands of the King and the
landlords. Montesquieu went even further, writing that ‘the natural con-
sequence of trade is to bring peace’ (ibid., Vol. 2: 8). This led Albert
Hirschman to ascribe to Montesquieu the view of the doux commerce,
sweet trade, as a formidable argument in support of capitalism in its
early stages (Hirschman 1977: 60). However, trade can also be sour, and
the same for finance, particularly when economic and financial power is
highly concentrated.
Montesquieu and Smith used the four stages theory to explain the
evolution of human societies along a temporal dimension. The four
stages differed because of the different modes of subsistence: the way in
which societies solved the problem of their survival and reproduction;
14 Good governance is the topic of at least 7 targets and 11 indicators of Goal number
16, the one about inclusive societies, peace and justice.

from the simple societies of gatherers and hunters to pasturage, agri-

culture and, finally, the commercial stage.15 For the thinkers of the
Enlightenment, different stages did coexist during the same historical
period, a sort of exercise in comparative economic history, which is still
extremely useful today. There are human beings that live according to
the gatherers model, societies in which livestock is the symbol of wealth
and of status, and countries in which the control of natural resources is
the major determinant of wealth and power. The care for marginalized
groups is a central theme of Agenda 2030.  How to reconcile what we
call economic progress with respect for different traditions and cultures?
Debates about progress (see Chapters 1 and 2) are not new. A debate
on the noble savage and on the pristine positive nature of mankind took
place in the 1760s (Winch 1996: 52–56). David Hume (1711–1776)
and Jean-Jacques Rousseau (1712–1778) were on opposite sides. The
former supported self-interest as a leading determinant of human behav-
iour. Hume, much more than Smith, is the father of utility-based agency.
He believed that progress required the evolution of human societies
through the four stages. In his 1754 Discourse on the Origin and Basis of
Inequality Among Men, Rousseau considered instead the emergence of
more structured forms of society as the cause of inequalities among peo-
ple. Self-interest and markets do not guarantee happiness, and they cor-
rupt the goodness of human beings in the state of nature. Each man is
born free but the appropriation of natural resources by some men, that is
to say private property, leads to inequalities. Needless to say, Hume won.
In his 1752 Political Discourses, Hume used the quantity theory of
money to show that, contrary to Mercantilists’ views, a trade surplus was
not a permanent cause of wealth (Sect. 3.5 above). The excess of exports
over imports leads to an inflow of gold in the surplus country, and an
outflow in the deficit country. As a consequence, prices tend to increase
in the surplus country and to decrease in the deficit one. These changes
make the products of the surplus country less competitive, and the sur-
plus itself tends to disappear. This is the so-called flow-specie mechanism,
according to which in the long-run trade is always in balance (Vaggi and
Groenewegen 2003: 78–80).16
15 This
is the so-called four stages theory (Meek 1976).
16 Thisimplies that the velocity of circulation of money and the level of real transactions
do not change; however, some real effects can be seen during the adjustment process. In
1758, Hume wrote Of the jealousy of trade, another essay against Mercantilism.
86 G. VAGGI
4.4 Adam Smith and the Productivity of Labour
4.4.1 A New Principle of Wealth

Smith’s 1776 An Inquiry into the Nature and Causes of the Wealth
of Nations was a clear attack on Mercantilism (Smith 1776: IV.iii.c.9).
Smith offered a different principle of wealth and of the causes of its
increase. Following Quesnay, wealth was not measured by the stock of
the country’s reserves but was a flow notion: ‘…the real wealth, the
annual produce of land and labour’ (ibid.: Introduction and plan of the
work), very similar to today’s Gross Domestic Product. The cause of the
increase of national wealth was not a trade surplus but the division of
labour and ‘the improvement in the productive powers of labour’(ibid.:
Title of Book I).
The structure of Book I of the Wealth of Nations reveals the unfold-
ing of Smith’s analysis. Chapters 1–3 present the new principle of wealth.
National wealth and economic growth depend on the improvements in
the productivity of labour, which in turns depends upon the division
of labour. These chapters describe how to increase the physical output.
Chapters 4–7 discuss the determination of the values of the commodi-
ties. The physical dimension of output is a necessary condition for repro-
duction, but alone does not explain national wealth. In order to become
wealth, these products must have a value on the markets. Chapter 4 is
dedicated to money and includes the separation between ‘value in use’
and ‘value in exchange’, with the famous example of water, a very useful
good with a zero or low price, and a diamond, a fairly useless good with
a high price (ibid.: I.iv.13).17 Chapters 8–11 explain how the output is
distributed among wages, profits and rents, which are the incomes of the
three social classes, the ‘ranks of people’, in a commercial society: work-
ers, capitalists and landlords.
Chapter 1 of Book I provides the famous example of pin-making,
which explains how the technological division of labour increases labour
productivity. Making a pin required eighteen operations: by assign-
ing distinct operations to different workers, they specialized and each
worker produced many more pins than a single worker would by doing
17 The water–diamond paradox is not unique to Smith (1776: Book I, footnote 31).
all the operations (ibid.: I.3). Economic growth was the outcome of ris-
ing labour productivity that depended upon the available amount of cap-
ital, which determined how many workmen could be brought together
in the same plant. Capital included all the inputs required in produc-
tion: wages18 and physical capital. A larger amount of capital allowed the
eighteen different operations to be divided up in a better way, thereby
deepening the division of labour. The road to prosperity did not depend
on protectionist trade policies but on capital accumulation in the most
productive activities. The available capital determined the type of tech-
nology which could be employed; technical progress depended on the
amount of capital invested.
The technological division of labour is a type of intensive growth
characterized by growing labour productivity, which leads to increasing
returns to scale; but there is also an ‘extensive growth’ when productivity
does not change but workers move from less productive to more pro-
ductive sectors (Lewis 1954, Sect. 1.3 above). Like Quesnay, Smith used
the notions of productive and unproductive labour. ‘There is one sort of
labour which adds to the value of the subject upon which it is bestowed.
There is another which has no such effect’ (Smith 1776: II.iii.1). Capital
accumulation makes it possible to increase the number of workers
employed in productive activities.
Agriculture and manufacture are productive because they produce
commodities which can be accumulated and become inputs in further
production: wage goods and other means of production. Services in
general are unproductive because they consume revenue rather than
augment it (ibid.: II.iii.2). Improvements in agriculture are very impor-
tant because they make food available to the other social groups; there-
fore, agricultural surplus is always very important.19 However, ‘the
nature of agriculture, indeed, does not admit of so many subdivisions
of labour […] as manufactures’ (ibid.: I.i.4). Manufacturing takes the
centre stage.
18 For Smith as for Quesnay, real wages are composed of a food basket which tends to
be at subsistence level; money wages largely depend on the price of food (Smith 1776:
I.viii.52).
19 Similarly to Petty, Smith wrote that the differentiation of economic activities is possible
when, thanks to the improvements in the cultivation of land, the labour of half of the soci-
ety becomes sufficient to provide food for the whole (Smith 1776: I.xi.c).
88 G. VAGGI
4.4.2 Investments, the Spirit of Monopoly and Imbalances

Chapter V of Book II is entitled Of the Different Employments of Capital;
Smith says that there is a natural order of investments: capital first goes
to agriculture, then to manufacturing and domestic trade, and finally it is
invested in foreign trade. Foreign trade is not the starting point for eco-
nomic progress, but international demand can help overcome insufficient
domestic demand: this is ‘the vent for surplus’ argument (ibid.: II.v.34,
IV.i.31).20
A country prospers if this sequence is not violated; unfortunately,
the merchants’ spirit of monopoly and their influence on govern-
ments can overturn this natural order and lead to privileged invest-
ments in foreign trade. Investments are guided by profitability, and
the rate of profit is a decisive magnitude, but the ‘dealers’, the mar-
ket intermediaries, try to limit competition and increase their profits
above their natural level (ibid.: I.xi.10). Smith used particularly harsh
words against the ‘chimerical projectors’ who promised very high
profits through credit and financial instruments; this is why he was
in favour of a legal upper boundary to the rate of interest; the abuses
of finance could disrupt the natural order of investments (Kurz 2016:
632–633).
Smith was not a naïve supporter of the idea of continuous economic
progress; even when it followed the natural order of investments, a coun-
try could be in an advancing, stationary or declining state of society
(Smith 1776: I.vii.34).
Book IV of the Wealth of Nations is an explicit attack on Mercantilist
views: ‘nations have been taught that their interest consisted in beggar-
ing all their neighbours. […] Commerce, which ought naturally to be,
among nations, as among individuals, a bond of union and friendship,
[sweet trade] has become the most fertile source of discord and animos-
ity [sour trade]’ (ibid.: IV.iii.c. 9). These doctrines dominated economic
policies for two centuries, the outcome of an alliance between the mer-
chants and the nation state, ‘The sneaking arts of underling tradesmen’
(ibid.: IV.iii.c.8). A bit further on we read: ‘But the mean rapacity, the
monopolizing spirit of merchants and manufacturers, who neither are,
20 Smith is often described as a supporter of a straightforward supply-side approach,
with no role for the demand side. Recall the title of Chapter 3 of Book I: That the division
of labour is limited by the Extent of the Market.
nor ought to be the rulers of mankind, though it cannot perhaps be cor-

rected, may very easily be prevented from disturbing the tranquillity of
any body but themselves’ (ibid.: IV.iii.c.9).
It was not just a question of the excessive power of the merchants; the
problem lies in the spirit of monopoly that guided the behaviour of both
merchants and manufacturers. The association of these groups with the
state was instrumental in generating policies to increase their power and
wealth to the detriment of ‘the tranquillity of any body’ else and ‘to the
repose of Europe’ (ibid.: IV.iii.c.8).
Smith opposed the alliance between big corporations and the state
because it increased the differences among people: ‘this alliance could
perpetuate and even enlarge the differences between the different mar-
ket players, thus increasing imbalances instead of reducing them’ (ibid.:
book IV.iii.c.9–10).
4.4.3 The Labouring Poor

The labour market is a typical situation in which large disparities between
the two parties lead to increasing imbalances. Workmen and master man-
ufacturers are in opposition in the determination of wages: ‘what are the
common wages of labour depends everywhere upon the contract usually
made between those two parties, whose interests are by no means the
same. The workmen desire to get as much, the masters to give as little
as possible…’ (ibid.: I.viii.11). The two classes have very different eco-
nomic powers. The workers are poor and can only go without wages for
a few days, while ‘a landlord, a farmer, a master manufacturer, or mer-
chant, […] could generally live a year or two upon the stocks which they
have already acquired’ (ibid.: I.viii.12).
Not only are the masters wealthier, but being ‘fewer in number,
can combine much more easily; and the law, besides, authorises, or at
least does not prohibit their combinations, while it prohibits those of
the workmen’ (ibid.: I.viii.12). Smith did not attack trade unions; the
real distortions in the labour market came from the masters side; in the
labour market, competition was hindered by the excessive disparity in
the political powers of the two parties. The associations of masters lacked
transparency: ‘masters are always and everywhere in a sort of tacit, but
constant and uniform combination, not to raise the wages of labour […].
We seldom, indeed, hear of this combination, […]. These are always
90 G. VAGGI
conducted with the utmost silence and secrecy, […]’ (ibid.: I.viii.13). In
the end, the violation of competition boiled down to three main causes:
– the masters were too much wealthier than workers;

– they were fewer in number, and it was thus easier to join forces to
promote their interests;
– they were connected to political powers and could influence the
rulers.
Smith was not an unconditional supporter of the view that markets

always produce efficient outcomes. Competition has to do with the num-
ber of players in the market, but it depends on the economic powers of
the different actors, and there is a tendency of the most powerful actors
to increase their ability to influence the markets.
In the early phases of the industrial revolution, the labour mar-
ket was not so efficient, and Smith quite often referred to the workers
as the ‘labouring poor’ (ibid.: I.viii. 27, 30, 31). The ‘labouring poor’
reminds us of the shrinking share of wages in national income since the
eighties (see Sect. 3.3 above). Full employment and decent work have
been essential components of development since the 1970s (Sect. 1.3.3.
above); they are also the essence of Sustainable Development Goal n. 8:
‘Promote sustained, inclusive and sustainable economic growth, full and
productive employment and decent work for all’.
4.4.4 Natural Progress and Developing Countries

Will all societies progress towards the commercial stage in a deterministic
way? Will poor countries grow fast enough so as to catch up with the
rich ones? Do human societies have some inbuilt mechanism which guar-
antees economic prosperity and happiness?
‘It is easier for a nation, in the same manner as for an individual, to
raise itself from a moderate degree of wealth to the highest opulence,
than to acquire this moderate degree of wealth’ (Smith 1763: 579).21
According to Smith, poor countries face five major impediments, which
we will examine with some comments referring to modern developmen-
tal issues (ibid.).
21 On the debate of rich countries and poor countries during the Enlightenment, see
Hont and Ignatieff (1983).

• The extreme difficulty in beginning to accumulate capital; lack of

domestic savings.
• The long time needed to discover things which now appear as the
simplest inventions; economic growth might skip some technical
innovations, for example, mobile versus fixed-line telephones, but
quite often this is not the case.
• A nation is not always in a condition to imitate and copy the inven-
tions and improvements of its wealthier neighbours; technological
transfer requires many favourable conditions which are not always
present.
• The application of these [improvements] frequently requires a stock
of capital which developing countries do not have; technical pro-
gress is largely embodied in capital accumulation.
• The oppressive and injudicious governments to which mankind is
almost always subject, but more especially in the rude beginnings
of society; economic growth and development require appropriate
social and political institutions.
Societies can progress but not in an automatic way; both individuals and
societies are affected by powerful forces, such as the search for profits,
and by historical structures and institutions; there is no self-adjusting
mechanism in the markets. The natural progress of opulence can be
derailed by the ‘spirit of monopoly’; moreover, the division of labour
leads to increasing returns to scale, which favour the business with the
largest capital stock. Those who have more power and more wealth try
to increase their distance from the rest of the population.
Remember that Goal 10 of the SDGs is about social inclusion and
seeks to ‘reduce inequality within and among countries’. Laws and reg-
ulations should prevent growing imbalances and help to rebalance eco-
nomic powers. Smith believes that this may be possible, though Marx
would be much less confident.
4.5 Ricardo, Free Trade and the Falling Profit Rate

Ricardo is remembered as the inventor of static comparative advan-
tages and as a champion of free trade. In England, the issue of foreign
trade policies characterized the years following the Napoleonic wars,
92 G. VAGGI
producing the debate on the Corn Laws about whether or not to intro-
duce duties on the importation of corn. Ricardo believed that a tariff on
imported corn would reduce the profit rate, while Malthus maintained
that import duties would increase profitability. In a very sketchy way,
we can say that Malthus represented the interests of the landlords while
Ricardo those of the entrepreneurial bourgeoisie. Malthus won; tariffs
were introduced with the Importation Act of 1815, which would be
repealed in 1846. During the reign of Queen Victoria, the idea of free
trade would prevail.22
Ricardo suggested that every nation should specialize in producing
the goods from which it obtained the best return; that is, in which it
had a comparative advantage. Ricardo used the example of Portugal
and England, which produced both wine and cloth. He showed that
the quantities produced of the two commodities were the highest if
Portugal specialized in producing wine and England cloth. Of course,
each country had to import the commodity it did not produce since
both commodities were wage goods (Ricardo 1817: 135–136).23
Given the total number of workers in the two countries, the allocation
of labour to wine production in Portugal and to clothing in England
guaranteed a higher output for both goods. This situation was the most
advantageous to the consumers of both countries, but above all to their
capitalists (ibid.).24
Ricardo’s support of free trade derived from an analysis of the deter-
mination of the profit rate. In his 1815 Essay on profits, Ricardo showed
there is an opposition between wages and profits regarding the distri-
bution of output (Ricardo 1815). If both inputs and outputs are made
up of the same bundle of goods, say corn, then the net product can
be determined in physical terms. We shall call this as the ‘corn model’.
Ricardo shows that under certain conditions there is a trade-off between
22 The East India Company ruled India until 1858 when the country became part of the
British Empire.
23 Portugal employed fewer workers than England to produce one unit of both wine and
cloth; thus, she had an absolute advantage in both sectors, but this advantage  was larger in
the case of wine, which why Portugal should have specialized in that production.
24 Ricardo’s example assumed  free mobility of capital across the two countries.
Wages were also the same in both countries, which should have led to the same prices for
the two commodities and to the same rate of profit, but Ricardo himself recognized that
this might not be the case (ibid.: 137).
the profit rate and real wages as well as between rents and profits (ibid.:
111).25
The price of corn depends on the productivity of the labour used
in its cultivation; with a duty on corn imports, British farmers must
produce more corn at home, which requires the cultivation of lands
of inferior fertility and lower productivity. Adopting Quesnay’s meta-
phor, it would be like going from horses back to oxen (see Sect. 4.2.2
above).
Ricardo provided the first full-fledged theory of the distribution
of income divided into its three components: wages, profits and rents.
Labour productivity in the wage-goods sectors was the decisive deter-
minant of profitability. Free trade was a way to keep profitability high.
There was another powerful force which led to the cultivation of lands
of inferior fertility and hence to a decrease in the profit rate: population
growth.26 Apart from free trade, there was a second way to counter-
act the tendency of the profit rate to fall: technical progress, by which
Ricardo meant an increase in the productivity of labour in the produc-
tion of wage goods (ibid.: 292).
From Petty to Ricardo, economic development was closely related to
the physical reproduction of society; the most important type of use val-
ues were the products needed to maintain the workers. However, with
Smith, and more clearly Ricardo, it became clear that the physical sur-
plus of wage goods was a necessary but not sufficient condition for the
determination of the profit rate. Inputs and outputs were heterogene-
ous sets of commodities, and it was necessary to have a theory which
explained their prices. The profit rate was linked to the relative prices of
commodities; profitability had an exchange value dimension.27
If inputs and outputs are heterogeneous commodities, it is impos-
sible to measure the profit rate in physical terms; profitability loses
25 Real wages were at subsistence levels and consisted mainly of subsistence goods.
A detailed analysis of Ricardo’s theories of rent and profit is in Vaggi and Groenewegen
(2003: 138-ff).
26 In 1798, Malthus published An Essay on the Principle of Population, in which he fore-
saw a large increase in population with negative impacts on profitability.

27 On the relationship between relative prices and the profit rate, see Sraffa (1960).
94 G. VAGGI
the direct connection to the physical aspects of production. Ricardo’s

1817 book opens with a chapter on value, where he shows that with
some exceptions the price of a commodity is determined by the
amount of labour required in its production (Ricardo 1817: 14–17).28
This is the labour theory of value; Marx would also use it, but this
approach would prove to be unsatisfactory as a general theory of rela-
tive prices.29
For the classical economists, the sectoral composition of output
played a major role. If Smith’s wording, productive and unproductive
labour, sounds old-fashioned, it is sufficient to assume that some sectors
are more important/productive than others. To Quesnay it was agricul-
ture, the source of people’s subsistence; to Smith the most important
sectors were agriculture and manufacturing, since they produce com-
modities which could be reinvested in production; for Ricardo it was the
wage-good sectors.30
In his distinction between the exchange value and a country’s riches,
Ricardo gave the example of the privatization of water. Water which had
no price would now have a positive exchange value, not because of its
scarcity but because of the monopoly (ibid.: 276–277). This privati-
zation increased the riches of the new proprietor of water but not the
riches of the country. On the contrary, workers had to use part of their
output to pay for water, which was free; ‘not only would there be a dif-
ferent distribution of riches, but an actual loss of wealth’ (ibid.: 277).
This is an example of the possible conflict between exchange values and
use values.
In the nineteenth century, a new view would gradually impose itself:
any type of good and service was equally ‘productive’ insofar as it had a
positive price. This evolution was linked to the abandonment of a view
of value as being determined by the conditions of production in favour
of an approach that saw in utility and scarcity the foundations of value
(Vaggi and Groenewegen 2003: 118, 124).
28 The description of how Ricardo became aware of the need to face the problem of
value is in Sraffa (1951, Sects. 4 and 5).

29 On the problem of the labour theory of value, see the contribution by Vianello in
Eatwell et al. (1987, Vol. 3: 107–113).

30 According to Malthus, ‘the distinction between the different kinds of labour is the cor-
ner-stone of Adam Smith’s work’ (Malthus 1820: 17).

4.6 The Capitalist Mode of Production and the Crises

The view that in the long run the profit rate would decline was taken
up by Marx and was part of his explanation of the repeated crises which
would lead to the collapse of the capitalist mode of production.
4.6.1 The Modes of Production

Marx wanted to explain the long-run evolution of human societies, like
many authors of the Enlightenment. He was aware that human socie-
ties were very complex systems that connected people through many dif-
ferent relationships. His 1859 A Contribution to a Critique of Political
Economy outlined a methodology to identify the forces which deter-
mined the direction and the pace of society.
In each specific society, call it a Social Formation, SF, it was possible
to identify the economic base, or structure, which included all economic
relationships among people, activities which involved the production, cir-
culation, distribution and consumption of commodities. All other types
of connections were part of what he called the ‘superstructure’ (Marx
1859: Preface). Between these two spheres there were many interrela-
tions, but a process of simplification was needed to identify the laws of
motion of society.
The economic base was the engine of social change; however, the eco-
nomic base was no simple entity. In the economic sphere, people could
interact in many different ways, which Marx called ‘modes of produc-
tion’, MoP. When one mode of production dominates the others, it gives
the name to the specific SF: capitalism is the SF in which the capitalist
MoP dominates the others; feudalism is the SF in which the dominant
role is taken up by the feudal mode of production.
Each mode of production includes the productive forces: labour,
natural resources, capital—in the sense of produced means of produc-
tion—and technology. The way in which these four elements are joined
together in the spheres of production and of circulation of commodi-
ties depends on the specific ‘relationships of production’. MoPs differ
because of the different ways in which the productive forces are linked to
one another.
Marx focused on the different ways in which labour is related to the
other productive forces, in particular on the degree of freedom work-
ers had in both the production and circulation spheres. In ‘slavery’,
96 G. VAGGI
which prevailed in the ancient empires, workers were fully restricted.

In feudalism labour was partly free and partly constrained: under the
corvées system, the servants had to give part of their labour time to
the landlord and were not completely free to move out of the land
estate. In the ‘capitalist’ (which Marx often calls ‘bourgeois’) MoP,
workers are free in the sphere of circulation: they are not compelled
to sign the labour contract, which is a private contract. However, they
are restricted in production because they have no say about what, how
much and how to produce.31
In a pre-capitalist society, where there is no appropriation of land and
natural resources and no accumulation of capital, ‘communal property’
prevailed and workers were free in both spheres. ‘The individual relates
to himself as proprietor, as master of the conditions of his reality’ (Marx
1857: 403). This part of the Grundrisse is called ‘Forms which precede
capitalist production’, and in this early stage not only is the worker free
but he does not act in view of an abstract value; ‘its aim is sustenance of
the individual proprietor and of his family, as well as of the total com-
munity’ (ibid.). In these societies, the satisfaction of people’s needs
was directly assured by people’s labour, the specific use values needed
were guaranteed without resorting to exchange values.
The situation is completely different in a capitalist system in which
markets and prices dominate people’s needs and wants. Marx criticized
the classical economists for taking the commercial stage as the ultimate
type of society; capitalism is neither the final stage of history nor is it a
system of complete freedom.
4.6.2 Capital Accumulation and Crises

For Ricardo, the tendency of the profit rate to decrease depends upon
the growing population and the scarcity of fertile lands. For Marx, the
profit rate diminishes for reasons which are inbuilt into the capitalist
mode of production.
Capital consists of the means of production invested in each productive
cycle; it is made up of wages, which Marx calls variable capital and whose
value in labour terms is expressed by v, and of tools and raw materials, called
constant capital, whose labour value is c (Marx 1867, Vol. I.: 193-ff. and
31 In the sphere of circulation, there is only an illusory form of freedom: workers must
accept jobs at very low wages because they have no alternatives.

204–206).32 (c  + v) = C is the value of the inputs invested by the capitalist;

c represents past labour whose value is transferred to the new commodity, v
is the cost of a special commodity, labour power, which is ‘a source not only
of value, but of more value than it has itself’ (ibid.: 188, italics in the origi-
nal), and s is the surplus value (ibid.: 204). v  +  s is the value which labour
power adds to that of the means of production, v is paid labour, and s is
unpaid labour.
The overall value of the commodity is (c + v) +  s  =  C′, and the rate
of profit is r  =  s / (c  +  v). Dividing by v we obtain r = (s/v) / (c/v + 1),
where s/v is the rate of surplus value or rate of exploitation (ibid., Vol.
I: 205–206) and c/v is the organic composition of capital (ibid., Vol. I:
574; Vol. III: 144).33
The profit rate is positively related to the rate of surplus value, but the
surplus value s cannot increase beyond a certain limit because the length
of the working day cannot be pushed beyond 24 hours. The value of the
wage basket v can be reduced thanks to an increase in the productivity
of labour in the wage-goods sectors: this will increase s/v but also c/v,
which has a negative impact on r (ibid., Vol. I Chapter XVI). In order
to diminish v, it is necessary to employ production techniques which
require more raw materials and machines; thus, the organic composition
of capital increases, and this ‘must necessarily lead to a gradual fall of the
general rate of profit’ (ibid., Vol. III: 212, Marx’ italics). Marx measured
the magnitudes, c, v and s, and hence the profit rate, in terms of labour
embodied, the so-called labour theory of value, even if in volume III of
Capital he recognized that labour embodied was not a satisfactory way
of measuring the exchange values of commodities (Marx 1867, Vol. III:
142-ff.).34
The ‘tendency of the general rate of profit to fall’ is, therefore, ‘just
an expression peculiar to the capitalist mode of production of the progres-
sive development of the social productivity of labour’ (ibid.: 213, Marx’
italics). Contrary to the views of the classical economists, the increase in
the productivity of labour is no solution to the decline in profitability.
32 c can also include the amortization of fixed capital.

33 Apart from the different definition of capital and problems of measurement, c/v is sim-
ilar to the capital/labour ratio, K/L, of mainstream growth models.
34 The problem arises because different production sectors have different values for the
‘organic composition of capital’. Marx tried to transform labour values into prices of pro-
duction (Marx 1867, Vol. III: Part II).
98 G. VAGGI
There are counteracting influences to the decline of the rate of profit;

these include the speeding up of the process of amortization of fixed capi-
tal and the squeezing of wages below the value of the labour power (ibid.:
235–236). The decrease in r can be delayed by foreign trade: advanced
countries exploit the cheap labour of backward countries and sell them their
commodities above their true value, as is typical in colonial trade. However,
in the end it is impossible to avoid overproduction (ibid.: 238–239).
In volume II of Capital Marx dealt with the issue of crises. Crises
represent a disruption in the process of the circulation of capital. He
used different schemes to illustrate how the circulation of money, com-
modities and capital encounters inherent obstacles. Capitalist pro-
duction is characterized by different sectors (ibid., Vol. III: 142, 155)
which produce distinct types of commodities, each with different roles
in the reproduction process. In Marx’s first reproduction schemes, the
economy was made up of two sectors, one producing the means of pro-
duction, constant capital, the other the commodities for consumption,
variable capital (ibid., Vol. II: 399).
In a very sketchy way, we can say that capitalism leads to two types of
crises. A first crisis has to do with the different growth rates of the two
sectors; there is an excess of output in one sector, food, but there is not
enough capital to employ all the workers who can be fed. Crises are part
of the capital accumulation process and are due to the inherent anarchy in
the capitalist decision-making process, which leads to different rates of cap-
ital accumulation in the two major sectors of the economy, a position also
adopted by Tugan-Baranowski (Sweezy 1942: Part I Chapters VIII–XII).
The second type of crisis is more damaging; it is characterized by
either under-consumption or overproduction for the entire economy.35
The capitalists try to increase the rate of surplus value, s/v, by substitut-
ing machines for workers, a situation which leads to an excess of labour-
ers and to the ‘industrial reserve army’ (Marx 1867, Vol. I: 589). The
squeezing of wages reduces the purchasing power of the workers and
creates a lack of effective demand: ‘it is a sheer tautology to say that cri-
ses are caused by the scarcity of effective consumption, or effective con-
sumers’ (ibid.: 414).36 Again: increasing labour productivity does not
eliminate crises; they are inherent to the capitalist MoP because ‘The
35 This point is also discussed in Part 2 of the Theories of Surplus Value (Marx 1905, Vol.
II Chapter XVII).
36 Marx rejected Say’s Law (Dobb 1973: 164).
Contradiction between the Impetuous Development of the Productive

Powers and the Limitations of Consumption Leads to Over-production’
(Marx 1905, Vol. II: 527).
In 1913, the under-consumption view of the crises due to the increas-
ing poverty of workers was taken up by Rosa Luxemburg; this tendency
prevents the full realization of the surplus value and ultimately leads to
the collapse of capitalism. The fall of the profit rate is the outcome of the
intrinsic contradiction between use and exchange value in the capitalistic
mode of production: commodities which are highly needed cannot be
sold at a profit because of the lack of effective demand, even if there are
potential consumers, the labouring poor.
In the capitalist MoP, there is an intrinsic conflict between workers
and capitalists, but fierce competition among capitalists is also an essen-
tial component; the combination of the two conflicts leads to the inher-
ent contradiction between capital accumulation and profitability (Mandel
1987: 378). The interests of the capitalists are opposed to those of the
workers, but the capitalists also compete against other capitalists, both
inside the country and at the worldwide level. The nation state can be a
useful ally of large firms within this fight.
In 1917, Lenin published Imperialism, the Highest Stage of
Capitalism, in which he wrote that the capitalist MoP tends to produce a
situation of monopoly. Fifty years after Lenin’s book, Baran and Sweezy
published Monopoly Capital, which emphasized the tendency of the cap-
italistic process of accumulation to destroy competition and to generate
large monopolistic capitalist groups (Baran and Sweezy 1966).
4.7 Conclusions
Substituting labour productivity for foreign trade as a source of wealth
does not eliminate economic conflicts inside and among countries. Some
useful messages can be drawn from the Founding Fathers.
First, the four stages theory and Marx’s use of the modes of pro-
duction are examples of a method of comparative economic history,
something which should be an essential feature of development eco-
nomics. Societies are complicated entities with many different aspects;
institutions and social structures do matter, and the nation state is
only one of the many possible ways in which human beings organize
themselves.
100 G. VAGGI
Second, Marx reminds us not to underestimate the power of eco-

nomic forces, which, in a capitalistic economy, express themselves
through capital accumulation and technology. Investments are the most
important economic magnitude: they shape the future.
Third, for the Founding Fathers the relationships between the indi-
viduals, the markets and the state are much less simplistic than their
depiction in mainstream economics. Smith made extremely interesting
observations about the interactions between markets, political institu-
tions and individuals.
Fourth, for Ricardo declining profitability rests on two elements: the
growing population (People) and limited natural resources (Planet).
People and the Planet are the first two of the five areas of importance
of Agenda 2030, but they are also the two original non-produced ele-
ments of production according to Petty: land and labour. The profit rate
belongs to the third area: prosperity; in Marx, the realm of exchange val-
ues dominates that of use values.
Moving from a primitive society to the commercial/capitalist system
does not eliminate the fundamental relationship between human beings
and nature.
Capital accumulation and new technologies can modify the amount
and the definition of natural resources and can change the quantity and
the quality of labour needed in production. But capital and technology
cannot eliminate the relationship between people and planet, between
the needs and wants of people and the resources which can help to satisfy
them. This relationship is at the core of sustainability. How far is it pos-
sible to reconcile the realms of exchange and use values? Whether or not
markets plus self-interest, plus the profit motive can eliminate the con-
trasts between the social, economic and the environmental dimensions of
sustainability is the topic of the last two chapters.
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CHAPTER 5
Sustainable Reproduction, on Use

and Exchange Values
Abstract  This chapter deals with sustainable reproduction and the

distinction between ends and means in the SDGs. The former are stra-
tegic ‘use values’, the latter belong to the realm of ‘exchange values’.
Four reproduction cycles are examined: the universal, capitalistic, sus-
tainable and financial cycles. This chapter presents different contributions
on how to achieve sustainable development; some authors rely on mar-
ket mechanisms, other writers are very critical of the idea of growth in
itself. From Randomized Control Trials to incentives and market games
to institutions in development. Neo-structuralist and neo-Keynesian
authors emphasize the macro-constraints to growth facing developing
countries. Degrowth and the circular economy underline the limits of
nature; sustainability requires the abandonment of capitalist production.
We have entered a period of Financial Mercantilism: money generates
money. Investment banks and funds behave like the old Mercantilists,
their choices dominated by the search for a surplus value.
Keywords  Reproduction · Sustainability · Use and exchange values ·

Financial Mercantilism · Institutions
The Founding Fathers offer viewpoints on the evolution of societies

which can be useful in tackling contemporary development challenges
and in putting them into a broader perspective.

https://doi.org/10.1007/978-3-319-54879-1_5
104 G. VAGGI
5.1 On Reproduction Cycles
5.1.1 Value in Use and Value in Exchange

Most development goals are use values, but the relationship between
value in use and value in exchange is a problematical one. The paradox
of water and diamonds relates that each ‘object’ has two different dimen-
sions which might not be easily reconciled: its specific usefulness and its
value or price. ‘Objects’ can be material goods, intangible services, even
social relationships; many ‘objects’ are tradable goods and services, and
they become commodities with a market price, an exchange value. Other
‘objects’ have very low exchange values but can be very useful.
Some ‘objects’ are part of the GDP while others are not. The enlarge-
ment of the notion of development beyond its economic dimension (see
Chapter 2) is an attempt to recover the use value dimension of many
‘objects’. Education, health, environment, inclusive society, freedom,
security, are ‘development objects’: these are all part of the SDGs and of
what we regard as well-being (Stiglitz et al. 2008).
The exchange value of ‘development objects’ is determined by the
rules of the dominant social and economic structures, which today are
characterized by the capitalist organization of production. In the realm
of exchange value, the search for profits is the driving force of capi-
tal accumulation and determines investments. Can the ‘development
objects’ be the outcomes of these structures and forces? Will the realm
of the exchange values lead to those specific use values, for instance, the
SDGs, on which there is a widespread consensus?
In a very sketchy way, there are three possible answers. First, in the
long-run, economic growth does ‘trickle down’ (see Sect. 1.2 above),
and well-being will follow. Second, the desired ‘development objects’
arise from an appropriate system of social and economic incentives which
guides the decisions of economic agents. This second position is the
one now prevailing in development policies. To different degrees, both
answers consider the exchange values as instruments which are necessary
and sufficient to attain the desired use values. A third type of answers
considers the realm of exchange values to be detrimental to the achieve-
ment of the ‘development objects’, which can hardly be reached within
the structures and forces of the capitalist economy. Sections 5.2 and 5.3
briefly address these three views. However before moving to the modern
views, we will consider how the idea of reproduction of classical political
economy is useful in examining contemporary debates on sustainability.
5 SUSTAINABLE REPRODUCTION, ON USE … 105
5.1.2 Reproduction Cycles and Sustainability

According to Petty, land and labour are the original inputs of all pro-
cesses of production and generate all outputs, in particular, subsistence,
food, for the whole society.
Labour + Land ⇒ Subsistence.
Petty describes a world in which the relationship between the original,
non-produced inputs and the specific use values, whether they are corn
or basic needs, or even luxury goods, is rather direct and easy to recog-
nize. People and Planet are two of the five ‘areas of critical importance’ in
Agenda 2030 (see Sect. 2.4 above) and they produce everything else; planet
stands for nature, natural resources, land, La, and people for labour, L.
Petty’s cycle is as close as we get to a universal reproduction cycle. All
societies should reproduce themselves; natural resources and people are
the starting point of a process which through the production of specific
use values leads to reproduction. In a simple form, its description refers
to the stage of hunters and gatherers, the first stage of human societies
(see Sect. 4.3), here the exchanges values play a minor role.
Quesnay brings in the role of physical capital and technology; horses
open the way to large-scale cultivation and to the most productive tech-
niques. Quesnay regards production as a circular process, in which inputs
and outputs are made up of the same types of goods. The technical con-
ditions of reproduction require that the output Y must include at least
all the types of inputs in at least the same amounts which have been used
during the production cycle. The inputs are the subsistence wages of the
workers; the raw materials produced within agriculture; the amortization
of capital equipment (horses). Farmers also have a social and political
obligation: the payment of a rent, to the landlords for the use of their
lands (Vaggi 1987: 80-ff.).
The universal reproduction cycle now becomes more complicated
because there is an intermediate stage: the production of Capital
Equipment with Technology, K&T.
People + Planet ⇒ [L, La, K&T] ⇒ Increased Subsistence,
including the recovery of used up inputs.
Capital equipment and advanced technology allow an increase of output.
The use values which make up the output include subsistence for the
people but also raw materials and means of production which have been
consumed in production.
106 G. VAGGI
SDG 2 reads ‘End hunger, achieve food security and improved nutri-
tion and promote sustainable agriculture’, a clear end-goal. Targets 2.1
and 2.2 are also end-goals, but target 2.3 seeks to ‘double agricultural
productivity’ (UN 2015: 15). Reproduction originates from People
and Planet, the end-goal being food security, subsistence for all, a very
specific use value. In Quesnay and in the SDGs, capital equipment and
technology are means, not end-goals. However, in order to achieve the
end-goal, food security, it is necessary to focus on the means: capital and
technology, which can increase agricultural productivity and leaf to eco-
nomic growth. The goal is the ultimate purpose, the final use value, but
a means, a tool, becomes the dominant issue.
In Quesnay, as in Petty, the use value dimension of inputs and outputs
dominates the reproduction process. Capital goods and technology take
centre stage, but the end-goal is to have a larger amount of some specific
use values.
The industrial revolution and the division of labour generates an
increasingly articulated economic production process. With Smith and
Ricardo, the exchange value comes to the fore: the production process
must guarantee the physical reproduction of inputs and hopefully a surplus,
but it must satisfy the conditions of profitability. The tendency towards a
uniform profit rate for the whole economy, the condition of free competi-
tion in Smith, can be achieved only through a system of relative prices.1
In Marx, the ‘universal reproduction cycle’ becomes a capitalistic
reproduction cycle, crc, in which exchange values generate exchange val-
ues.2 In the capitalistic reproduction cycle, L is labour power and is com-
bined with the other productive forces, La and K&T, according to the
capitalistic social relationship of production.
People + Planet ⇒ [M ⇒ (L, La, K&T)
(5.1)
⇒ Y = M′ ]
M is the amount of money/capital invested in production, Y = M′ is
the exchange value of output. Y = M′ >M includes subsistence and the
replacement of inputs, which hopefully leads to more use values available
to people, but this is no longer the criteria which guides economic deci-
sions about investments, which are taken in view of surplus value, that is,
1 The relationship between use value and exchange value is the theme of the opening
chapter of both Ricardo’s Principles and Marx’s Capital.

2 On the circulation of money in the capitalistic mode of production money, see Marx
(1867, Vol. II: 26, 34, 63).

profitability. The exchange value dominates the use values, and it does
not necessarily respect the condition of long-run physical reproduction;
People and Planet might be wrecked.
Societies depend on the working of the forces and mechanisms
the capitalistic reproduction
of cycle, inside the square brackets
M ⇒ (L, La, K&T) ⇒ Y = M′ ; none of the four factors/elements is an

original input and Y is not necessarily a use value.

The exchange value of commodities and the power of capital, as an
amount of value, to generate a surplus value is the dominant aspect as
well as the indicator of the capacity of the capitalist mode of production
to reproduce itself.
By including foreign trade and finance in crc, the capitalistic repro-
duction cycle becomes:
People + Planet ⇒ [M ⇒ (L, La, K&T, Trade, Finance)
(5.2)
⇒ Y = M′ ]
Inside the square brackets we find technology, trade and finance, three
main groups of targets in SDG 17, the one on global partnership; the
fourth group is capacity building. In Agenda 2030, people and planet
are the first two ‘areas of critical importance’. The third area is prosper-
ity and has very few end-goals; it is mainly made up of means; crc, the
elements inside square brackets, includes the mechanisms, the structures
and the forces which should lead to prosperity. These economic forces
and structures rule modern societies and determine their evolution.
Economic structures are neither People nor Planet, but they are the core
of the capitalist mode of production.
The Brundtland report on sustainability requires that at least the same
quantity and quality of natural resources be passed on from one genera-
tion to the other (see Sect. 2.1); the same should be true of people. In
a sustainable reproduction cycle, src, people and planet are both at the
origin and at the end of reproduction.
Peoplet + Planett ⇒ {(L, La, K&T, Trade, Finance) => Y}

(5.3)
⇒ Use values + Peoplet+1 + Planett+1
Production and consumption systems should consider People and Planet

as part of the output as well as the inputs. Peoplet+1 ≥ Peoplet and
Planett+1 ≥ Planett. At t + 1, People and Planet are different than at t.
The symbol ≥ is a poor way to describe the need for human beings and
natural resources to at least be the same, both in quantities and qualities,
108 G. VAGGI
at time t + 1 as at time t. People should live longer and be more capa-
ble of taking decisions about their life, which represents empowerment;
natural resources should be preserved. SDG 12 asks for ‘sustainable pro-
duction and consumption patterns’; according to the three dimensions
of sustainability (see Sect. 2.4).
In Eq. (5.3) the curly brackets indicate that the combination of peo-
ple, planet capital and technology is not necessarily that of a capitalistic
reproduction cycle. Can a capitalistic reproduction cycle lead to a sus-
tainable reproduction cycle? In this case, crc should become:
People + Planet ⇒ [M ⇒ (L, La, K&T, Trade, Finance) ⇒ Y = M′ ]

⇒ Use values + Peoplet+1 + Planett+1
We have, trade, finance and above all the search for the surplus value
M′ > M, but they are not necessary components of a sustainable repro-
duction cycle. In a sustainable reproduction cycle everything which takes
place inside the square brackets should lead to more well-being for each
individual and for each country. Y can be GDP or some other defini-
tion of well-being. Sustainability requires that src should produce those
use values which are needed and which leave People and Planet better
off; this largely depends on decisions to be taken about investments and
technology. The issue is how these decisions are taken and by whom.
5.1.3 Overcapacity and Secular Stagnation

The separation between use and exchange values and the Founding Fathers
provide some help in examining the issue of ‘secular stagnation’ (see
Sect. 3.4). The growth slowdown of developed countries since 2008 can
be understood by finding the relationships  between the ‘four changes’ and
‘two imbalances’ of Chapter 4. In this regard, here are a few considerations.
The problem is how to transform the elements of crc not only into more
goods and services, use values, but into additional exchange value as well.
This crisis has many features of a crisis of underconsumption with a lack of
effective demand, which also derives from the worsening income distribu-
tion (Palley 2016). Firms inside all countries, even the rich ones, look for
customers abroad, and this replicates an essential aspect of Mercantilism.
Capital accumulation with technical change, K&T, is the driving force
behind capitalistic production, but growing labour productivity can also
generate problems. For many years, China has been investing 35–40% of
GDP, reaching 45% in 2010, and other countries in Asia have also fol-
lowed a similar path, even if not with such high investment ratios. This
has contributed to taking billions of people out of poverty, but it has also
led to a situation of overcapacity (see Sect. 4.6) at the world level. The
overall productive capacity created could produce more goods than can
profitably be sold on international markets. Some sectors appear to be
saturated, the iron sector being a case in point; but this is also the case
for cars and for many consumer durables, including high-tech products.
Quite often protectionism and the management of trade are the
answers; here trade is not sweet (see Sect. 4.3 above) but sour and might
lead to trade wars. International competition takes place through cap-
ital accumulation and technical innovation, but this is not sufficient to
guarantee higher growth rates and greater well-being. More competition
can even contribute to widening the differences and imbalances among
countries. More use values can become a problem because of the lack of
exchange value, of effective demand, M′ does not materialize.
5.2 Achieving Use Values Through

Exchange Values
How to reconcile, if possible, exchange values and capitalistic produc-
tion with sustainable development and the SDGs? There is a multitude
of positions; the few we summarize here can be set along a range which
goes from those more focused on micro aspects to those which question
the macrostructures.
5.2.1 Going Micro

The prevalent views identify tools and incentives that should induce
self-interested consumers and firms looking for profits to behave in uni-
son with sustainable goals. The idea is to use market forces and agents’
motivations to orient production and consumption choices towards sus-
tainability-friendly behaviours.
Markets and the search for profits are facts which households, firms
and policymakers must take as given. Competition must be enhanced
and rent-seeking behaviours opposed; both goals are achieved through
fewer regulations and more incentives. This approach mirrors the
changes in economic theory, which have occurred together with the
110 G. VAGGI
rational expectations revolution and the pre-dominance of microeco-

nomics over macroeconomics (see Sect. 1.5). The structures of the cap-
italist system, crc and the elements in square brackets in Eq. (5.2), are
not questioned, and the focus is the orientation of agents’ behaviour.
The realm of exchange values is used to achieve the desired use values.
One example of this approach is the so-called ‘mechanism design
framework’, which first identifies some goals and then moves back-
wards to define the type of incentives and mechanisms needed to achieve
those goals (Maskin 2007).3 The framework is based on game theory;
the outcomes of the game are set and then the structure of the game is
identified. Economic agents are rational and operate within given game
structures, which can be differentiated depending on the desired out-
comes. This approach is quite close to the ‘market engineering frame-
work’ in which the agents respond to specific types of markets that
depend on a given economic and social environment. The exchanges tak-
ing place are the result of the interaction between individual agents and
the characteristics of the markets: the technology available, the features
of competition and the legal framework.
Another approach which studies the behaviour of individuals is that
of the ‘Randomised Control Trials’, RCTs, which has become extremely
successful in development thanks to the work of the Jameel Poverty
Action Lab at MIT. RCTs is based on field experiments in a developing
context (Banerjee and Duflo 2011). One set of individuals, for instance
comprising a village in Africa, is provided with some type of opportu-
nities/incentives, such as insurance schemes, in order to achieve some
given outcomes, such as health and educational improvements.
The experiments focus on opportunities and help to understand how
individuals and communities react to them. Through data collection,
direct interviews and comparing the outcomes with those in communi-
ties with no incentives, the control group, an evaluation is produced of
the effectiveness of the tools adopted. The aim is to establish causal links
between policies and the desired outcomes: what works and what does
not work.
RCTs are powerful policy tools because they provide so-called evi-
dence based results. Trials can be adapted to many different outcomes
3 In 2007, Eric Maskin won the Nobel Prize together with Leonid Hurwicz and Roger
Myerson, precisely for this contribution.

and situations and can be repeated many times in different countries and
contexts. The use of quantitative methods and the fact of being based on
fieldwork has contributed to the success of RCTs.4
Many RCTs investigate projects which involve financial opportunities
for small communities, but the leading authors of RCTs are very criti-
cal of microfinance mainly on account of the fact that there is very little
impact evaluation (Banerjee et al. 2009).
This approach is providing very useful indications for specific develop-
ment policies; however, it is criticized because quite often what works at the
micro level cannot be reproduced for the country as a whole; the upscaling
of the projects has not proven to be either easy or successful (Bédécarrats
et al. 2017: 17, 24). What is good for the micro case is assumed to be good
for the whole. However, the macro social and economic structures are not
simply the sum of the micro conditions. Both microfinance and RCTs have
been criticized because they ignore the general context; the impact on the
economy and society at large is not investigated and the most interesting
questions are not discussed (Rashid 2014: 118–119).
All these approaches owe a lot to behavioural and experimental eco-
nomics and have the merit of studying real, even if limited, situations.
Moreover, they focus on individuals and on communities. It is interest-
ing to notice that these approaches have gained ground during the years
in which the notion of development was evolving in the direction of
putting people and their empowerment at centre stage (see Sect. 2.1).
But in this case people are considered merely as economic agents, whose
opportunities are defined and constrained by the institutions and struc-
tures in which they operate.
5.2.2 Institutions for Markets

The title of the 2002 World Development Report is Building Institutions
for Markets (World Bank 2002). It describes another way of framing a
setting in which individual choices can be geared towards the desired
goals. The role of institutions owes a lot to the work of Douglas North
and Ronald Coase, which has led to the New Institutional Economics
which derives from a critique of standard neoclassical assumptions about
4 The World Bank has greatly supported RCT, see World Bank (2005).
112 G. VAGGI
competitive markets and fully informed agents.5 Transaction costs based on

information asymmetries can lead to the inequality of power between dif-
ferent groups. Institutions represent constraints on human actions, which
determine the political, economic and social interactions among individuals.
Institutions can be characterized either by formal or informal rules.
Institutions have been directly linked to the process of development
and long-run growth, in particular thanks to the studies by Acemoglu
et al. (2004) and Acemoglu and Robinson (2012), which cover a wide
set of situations, from South Korea to African villages. Attention is paid
to the historical evolutions of countries and to the social structures in
which people have to act. This approach is a critique of the oversimpli-
fied description of markets and individual behaviour, and it is open to
contributions from sciences other than economics.
However, this approach too neither questions the structures of capitalistic
production, crc, nor the profit motive as a guiding force of human conduct.
Institutions must favour the working of markets and challenge
rent-seeking positions; in particular they must guarantee property rights,
which together with competitive markets are the main source of eco-
nomic growth. ‘Economic institutions encouraging economic growth
emerge when political institutions allocate power to groups with interests
in broad-based property rights enforcement, when they create effective
constraints on power-holders, and when there are relatively few rents to
be captured by power-holders’ (Acemoglu et al. 2004: Abstract).
In the end, market competition and the appropriate incentives lead
to well-being. The wide-ranging historical descriptions of the founding
fathers are lost.
5.3 When Structures Should Change

There are other approaches which stress the importance of changing the
capitalistic social and economic structures, arguing that markets and the
search for profit are not enough to guarantee well-being and sustaina-
bility. Some authors build on the Structuralist and Keynesian traditions
(see Sects. 1.3 and 1.4) to describe an active role for economic policies in
improving the growth and employment prospects. Other views propose
a more radical change in the capitalist system of production and reject
economic growth as a goal.
5 North has opened the way to the New Economic History, which relies on quantitative
methods to explain history.

5.3.1 The State and Economic Growth

The developmental role of the state, which has been so effective in Asia
(see Sect. 3.1), is coming back in policy debates (Mazzucato 2013). This
implies a stronger emphasis on macroeconomics and on the role of social
and economic structures in explaining stories of both success and failure.
Hausmann and Rodrik have developed the ‘growth diagnostic’
approach to identify the specific constraints to economic growth, which
considers a variety of possible constraints: from institutions to labour
market structures to education and infrastructures (Hausmann et al.
2005). This approach is based on the view that development processes
are not necessarily standardized and that countries must try different
possibilities to find their way to growth and refuse the ‘one recipe fits all’
mainstream view (Hausmann and Rodrik 2003).
Other authors refer directly to the structuralist approach of the fif-
ties and emphasize the need for profound modifications in the structure
of GDP and in the social and economic organization of the economy.
Macroeconomic models are used to underline some specific features of
developing countries which may hinder the capital accumulation process
and to highlight how countries can overcome these constraints (Taylor
1983). Only a transformation in the productive structure can lead to
higher growth rates, and government intervention and industrial poli-
cies are needed to achieve these changes: the market must be guided and
investments oriented towards the sectors with the highest value added
and highest growth potential. As for the classical economists some sec-
tors play a special role in the reproduction process, and the support of
productive activities is a major policy recommendation.
Developing countries face problems related mainly to their depend-
ence on primary exports, which mirrors a colonial economic structure,
to the dualism of labour markets, and to the lack of domestic savings and
effective demand. Picking up on the Structuralist tradition, most mod-
els underline the links between rich and poor countries and the way in
which today the international division of labour constrains growth in the
‘South’.
UNCTAD’s reports often underline the role of the structural
approach to economic development and the importance allowing devel-
oping countries the necessary policy space for them to be able to have
better opportunities in international markets (UNCTAD 2014). The
CEPAL, where the structuralist approach originated in the fifties, is still
114 G. VAGGI
very active in producing research which shows how international trade

relations hinder the economic prospects of developing countries.
The modern structuralist approach often merges with the Keynesian
tradition, which underlines the role of aggregate demand in economic
growth. The neo-Keynesian authors emphasize the importance of
domestic demand, which leads to the issue of income distribution, which
can generate different growth regimes. Economic growth can be driven
either by domestic consumption and wages, wage-led, or by invest-
ments out of profits, profit-led, or by the exports (Bhaduri and Marglin
1990). Different growth regimes are linked to different types of income
distribution and helps to explain the worsening income distribution in
high-income economies (see Sect. 3.3).
The Keynesian approach does not directly focus on developing coun-
tries, but it shows that profit and export-led growth regimes lead to
harsh competition among countries and most likely to protectionist pol-
icies and a further squeezing of workers’ purchasing power. By playing
down the role of consumption and of domestic demand, countries are
led to a situation quite similar to that described by the Mercantilists in
the seventeenth century.
There are several external constrains to economic growth in develop-
ing countries, and a special group of problems concerns finance. Quite
often these countries suffer from ‘two gaps’; on the one hand, they have
low domestic savings, and on the other, because of a weak export struc-
ture, they lack the foreign currencies needed to import capital goods
(Bacha 1990). Similarly, Thirlwall underlines the balance of payments
constraint and the importance of both export and import elasticity in
determining the growth rate (see Sect. 1.3.2). If the trade structure does
not generate enough hard currency, countries could resort to foreign
financing, but this might led to severe crises (see Sect. 3.2).
The Structuralist and the Keynesian approaches focus on the policies
that developing economies should follow to achieve economic growth
and share much of the analysis and recommendations.6 Economic
growth derives from a process of industrialization, which modifies the
sectoral composition of output; however, this is not an automatic out-
come of the capitalist reproduction cycle, crc, which on the contrary can
6 On the structuralist perspective Cimoli and Porcile 2011; on the evolutionary
approach to growth, see Dosi et al. (2017). An overview of the two approaches and of the
Schumpeterian/evolutionary one is in Botta et al. (2018).
constrain developing countries in an ancillary role.7 State intervention

plays a major role.
The Structuralist and Keynesian approaches concentrate on economic
growth, Y, in Eq. (5.2), but they seek to introduce major changes in the
structures and mechanisms inside the square brackets, crc. Developing
countries need to use state power and regional alliances to re-balance
their position in the international division of labour. Non-mainstream
development authors do not deny the importance of exchange values
and of international prices. However, the policies suggested have in view
some very important use values which can be found among the SDGs; a
more equitable income distribution within and among countries (SDG
10) and employment and inclusive growth (SDG 8).
5.3.2 Beyond Economic Development

Some authors are very much critical of capitalistic production and of
economic growth. According to the ‘Circular Economy’ view, the lead-
ing aim of production processes should be preserving natural resources,
and all economic activities should be geared towards that effort. This
approach dates back to the eighties and to the contributions of Walter
Stahel and the encouragement of the European Commission (Stahel and
Reday 1981). The Ellen Macarthur foundation, a big supporter of the
circular economy, gives the following definition: “A circular economy
aims to redefine growth, focusing on positive society-wide benefits. It
entails gradually decoupling economic activity from the consumption of
finite resources and designing waste out of the system. Underpinned by
a transition to renewable energy sources, the circular model builds eco-
nomic, natural, and social capital” (retrieved June 2018, https://www.
ellenmacarthurfoundation.org/circular-economy/overview/concept).
In many ways, the circular economy is similar to the sustainable
reproduction cycle, src, in that natural resources are not only inputs but
must be accounted among the outputs of production. Both waste and
7 Rodrik highlights the risk of early de-industrialization in many developing countries.
The share of manufacturing value added in GDP declines before income per capita reaches
levels comparable to those of high-income countries (Rodrik 2015: 3, 15, 31).
116 G. VAGGI
pollution should be reduced, products should last longer, and the out-
come of production processes should be regenerated to avoid using new
natural resources.
‘Degrowth’ theories are very critical of capitalistic production and
advocate a radical change in the study of development. This approach
has its origin in the contributions of André Gorz and Nicholas
Georgescu-Roegen, but degrowth comes to the fore with the works of
Serge Latouche, for whom ‘Infinite growth is incompatible with a finite
planet’ (Latouche 2006).
This simple phrase is the starting point of a series of recommendations
for returning to a sustainable ecological impact for the planet, which
is summarized by Latouche’s 8 Rs: “Re-evaluate, Re-conceptualize,
Restructure, Redistribute, Re-locate, Reduce, Re-use and Recycle.
Most of the Rs are self explanatory and seek a major change in the
production and consumption patterns. However, to Re-evaluate and
Re-conceptualize make clear that Latouche has in mind a change in
values and in lifestyle to conduct a simple life in which social relations
are highly valued. Most of the products necessary to meet people’s
needs should be produced locally, thereby restoring peasant agriculture.
Productivity increases should be used to reduce the working time and
the ‘production’ of relational goods should be encouraged” (ibid.).
According to Latouche, the capitalistic mode of production assigns
positive exchange values to products which cannot be sustained because
they tend to deplete both people and planet. Degrowth asks for a dif-
ferent view of progress and well-being; the idea itself of development
cannot be linked to that of sustainability, and ‘sustainable development’
is self-contradictory. The obsession with growth must be reversed and
a different lifestyle is needed with use values which can be achieved
through a different  market mechanism, and not through a capitalistic,
process. Degrowth and post-development views look to people and to
local communities as the pillars for a different type of social organiza-
tion based on local traditions and lifestyles, where use values come to the
fore.
Sections 5.2 and 5.3 have presented different ways of achieving spe-
cific use values, for example, the SDGs. How to achieve sustainable
development is the topic of the final chapter, but we must first examine
how the capitalistic reproduction cycle, crc, can be modified by the pres-
ence of finance.
5.4 Neo-mercantilism and Its Features

Capitalist production aims at a surplus value, the outcome of an
exchange value. Economic stagnation and structural imbalances stimulate
neo-mercantilist and protectionist policies, with nations fiercely compet-
ing on international markets (UNCTAD 2014: 17–19).8 Each country
relies on the external markets and on the demand from foreign countries
to obtain the exchange values which can ensure profitability and eco-
nomic growth. It looks as if we are back to the ‘beggar thy neighbour’
type of policy of the mercantilist period (see Sect. 4.1).
Large savings, which are at the core of the main explanations for the
‘secular stagnation’ hypothesis, are the outcome of external surpluses and
lead to large reserves of foreign currencies. East Asian countries, China
in particular, are often regarded as the culprits, mainly because of their
undervalued exchange rates.9 However, some high-income countries
follow similar policies, trying to compress wages and to rely on foreign
demand. In a world of financial liberalization, countries compete to
attract foreign capital through the opening of the capital account as well
as with special tax advantages.10 This produces a ‘race to the bottom’ in
which business and income taxes are lowered to attract Foreign Direct
Investments. Government revenues decline and public expenditures must
be reduced in order to avoid budget deficits. This is a ‘profit-led’ type of
economic policy which, however, bumps into the Mercantilist problem:
Mercantilism is a zero-sum game, not all countries can run a trade sur-
plus at the same time.
In today’s world, where all economies are closely interconnected,
modern Mercantilism has two main features.
First feature: neo-Mercantilist policies aim at restraining domestic
demand and relying on exports for the realization of the exchange value.
8 The hostility to the free movement of people quite often complements neo-protectionist
policies.
9 The management of the exchange rate is only one of the policies which can generate a
current account surplus. Export subsidies and import duties are the traditional tools, but
there are also: selective credit systems, tax exemptions on reinvested profits, VAT rebates
on exports, the compression of domestic wages/incomes, subsidies to Research and
Development, and poor labour rights.
10 Capital account liberalization worsens income inequality, especially after a crisis
(Lagarda et al. 2017: 3).

118 G. VAGGI
There are major differences between high-income countries and

developing ones; the former have a large effective demand, the ability to
buy, while the latter have a large potential demand but a very small buy-
ing capacity.11
We must not confuse Mercantilism today with the lack of competition
on international markets. During the last thirty years, there have been
many newcomers in international economy, the so-called emerging cun-
tries, in particular in East Asia. However, this has very little to do with
the idea of competition found in most textbooks, which is characterized
by a multitude of rather similar producers and the possibility for any new
producer to enter the market.
The international economy is characterized by fierce competition
among firms and countries, but this is a competition among giants. In
many sectors: from automotive, to capital equipment, to infrastructure
procurement, to international finance, there is a strong concentration
of productive capacity, also through mergers and acquisitions. Since
the 1980s, the mark-ups in the US economy have been growing, with
a negative impact on the growth rate (De Loecker and Eeckhout 2017)
and on income distribution (see Sect. 3.3). Autor et al. (2017) describe
the link between the rise of the ‘superstar firms’ in the US economy, the
decrease in the labour share, and the growing market concentration.
Free trade is no antidote to the concentration of market power; on
the contrary, it might magnify the power of larger firms, which can then
dominate the markets. At the world level, many sectors are characterized
by oligopolistic competition (Dutt 1984), something which was clearly
foreseen by Marx but the idea goes back to Smith’s (1776) scale effects
on labour productivity (see Sects. 4.4 and 4.6). International markets are
the place where capitalist firms search for a surplus in the exchange value,
for which they look to the state for support.
Second feature of neo-Mercantilism: the alliance between big corpora-
tions and the state. Big international companies may twist the functions
and powers of the states to their advantage.12
Mercantilist policies do not necessarily imply state intervention; in
most cases, large firms are against regulations and state intervention
11 In developing countries, the compression of domestic demand could generate an
export-dependent type of economy.

12 The term ‘state’ also indicates international organizations and institutions where nation
states take decisions about the international economy: IMF, World Bank, WTO.
(see Sect. 1.5), as is particularly clear in capital markets.13 Big financial

operators want free capital mobility and free hands to invent any type
of financial product/service without having to submit to regulations.
Mercantilism versus free trade is a misleading antagonism. The crucial
issues are the huge imbalances in market and political power and the fact
that large companies influence the state to implement policies which are
favourable to them. These uneven economic powers lead to monopolis-
tic structures and according to Samir Amin capitalism has now entered a
phase of generalized monopoly (Amin 1997, 2011).
5.5 Financial Mercantilism14
5.5.1 The Mercantilist Reproduction Cycle

In Volume I of Capital Marx describes money as ‘the medium of cir-
culation’, using the script C − M − C to depict the simple circulation of
commodities (Marx 1867, Vol. I: 106, 108, 146). A commodity, C, is
exchanged for money, M, to buy a different commodity, C. Circulation
opens and closes with commodities, specific use values; ‘the circuit
M − C − M would be absurd and without meaning if the intention were
to exchange by these means two equal sums of money’ (ibid.: 146). Marx
provides a description of the Mercantilist version of circulation: ‘M − M′,
money which begets money, such is the description of Capital from the
mouth of its first interpreters, the Mercantilists’ (ibid.: 153). A few lines
later Marx writes that in the case of ‘interest-bearing capital, the circula-
tion M − C − M′ appears abridged. We have its result [the surplus value]
without an intermediate stage, in the form M − M′, “en style lapidaire” so
to say, money that is worth more money, value that is greater than itself’
(ibid.).15
Monetary-capital is not just a medium of circulation since it aims at
a surplus value: M − C − M′, with M′ = M + M (ibid.: 149). Exchange
values rule the Mercantilist reproduction cycle, but the decisive element
is the surplus value, ∆M.
13 In many cases, the Mercantilists asked the rulers to refrain from regulating trade; for
instance, in the case of an old law prohibiting the export of money (Mun 1623: 34–36).
14 Vaggi (2018) provides a larger analysis of Financial Mercantilism and its features.
15 These quotations are from the final page of Chapter IV: The General Formula for
Capital, in Part II: The Transformation of Money into Capital, in Vol. I of Capital.
120 G. VAGGI
5.5.2 The Financial Reproduction Cycle

The gain for the merchant derives from his ability to buy cheap and sell
dear, to achieve which he must move the goods in space and time; food
was transported from the countryside to the cities, the spices from the
Indies had to reach the metropolitan area.16
In international financial markets, investors behave like modern mer-
cantilists, who profit from the difference between the selling and the
buying price of any financial product. The ‘financial reproduction cycle’,
frc, also aims at M′ > M. However there is no need either to go through
the production processes or to move goods across time and space.
Capital gains are a typical example of buying a certain type of financial
product cheap and selling it dear. Of course, when M′ < M there are
losses and bankruptcies; systemic risk is also present for the big players.
Space is relevant only insofar as different financial markets are special-
ized into different types of products. The City of London is home to the
largest foreign exchange market; financial centres apply different regu-
lations and laws to similar products: issuing a bond in London requires
different legislation than issuing it on Wall Street.
Time is much more relevant; financial ‘products’ are basically forward
contracts, a sort of bet: in other words, a commitment to buy and sell
at some future time at a certain price, perhaps conditional on specific
events. These are immaterial products, which can make people either
richer or poorer.17
Financial operations are quite fast, and agents’ behaviour is charac-
terized by short-termism.18 In the age of Financial Mercantilism, the
separation between short-term and long-term operations is blurred.
A ten-year bond is long-term, but it is both sold and bought in a con-
tinuous way; in the secondary market, long-term bonds are just finan-
cial products. This is particularly dangerous for developing countries and
16 Modern value chains coordinated by transnational corporations do something similar,
and they also generate new types of goods.

17 The insurance and credit sectors provide specific services, use values, to households
and firms, but many financial services exist only because of the specific nature of financial
markets. Credit Default Swaps, CDS, are a typical example of a contract whose existence is
justified only because systemic risk is an essential component of finance.
18 Short-termism is not just a feature of financial operators, but it seems to become a
rather pervasive behaviour of corporate managers. Mallaby speaks of short-term capitalism

(Mallaby 2015).
emerging markets, whose bonds usually bear higher interest rates than
those of high-income economies. The search for high yields can attract a
lot of capital inflows, which, however, will not necessarily remain for the
entire maturity of the bond; in the case of a perceived crisis, even long-
term capital flows will leave the country.
Pension funds have a long-term contract with their clients, who save
now in view of greater consumption capacity in the future. However, to
guarantee a future income to their customers, the pension funds must
continuously shift savings across different types of investments to yield an
annual return at least similar to that of their competitors.19
Money cannot rest; it must endlessly move throughout different mar-
kets and different financial products in view of a surplus value and a posi-
tive sign in the balance sheet.
Financial markets are characterized by a ‘zero sum game’, but they
change the distribution of income and wealth and can either enrich people
and countries or impoverish them.20 All this takes place without the need
to go through either the production process or transportation and storage.
Not only are international financial markets characterized by price
fluctuations; the volatility of prices of financial products is at the origin of
the difference M − M′, which is a necessary condition for the existence of
surplus value. A higher volatility increases the opportunities for speculat-
ing on the difference between the buying and the selling price.
In the financial reproduction cycle, frc, there is a separation between
use and exchange value, with the latter dominating. In Financial
Mercantilism, it is not necessary to go through commodity production
to achieve a surplus value. Equation (5.1) becomes M ⇒ M′, a relation
between two exchange values.
How can money beget more money? How is it possible to have a
value that is greater than itself ‘without an intermediate stage’ (Marx
1867, Vol. 1: 153)? An ‘intermediate stage’ is still there. For the econ-
omy as a whole, physical and social reproduction must be secured; thus
financial reproduction cycle, frc, is better represented as:
M ⇒ (L, La, K&T, Trade, Finance) ⇒ Y ⇒ M′

(5.4)
19 Returns play a key role in the portfolio differentiation decision, but expectations about
possible price gains/losses are the decisive element in buying and selling activities.
20 The relationship between finance, inequality and growth is explored in UNCTAD
(2017: 93-ff).
122 G. VAGGI
The physical inputs and outputs can be objects for speculation; they are
potential elements of ‘derivative’ exchange values, in particular consider-
ing the expectations about their prices. The ‘financial reproduction cycle’
is similar to the capitalistic one, equation (5.4) is very close to (5.2).
But the crucial issue is that People and Planet are now totally irrelevant
aspects. Financial investment decisions are taken with no consideration of
the specific use values involved and of the sustainability of society. In frc
the exchange value is both the starting point and the goal.21
There is still one question: how is the surplus value, ∆M, appropri-
ated? The answer can be found in the second feature of Mercantilism:
the concentration/centralization of market power in the hands of a few
big players. In international finance, there are huge imbalances in the
negotiating power of the actors because of the overwhelming power of
large international investment banks, which can influence the markets by
changing the rules and inventing new products.22
There are at least three ways in which the largest financial organiza-
tions can manipulate the markets23:
• asymmetric access to information

• lack of transparency regarding many financial products and contracts
• some investment opportunities, usually the most lucrative ones, are
accessible only to investors who have a large amount of funds. Small
is not so beautiful.
Agenda 2030 has five areas of critical importance (see Sect. 2.4 above;
two of them are People and Planet. We can imagine that inside the
square brackets of Eqs. (5.2) and (5.4), the capitalistic and financial cycle
respectively, there is also another P, Power, which summarizes the differ-
ent ways in which market and political powers affect the production and
distribution process. P is not a neutral element, there are large power
21 Recall that for Smith wealth is derived from a natural order of investments: first in
agriculture, then the manufacturing sector, then domestic trade, and, finally, foreign trade
(Smith 1776: II.v). The Mercantilists wanted to overturn that order.
22 In 2014, the six largest investment banks, four of them American ones, had 49% of the
global market share by revenue in the equities and investment banking divisions.
23 The capitalistic and financial reproduction cycles are not separate entities but can com-
bine in several ways. The debate about the relationship between financial and industrial
capital dates back to Lenin and Hilferding (Marois 2012).
imbalances among people and countries, in particular when decisions

have to be made about investments and the choice of technologies which
are both the essential component of long-term sustainability.
The next section will provide some indications about the road towards
sustainable development and the SDGs. A re-balancing of economic
powers is needed.
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HTM.
CHAPTER 6
Making Global Partnership Work
Abstract  Sustainable development requires a global partnership, the topic

of SDG 17; but how can partnership work within economic structures
characterized by deep-rooted imbalances? Global partnership can only be
achieved through negotiations and dialogue; however, different stakehold-
ers have very unequal political and economic powers. Re-balancing the
negotiating powers is a leading principle of a global partnership; owner-
ship requires that developing countries should have a stronger voice than
in the past and more policy space in development policies. In the case of
trade, re-balancing requires developing countries to be allowed to protect
their manufacturing sectors. The separation of development finance from
the speculative financial markets would also help long-run investments in
developing countries. Section 6.6 focuses on social protection systems and
on the challenges of development with dignity.
Keyword  Global partnership · Ownership · Development finance ·

Re-balancing · Dignity

https://doi.org/10.1007/978-3-319-54879-1_6
128 G. VAGGI
6.1 ‘To the Lighthouse’1

There is a widespread consensus on sustainable development as a process
of empowerment through freedom and ownership. We can imagine the
components of sustainable development as being inside the lighthouse:
the 17 SDGs and the three dimensions of sustainability and the use val-
ues they represent. This collection is made up of specific use values and
includes human development and human rights, the respect for nature
and other possible end-goals.
However, there are two complications. First, the lighthouse has a
beam which indicates a single direction, although the views of different
partners about how to achieve sustainable development might diverge.
SDGs are there, representing agreed use values, but the paths to sustain-
able development might differ. Exchange values play an important role in
navigation, and each group or country can interpret the direction of the
light beam in its own way.
Second, to reach the lighthouse the boat must sail across the ocean.
The ocean represents the social and economic structures within which
the pursuit of sustainable development must take place. These structures
are dominated by the capitalistic reproduction cycle, Eq. (5.2), in which
the driving force is the search for profit, a surplus value. Chapter 3 pro-
vided a description of the type of environment in which the ship to the
SDGs must sail. The ocean is not calm and there is no stream leading
to the lighthouse. The interests of different economic groups and coun-
tries may come into conflict and exchange values could rule the entire
process.
The first complication has to do with different interpretations of the
path towards sustainable development, the second with the fact that in
the capitalistic reproduction cycle sustainable development is not an end-
goal. Chapter 5 showed how different approaches try to come to terms
with the troubled waters of the ocean.
The true challenge of sustainable development concerns the processes
and practices which all stakeholders should share. The real goal to pur-
sue in the coming years is to assure an effective and fair global partner-
ship among all stakeholders: the topic of SDG 17. In Woolf’s novel, it
took 10 years to reach the lighthouse; much more will be needed to
1 Borrowed from Virginia Woolf’s novel.

6 MAKING GLOBAL PARTNERSHIP WORK 129
achieve empowerment, ownership and social, economic and environmen-

tal sustainability. These will not be achieved in 2030, but let us focus
on improving a development partnership: not a very thrilling conclusion,
though I suspect a highly realistic one. Without much optimism, this
final chapter explores a few ideas.
6.2 Last But Not Least: Sustainable

Development Goal 17
6.2.1 When Means Are More Important Than Ends

Most goals and targets in Agenda 2030 are heavily interconnected (UN
2015, point 55: 13)2 and some goals are clearly instrumental in achiev-
ing other goals. SDG 7 on energy, 9 on infrastructures, 11 on big cit-
ies, 12 on sustainable consumption and production systems,3 even 6 on
clean water and 13 on climate action look like necessary but intermediate
steps, like means. Decent work and inclusive society in SDG 8 and equity
in SDG 10 are very important goal, but this is so because of the specific
nature of the capitalistic social organization.4
In the sustainable reproduction cycle (see Sect. 5.1), some of the
above goals are among the outcomes of the cycle, but they are also very
much among the means. Think of investment decisions about technol-
ogy and sectoral priorities. It is not easy to separate ends and means, and
in a national development plan some means could receive greater atten-
tion than the end-goals.
Whatever the classification of the goals, without a serious partnership
made up of a continuous dialogue and thorough negotiations, the SDGs
will largely remain on paper. This is the only possible and realistic road
ahead for the SDG agenda, which is why SDG 17, the last one is proba-
bly the most important one.5
2 Vaggi (2016: 48) organizes the 17 goals and their targets into four clusters.
3 This goal seems to advocate major social and economic transformations, but the targets
focus mainly on environmental issues: reduce food losses (target 12.3), public procurement
strategies (12.7) and inefficient fossil fuel subsidies (12.c).
4 SDG 10 about reducing inequality represents a very important step forward with
respect to MDGs.
5 Most of the targets of the first 16 goals have to do with negotiations and require a dia-
logue among all the stakeholders.

130 G. VAGGI
All documents associated with the SDGs emphasize the global

partnership (UN-HLP 2013; UN-SG 2014; UN 2015). SDG 17
reads: ‘Strengthen the means of implementation and Revitalize the
Global Partnership for Sustainable Development’ (UN-ECOSOC
2017: 36).6
6.2.2 Country Ownership and Dialogue

Ownership is part of the consensus about development and cooperation
(see Sects. 2.5 and 2.6). Faced with a lot of goals and targets, each coun-
try will have to decide its priorities. It is difficult to imagine a low-in-
come country which could move ahead along all 169 targets and 241
indicators. A country should have a national development plan which
identifies the priorities for goals and means.
The UN Resolution on SDGs maintains that the goals and their tar-
gets are integrated and indivisible (UN 2015, point 55: 13), but the very
same point also indicates that ‘Each government will also decide how
these aspirational and global targets should be incorporated in national
planning processes’ (ibid.). Emphasis on country ownership and national
priorities can be found in different points (ibid., points 66: 29 and 74:
32) and in target 17.15. Respect for national policy space is also men-
tioned in point 21 (ibid.: 6).
The fundamental role of national strategies and country ownership is
also in the Addis Ababa Action Agenda: point 58 promises to ‘align the
activities with national priorities’ (UN-AAAA: 18 and 19). Point 74 con-
tains a commitment ‘to strengthen national ownership and leadership’,
while point 76 deals with ‘effective and durable multi-stakeholder part-
nerships’, stating that these partnerships must ‘support country-driven
priorities and strategies’ (ibid.: 22–23).
There should no longer be donor-driven programs at the country
level. This does not mean that partners should accept any country’s deci-
sion, but that developing countries will set the agenda for the debate
on the national goals and related means.7 Country ownership requires
process of dialogue and negotiations between the country and the other
stakeholders.
6 Thelast of the Millennium Goals, number 8, had a similar theme.

7 Some developing countries are undertaking experiments of devolution, but it is hard to
imagine how they could skip the policies of the central government.
Dialogue and negotiations should be in the name of international

cooperation and take place among traditional and new donors and recip-
ient countries. The new donors are either countries, such as the BRICS
and other emerging economies, but there are also private philanthropy
organizations and the business sector.8
Empowerment, ownership and global partnership require that coop-
eration should be a dialogue among less unequal partners. At pres-
ent, partners are very much different in terms of their wealth, their
role in international trade, their financial means, their knowledge and
their administrative capacities. The re-balancing of negotiating capac-
ities should be the leading principle for achieving a more effective
partnership.
6.3 Re-balancing: Reducing Distances

Re-balancing does not imply an equilibrium but more modestly the
reduction of the differences between the developing countries and the
other stakeholders. Re-balancing the negotiating powers helps to achieve
a fairer game. This might require restrictions for the most powerful
actors and some additional support for the weaker parties.9
Re-balancing the negotiating powers of the different stakeholders
requires more policy space for developing countries. Policy space means
that these countries can adopt policies and take actions which help to
reduce the distance from high income and emerging countries.10
These policies and actions may be at variance with the standard rec-
ommendations of international organizations and with international
agreements, such as the WTO rules. Low- and lower middle-income
countries have a Special and Differential Treatment, SDT, target 10.a of
Agenda 2030 (UN 2015: 21). SDT is justified not only by differences
8 On the BRICS development bank see Griffith-Jones (2014). Agenda 2030 empha-
sizes Public, Private Partnership, PPP; the collaboration between the public and private
sectors and the civil society organizations (UN 2015: 10–11). The World Bank Doing
Business reports emphasize the role of the private sector in fostering economic growth and
development.
9 The need for countervailing forces and a balance of power is found in Atkinson (2015:
123–125, 131, 237). Rodrik asks for a rebalancing of globalization (Rodrik 2017a).
10 The need for the policy space of developing countries is found in target 17.15 (UN
2015: 27). The UNCTAD (2014) Trade and Development Report is entirely dedicated to
the problem of policy space.
132 G. VAGGI
in income per capita and in human development, but also in negotiating

capacities. SDT is linked to the two principles of universality and differ-
entiation (ERD 2015: 310-ff.; UN-SG 2014, n. 84). Universality means
that the SDGs and their leading principles are shared by and apply to all
the stakeholders. Differentiation acknowledges the fact that the contri-
butions to the achievement of the SDGs depend on the different capaci-
ties of the countries.
SDG 17 includes 19 targets divided into 5 groups: finance, technol-
ogy, capacity building, trade and systemic issues (UN-ECOSOC 2017:
36–39). As part of the general principle of re-balancing, the next two
sections will briefly examine some ways to allow and Lower and Lower
Middle Income Countries more policy space in trade and finance.11,12
6.4 Sweet and Sour Trade

Since the 1947 General Agreement on Tariffs and Trade, GATT, trade
liberalization has been regarded as a main cause of economic growth; the
approach has been further fostered with the creation of the World Trade
Organization in 1995. From 1950 to 2000 trade has boomed rising
from 8 to 27% of world GDP. Since the nineties tensions are mounting
among large economies and even more so in recent years, the trade wars
of the Mercantilist age have not yet returned but there are growing con-
frontations on trade flows (see Sect. 3.5).
Apart from some countries in East Asia developing countries have not
benefited of trade liberalization but they have been largely confined to
the role of suppliers of primary commodities (see Sect. 1.4). Trade is a
typical case in which applying the same rules to players with huge dif-
ferences in their economic structures would be unfair and might lead to
inefficient deals. Many developing countries have a dualistic economy
similar to Lewis’s (1954) model (see Sect. 1.3). The overall development
strategy should be based on moving away from labour and resource
intensive manufactures and from low-technology products toward
medium and high-technology sectors. The aim of developing countries is
11 Most SDGs depend on choices about technology, which are interconnected with deci-
sions about trade and finance.

12 The fiscal system is an important dimension of the policy space (UNCTAD 2014:
161–162; Mackie and Williams 2015: 7).

to enjoy some sort of dynamic comparative advantage, which is the rec-

ipe of the new trade theory (Krugman 1986) and avoid to be stuck into
the export of primary commodities.
Lessons from East Asia indicate that industrial policies at the sec-
toral level and export promotion are among the most important tools
to improve productive capacity and change the output structure
(UNCTAD 2014: 92).13 Developing economies need the chance to pur-
sue industrial policies (Rodrik 2017b) which could allow them to dis-
cover the best type of innovative production processes (Hausmann and
Rodrik 2003).
The developmental state has a much wider scope than merely foster-
ing exports and growth (Schmidt 2015). Policies related to education,
infrastructures, research and investment are very effective in supporting
long-run growth (Mazzucato 2013).
Regional Trade Agreements have boomed in recent years. Regional
integration and coordination among LICs and LMICs will help them
achieve stronger negotiating positions between them and the high
income and emerging economies and encourage the establishment of
procedures for consultations at the regional level. Infrastructures, energy,
logistics and tax policy on foreign investments are all issues which could
greatly benefit from coordination at the supranational level. Trade nego-
tiations can be cumbersome. One example is the endless discussions
between the European Union and the African, Caribbean, Pacific (ACP)
countries about the Economic Partnership Agreements, EPAs, the eco-
nomic component of the 2000 Cotonou agreement. Negotiations were
supposed to be completed by 2007, but they went on until 2014. EPAs
had to try to accomplish the WTO reciprocity principle, which is much
less favourable to the ACP countries than are the other trade arrange-
ments with Europe, such as the EBA (Everything but Arms) initiative of
2001.14
13 The support of manufacturing has been widely adopted in the past in all OECD coun-
tries (Chang 2002). Rodrik (2008) discusses the role of industrial policies in a world in
which ‘late comers’ developing countries also face the growing powers of Asian economies
and of China in particular.
14 EBA provided for duty and quota-free access to EU markets for the products—except
arms and ammunitions—of the Least Developed Countries (LDCs), most of which are in
Sub-Saharan Africa (Vaggi and Evans 2007). This is an example of Special and Differential
Treatment.
134 G. VAGGI
In many trade agreements, developing countries benefit from some

flexibility and some exceptions to the general obligations (UNCTAD
2014: 82-ff.). From being an exception, Special and Differential
Treatment should become the rule; SDT in trade is mentioned in target
10.a. of the SDGs.
More policy space for developing countries implies granting them the
possibility to adopt policies which might be classified as neo-mercantilist.
However, re-call the first feature of Mercantilism in Sect. 5.4. The
restraint of domestic demand in high-income countries results in main-
taining and even enlarging the economic differences between a country
and its trading partners. Active industrial and trade policies by low- and
middle- income countries represent a way of reducing the economic dis-
tances from the high income and emerging economies.
Let us quote Rodrik: ‘A development-friendly international trading
regime is one that does much more than enhance poor countries’ access
to markets in the advanced industrial countries. It is one that enables
poor countries to experiment with institutional arrangements and leaves
room for them to devise their own, possibly divergent, solutions to the
developmental bottlenecks that they face’ (Rodrik 2001: 2).15
The protection of the domestic economy by the weakest countries is
both a realistic and an appropriate policy, and it can contribute to reduc-
ing economic imbalances.
6.5 Financing for Development
The first five targets of SDG 17 are dedicated to finance. They include
debt sustainability and Foreign Direct Investments, FDIs, but there is no
mention of the financial system, the focus instead being on the quantita-
tive aspects of the means of financing the SDGs. The 2014 UN Synthesis
Report is more direct and asks for ‘better regulation and more stability
in the international financial and monetary system’ (UN-SG 2014: 22,
n. 95), suggesting the possibility of a financial transaction tax (ibid.: 25,
n. 112). Moreover, the report demands the implementation of ‘compre-
hensive and adequate financial regulations in all countries, as the risk of
another global financial crisis has not been sufficiently reduced’ (ibid.:
25, n. 114).
15 The impact of more trade openness on economic growth depends on the elasticity of
demand of both imports and exports (Thirlwall 2013: 9).

6.5.1 Different Types of Financing for Development: FfD

The way in which finance will be mobilized and directed to the differ-
ent SDGs is more important than the overall availability of funds (ERD
2015: 27, 323). Different types of financial instruments are needed
for different goals/targets.16 FfD requires a country-specific financial
approach and must be tailor-made (Kharas et al. 2014: 17). The UN
group of experts on development finance mentions the need to secure
country ownership in the design and implementation of policies and in
the financing strategies (UN-ICESDF 2014: 8, 18).
Developing countries should try to rely increasingly on domestic pri-
vate and public resources, namely taxes (Touray 2014). But their tax base
and the tax revenue can only increase slowly, there is a possible time-mis-
match between the ability to raise enough domestic resources and the
way in which donors reduce concessional flows (Kharas et al. 2014:
26–27).
Foreign financing is required all the more so considering the number
of goals to be achieved. Different financial opportunities also depend on
the different income levels of the various countries (ERD 2015: 299–
300, 315). Different degrees of concessionality represent an obvious way
of classifying the different types of FfD.
LDCs and LICs must not go on depending on aid; they should go
through a process of ‘graduation’ which implies moving from grants and
fully concessional loans to blended finance and to borrowing in interna-
tional markets. In practice, it might be very difficult to follow an ideal
graduation path, which requires a continuous dialogue between coun-
tries, donors and International Financial Institutions.
The possibility for an economy to graduate and to finance its goals
through international financial markets depends on its capacity to avoid
balance of payments crises, but the ability of a country to react to a cri-
sis depends on its productive structure.17 Even resource-rich countries
are exposed to the risk of insolvency without a major transformation in
16 On the different types of finance for the different development goals, see Kharas et al.
(2014: 7) and the 2014 UN Report (UN-ICESDF 2014: 8, 18). A longer analysis of
development finance is found in (Vaggi 2018: Sects. 5 and 6).
17 In 1997–1998 the depreciation of the South Korean won worked well because the
export composition of the country was fit to take advantage of its competitiveness (see
Sect. 3.2).
136 G. VAGGI
their productive structure.18 This requires time and a process of struc-

tural change; most LDCs and LICs have structurally negative trade and
current accounts, and thus are still accumulating foreign debt.19 Many
LMICs and UMICs have not yet fully recovered from the debt crisis
of the ’80s (UN-ICESDF 2014: 7). The debt to GDP ratios are much
lower than those in the ’80s and ’90s, though they are still in the 40%
range (Tyson 2015, II: 6). Another debt crisis cannot be ruled out, in
particular in the LDCs (Eurodad 2014: 16).
A UN preparatory document from the Addis 2015 Conference on
FfDs indicates that ‘debtors and creditors must share the responsibility
for preventing and resolving unsustainable debt situations’ (UNDESA-
FfD 2015: 9).20 Unfortunately, nothing of that kind is available today.
Debt sustainability analyses have progressed considerably since the debt
crisis in the ’80s; however, the tools and policies to deal with debt dis-
tressed countries are very much the same today as they were thirty years
ago.
Countries should make use of all available tools and policies to slowly
and smoothly open the domestic credit and financial markets to interna-
tional finance.21 LDCs and LMICs should have the possibility of manag-
ing capital inflows and the financial account to favour the truly long-term
flows and penalize the short-term ones (IMF 2011b). As we have seen in
the global financial cycle, flexible exchange rates cannot insulate emerg-
ing economies from financial crises (Rey 2013); direct control of capi-
tal flows is needed to avoid major crises. The above-mentioned strategies
require Special and Differential Treatment for LDCs and LMICs to
allow them to manage their credit and financial systems (Eurodad 2014:
10; UN-AAAA 2015: 25–27, 33).
18 On the importance of the productive structure in the classification of developing coun-
tries, Tezanos and Sumner (2013: 1733, 1737–1738).

19 Resource-poor countries receive very little FDIs and often remittances compensate
for the negative current accounts (Vaggi and Capelli 2016). In many resource-rich coun-
tries, FDIs generate profit repatriation, which has a negative impact on the current account
(ibid.).
20 In early 2014, when the US Federal Reserve announced an increase in interest rates,
‘tapering’, Ghana, Kenya, Tanzania and Ethiopia had either to delay or to cancel some issu-
ances because of expectations about interest rate increases. Simulations suggest a 0.8% neg-
ative impact of ‘tapering’ on GDP growth in SSA (ERD 2015: 139).
21 There is a considerable body of literature which shows that the impact of FDI and
portfolio flows on growth is dubious (Te Velde 2014: 4).

This is part of the general view of re-balancing the different economic

and financial powers, but it is difficult to be optimistic about the possi-
bility of a smooth participation by the weakest countries in international
finance.
Apart from the degree of concessionality, it would also be useful to
classify the different financial resources according to two criteria:
1. whether the resources are short- or long-term;

2. what the real possibilities are for developing countries to lock-in
these flows.
Foreign financial flows should remain in the country long enough to

support development, which is a long-term process.
6.5.2 Development Bonds

Bonds should be long-term, and since 2010, many African countries
have been issuing sovereign bonds, which are mainly denominated in US
dollars (Tyson 2015, I: 3–5, 19). All these bonds are below ‘investment
grade’, and most of these issuances are managed by a lead underwriter
that usually is a global investment bank (ibid.: 6). In Sub-Saharan Africa,
there is a growing domestic bond market in local currencies; naturally,
interest rates on local currency bonds are higher than those on interna-
tional bonds (ibid.: 12).
A 6–7% real growth rate could satisfy the debt sustainability condition,
according to which the debt to GDP ratio does not increase if the inter-
est rate is not above the nominal growth rate (Vaggi and Prizzon 2014).
However, all these countries have negative primary fiscal balances, which
increase the public debt to GDP ratio (Tyson 2015, II: 6–7), as well as
negative current accounts, which increase foreign indebtedness.
The abundance of money on international markets and the search for
high yields (see Sect. 3.2) mean that sometime developing countries’
bonds are oversubscribed. This should not diminish the awareness of the
borrowing risks (Rashid and Stiglitz 2013). Without a global regulatory
system, countries should protect themselves (see IMF 2011a: 51).
Index-linked bonds could help developing countries entering inter-
national financial markets. Bond interest rates could be linked to some
macro magnitudes: GDP growth, export performance and, in the
case of resource-rich countries, the prices of primary commodities.
138 G. VAGGI
The indexation could also refer to the redemption value of the bonds, as
in the case of inflation-linked bonds (Atkinson 2015: 168).22
There are some technical issues to face such as taking either nominal
or real GDP as a benchmark for interest rates. Another issue concerns
the authority which should certify the growth rate, the risk being that
the national government could underestimate growth in order to pay less
interest.
GDP-indexed bonds imply an element of risk sharing, since they
transfer part of the risk to the creditors. Interest payments become
pro-cyclical: interests are higher when the country performs better and
vice versa; GDP-indexed bonds are particularly useful in case of an eco-
nomic slowdown.
Another positive element of these types of bonds are their very long
maturities, a fact which reduces the pressure of foreign debt service on
indebted countries. Index-linked bonds have been adopted in the debt
restructuring processes of Mexico and Argentina and can help to stabi-
lize the debt ratio (Borenzstein and Mauro 2004).23 The disadvantage of
indexed bonds is that they have higher borrowing costs than the equiva-
lent conventional bonds (Olabisi and Stein 2015).24
Indexed bonds are a macroeconomic tool aimed at easing the finan-
cial constraints on developing countries and facilitating their approach to
international markets. There are also development ‘impact bonds’ and
‘social bonds’, which target specific development projects (see http://
www.undp.org/content/sdfinance/en/home/solutions/social-devel-
opment-impact-bonds.html). Other initiatives are dedicated to financing
climate change programs and there is the idea of ‘peace bonds’ to be
used to finance peace initiatives (OECD 2014).
6.5.3 Separate Markets for Development Finance

The tools and policies of the previous section might help to reduce
the chances of speculative activities on the bonds from low-income
22 Indexed bonds can also produce significantly positive welfare effects, mainly by reduc-
ing default risks (Barr et al. 2014).

23 GDP indexed bonds have been indicated as a tool for restructuring the Greek debt
(Goodhart 2015).
24 There are a number of reasons why investors might not like to buy indexed bonds
(Griffith Jones and Sharma 2006).

countries. The group of Experts on Sustainable Development Financing

demands financial market regulations and an international environ-
ment that could ‘remove the sources of international financial volatil-
ity’ and ‘reduce global financial fragility’ (UN-ICESDF 2014: 27, 34,
40). Target 10.5 of the SDGs refers to the ‘regulation and monitor-
ing of global financial markets and institutions’, and debt sustainability
is mentioned in target 17.4. Indicator 10.5.1 of March 2016 calls for:
‘Financial Soundness Indicators’ (UN-IAEG SDGs 2016: 50).25
This is more or less everything we find on financial markets in the
SDGs, the focus being on regulations.26 There are different types of reg-
ulations of financial markets (Panico et al. 2012: 14) and they are highly
necessary, as the 2007 financial crisis has shown. Under the present con-
ditions, financial regulations which could help LICs and MICs to access
foreign financing are very difficult to achieve.
There are such huge differences in negotiating power between finan-
cial investors and LICs and MICs that the same market, the same play-
ing field, does not guarantee a fair game. It would be better to clearly
separate development finance from the speculative activities which char-
acterize international finance. If bonds and other financial tools geared
towards development enjoyed ad hoc markets, procedures and laws,
both the volatility and the risk of default would be highly reduced.
Development is a long-run process of empowerment and sustainability
where the goals are specific use values and should be the outcome of a
sustainable reproduction cycle (see Sect. 5.1), but they are very difficult
to reconcile with the working of the financial reproduction cycle (see
Sect. 5.5), which is fully dominated by the exchange value.
Separate markets for development financing resembles the separa-
tion between the activities of commercial banks and those of investment
banks, which was introduced in 1933 with the Glass-Steagall Act. This
separation was repealed in 1999 by the American Congress with the
approval of the Gramm-Leach-Bliley Financial Services Modernization
Act. Following the financial crisis of 2007–2008, the Dodd–Frank Wall
Street Reform and Consumer Protection Act of July 2010 introduced
25 In the December 2015 version of the same document, indicator 10.5.1 stated:
‘Adoption of a financial transaction tax (Tobin tax) at the global level’. An asterisk pointed
out that the final text had not yet been agreed.
26 Target 8.D of the Millenium Goals was more detailed on the issue of debt sustainabil-
ity. On the improvement of the processes of debt restructuring, see IMF (2014: 4–5).
140 G. VAGGI
many controls and regulations, but it has not separated commercial and
investment banking activities. Coming closer to such a separation is the
Volcker rule, which seeks to prevent US banks from making speculative
investments using the deposits of their customers.27
Compared to the use values and the rights of the sustainable repro-
duction cycle, these are very modest suggestions which might help to
try to re-balance the forces inside the square brackets of the capitalistic
reproduction cycle.
6.6 The Road to Dignity

‘The road to dignity by 2030’ are the opening words in the title of the
UN Synthesis Report in preparation for the 2015 UN General Assembly
on SDGs (UN-SG 2014). It would have been a nice title for Agenda
2030. Article 1 of the 1948 Universal Declaration of Human Rights
opens with the following words: ‘All human beings are born free and
equal in dignity and rights’. A sentence which evokes Rousseau’s works
and recognizes three essential features of the rights of human beings:
freedom, equality and dignity.
Dignity introduces two final issues: the welfare system and capacity
building.
Agenda 2030 mentions the need for social protection systems in each
nation (UN 2015, point 24: 7 and target 1.3: 15). Other targets refer to
elements of what Europeans call the welfare system; for instance, target
3.8 calls for ‘universal health coverage’ and target 11.1 seeks to ‘ensure
access for all to adequate, safe and affordable housing and basic services’
(ibid.: 16 and 22). Social protection is meant to avoid a worsening in the
conditions of the poorest and to leave no one behind (UN-HLP 2013).28
Social protection systems are mentioned in the document by the
group of experts on development finance (UN-ICESDF 2014: 22),
27 A softened version of the rule came into effect on 21 July 2015. On the difficulty of
taming finance, see UNCTAD (2017: 157–159). A more limited financial sector could pro-
vide services more effectively directed at the real economy and at sustaining the real needs
of households and firms (Kay 2015). This is all the more so in the case of long-term devel-
opment finance.
28 A comprehensive system of social protection is already part of the commitment of the
UN member states (Eurodad-Ibis 2015: 6). On the role of welfare systems in development,
see Zupi (2015: 7, 19).
where we also find the term global safety nets (ibid.: 44), an expression
largely used during the debt crisis in the ’80s to indicate policies aimed
at mitigating the negative impact of the Structural Adjustment Programs.
‘Welfare’ has very different meanings in the USA and in Europe.
Whether it is a welfare or a social protection system, a fair, equitable and
inclusive society cannot be established only by providing floors and nets
for those who are left behind. An inclusive society should have structures
and procedures which guarantee a decent life, health and education to
all human beings, because of the universal nature of human rights and
of people’s dignity, not just to mitigate the impact of economic crises
and of natural and manmade disasters. A social protection system is not
meant to mend the wounds but to prevent them, and it is closely linked
to the principle of universality of the SDGs.
A welfare system is adopted in a relatively small number of countries,
mostly in Western Europe; it is a social and political experiment pecu-
liar to the history of Europe. Although it is the outcome of a couple of
centuries of struggles, confrontations and laws, its achievement is quite
recent, going back to World War II.
Capacity-building is a major topic in SDG 17, and target 16.a men-
tions the need to ‘strengthen relevant national institutions….. for build-
ing capacities at all level’. The need to build administrative capacities and
have reliable data is an issue found in targets 17 and 18 of SDG 17 (UN
2015: 23), reappearing again and again in all the preparatory documents
(UN-AAAA 2015, points 125 and 126: 36–37).29 Local governance and
human capital are enablers of human and institutional capacities (ERD
2015: 167 and 171).
Without major improvements in administrative and institutional
capacities, it will be impossible to achieve the SDGs, and global partner-
ship for sustainable development will become an empty statement.
6.7 Conclusions
The road to dignity implies sailing towards a lighthouse which includes
empowerment, ownership, human rights and all the SDGs (see
Sect. 2.6). Re-balancing tries to put in place instruments and policies
to smooth the waves and to reduce the differences among stakeholders
29 The need for better sets of data for development is found in target 17.18 and in point
48 of Agenda 2030 (UN 2015: 12); see also Sachs (2015).

142 G. VAGGI
regarding the route of the light beam and the decisions to be taken
about navigation.30 Re-balancing economic powers is meant to achieve a
more effective partnership and to build a dialogue based on fewer unbal-
anced conditions among all the partners.
This represents a very minimalistic approach, with no overturning of
the social and economic structures. Sections 6.4–6.6 provide indications
which operate inside the capitalistic reproduction cycle; Eq. (5.2) and try
to redress some of the distortions of the crc.
But the capitalistic reproduction cycle is a tool, not and end-goal.
Sustainable development is the end-goal, and it implies the production of
specific use values in terms of output, technologies and the utilization of
resources as defined in the sustainable reproduction cycle, src. There are
no reasons to assume that the crc will lead to sustainable development.
The empowerment of people and countries takes place within specific
social and economic structures; but people and not the structures are the
priority and goal of development. In the history of mankind, no social
and economic structures have been eternal (see Sect. 4.3 above). The
challenge of how to achieve sustainable development inside a capitalis-
tic economy, in which exchange values and the search for profit guide
investment decisions, remains. Trying to gear the capitalistic reproduc-
tion cycle towards sustainable development (see Sect. 5.2) might be very
useful. However if the capitalistic and the sustainable reproduction cycle
should come into conflict, priority should be given to the latter, but
unfortunately today’s balance of power is disproportionately in favour of
the capitalist system.
Re-balancing through negotiations and dialogue is a small step
towards smoothing the ruthlessness of the realm of exchange values and
building fair and decent relationships among all the partners of long-
term sustainable development. Negotiations and dialogue might help to
increase mutual trust, even if this must not be taken for granted.
This is not a very appealing conclusion, and one that is certainly much
less attractive than most of the SDGs; but consider the alternatives. By
2030, some SDGs will be achieved while others will not. However, the
road to sustainable development depends on whether or not there are
improvements in building a global partnership.
30 UNCTAD asks for a global new deal on development (UNCTAD 2017: 152).
This chapter has investigated SDG 17 on global partnership. The last

but one goal, number 16, was not included in the Millennium Goals.
It reads: ‘Promote peaceful and inclusive societies for sustainable devel-
opment, provide access to justice for all and build accountable, effective
and inclusive institutions at all levels’. Quite a challenge. In 1967, Pope
Paul VI wrote: ‘Development, the New Name for Peace’ (Pope Paul VI
1967: 11).
Peace and justice open the way to another story.
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Index
A accumulation, xiv, 3–5, 9, 11–13, 16,

aid effectiveness 53, 54, 61, 66, 75, 76, 87, 91,
Accra Agenda for Action, 43, 45 96, 98–100, 104, 108, 109, 113
country ownership, 43, 45, 130 capitalism, 62, 63, 67, 84, 95, 96,
ownership, 43–45 98, 99, 119, 120
Paris Declaration, 43, 45 capitalist, xiv, 8, 10–12, 15, 18, 19,
Amin, Samir, 15, 19, 20, 119 52, 53, 67, 71, 75, 86, 92,
areas of critical importance 95–100, 104, 107, 110, 112,
partnership, 38, 107, 122 114, 117, 118, 142
peace, 38, 122 capitalistic sector. See sector, modern
people, 38, 105, 107, 122 formation, 17
planet, 38, 105, 107, 122 inflow, 59, 121, 136
prosperity, 38, 107, 122 -labour ratio, 6, 7, 97
Arrow, Kenneth, 12 mobility of, 8, 92, 119
-output ratio, 3, 6
patrimonial capitalism, 62, 63
B rate of return on. See profit, rate of
Bretton Woods, 56, 58 catching up, xii, 1
BRICS, 54, 55, 131 civil society organizations, 37, 41, 43,
45, 131
classical political economy, 11, 21, 104
C founding fathers, xiii, 71, 99
Cantillon, Richard, 79 climate change, 138
capacity building, xv, 46, 107, 132, 140 Conference of Paris (COP 21), 39
capital Colbert, Jean-Baptiste, 78
© The Editor(s) (if applicable) and The Author(s) 2018 165

https://doi.org/10.1007/978-3-319-54879-1
166 Index
Colbertisme, 78 development economics, 20, 83, 99

competition, 6, 53, 64, 65, 70, 88, 89, dignity, xv, 35, 38, 140, 141
99, 106, 109, 110, 112, 114, 118 distribution
monopolistic, 7 functional, 7, 62
oligopolistic, 78, 118 income, xiii, 7, 14, 17, 32, 51, 52,
perfect, 5 61–64, 76, 93, 108, 114, 115,
Comprehensive Development 118, 121
Framework (CDF), 42, 45 wealth, 52
convergence, xii, 1, 5, 8, 17, 18, 26, division of labour, xiv, 75, 79, 86, 91, 106
52, 68 international, xii, 1, 14, 15, 18, 55,
corn, 80, 81, 92, 105 113, 115
model, 82, 92 Domar, Evsey, 2
donors, 43, 135
new, xiii, 51, 54, 131
D old, 42, 45
debt dualism, 11, 113
cancellation, 57 dualistic economies, 10, 132
foreign, xiii, 13, 57, 136, 138 dualistic view, xii
Heavily Indebted Poor Countries dual society, 18
(HIPC), 44, 57
demand
aggregate, 4, 12, 17, 114 E
domestic, 13, 17, 69, 70, 88, 114, economic cycle, 2, 4
117, 118, 134 economic growth
effective, 98, 99, 108, 109, 113, degrowth, xiv
118 extensive growth, 11
foreign, 13, 82, 117 GDP growth, 1, 51, 55, 132
international. See foreign growth. See economic growth
dependence theorist, 18 growth accounting, 9
metropolis-satellite, 19 growth diagnostic, 113
deregulation, 22, 69 growth model, 2, 53
devaluation, 16, 59 growth rate, 3, 4, 9, 55, 64, 70
currency depreciation. See growth theory. See growth model
devaluation intensive growth, 87
developing countries, xii–xv, 1, 9–11, long-run growth, 2, 4, 112
13, 15–17, 20, 22, 26, 28, 33, natural rate of growth, 4, 6
34, 41, 43, 45, 46, 51, 54, 56, rate of growth. See growth rate
58–60, 63, 64, 66, 69–71, 77, warranted, 3, 5, 66
81, 82, 91, 103, 113–115, 118, economic power, xi, xii, xv, 54, 76, 89,
120, 130–138 91, 119, 123, 142
developmental state, 133 economic structure, 13, 15, 71, 107,
development cooperation, xii, 43, 51 113, 132
conditionality, xiii emerging countries, 51, 60, 66, 69, 131
Index 167
empowerment, xi–xiii, xv, 25, 44–46, G

108, 111, 128, 129, 131, 139, 141 goods, 3, 21, 30, 34, 35, 54, 68, 76,
enabling environment, 27 79, 83, 92, 97, 105, 106, 108,
Enlightenment, xiv, 75, 76, 85, 90, 95 109, 114, 116, 120
exports consumer, 16
industries, 20, 53 manufactured, 15, 16
-led growth, 13, 54, 78, 114 tradable, 104
net, 4 governance, xiv, 141
subsidies, 16 good, xii, 25, 84
great depression, 2
Gross Domestic Product (GDP), xiii,
F 1, 21, 36, 51, 54, 55, 59, 61, 64,
factors of production, 5–7, 9, 18, 19, 21 69, 76, 86, 104, 108, 113, 115,
finance 132, 136–138
bond, 56, 59, 120, 138, 139 GDP per capita, 30
derivative, 55, 58, 59
development, xii, 67, 135, 138–140
financial bubble, 59, 65 H
financial crises, xiii, 51, 56, 58–60, 136 Harrod-Domar, 2
financial instruments. See financial Harrod, Roy, 1–6, 66
tools heterodox, xii
financial liberalization, 56, 64, 117 approach, 2
financial markets, xiii, 21, 55, 56, high income countries, 54, 69, 131,
58, 60, 65–68, 71, 120, 121, 133, 134
135–137, 139 Hobbes, Thomas, 84
financial tools, 139 human development
financing for development, 42, 43, capabilities approach, 29
134 capability, 31
international finance, 51, 52, 55, education, xii, 70, 71
56, 62, 68, 118, 122, 136, health, xii, 25, 33
137, 139 Human Development Index (HDI),
new financial tools, xiii 29–32, 36
over the counter (OTC), 59 Human Development Report
short-term loan, 59 (HDR), xii, 25, 26, 29, 31,
sub-prime crisis, xiii, 55 32, 35
fiscal policy human rights, xii–xiv, 25, 31, 39, 75,
fiscal austerity, 69 83, 128, 141
fiscal balance, 137 Hume, David, 69, 83, 85
tax, 63 money-specie flow, 85
food, xiv, 11, 14, 79–81, 83, 87, 98, hunger, 39, 83, 106
105, 120, 129
security, 28, 106
Frank, Andre Gunder, 18, 19
168 Index
I J
imbalance, xiii, xv, 17, 51, 52, 68–71, Jolly, Richard, 14
84, 88, 89, 91, 108, 109, 119,
122, 123, 134
structural, 117 K
import substitution, 1, 20 Kaldor, Nicholas, 10–13
industrialization, 16 Keynes, John Maynard
incentive, xiv, 53, 71, 81, 104, 109, Keynesian, xii, 2, 4, 65, 103, 112,
110, 112 114, 115
income, xiii, 3–5, 9, 12, 14, 16–18, liquidity trap, 65
29, 30, 34, 35, 41, 43, 54, 58, Kuznets, Simon, 61, 62, 67
60, 61, 63–67, 70, 71, 76, 77, Kuznets curve, 61, 63, 64
83, 86, 90, 117, 121, 135
elasticity, 13
per capita, xii, 1, 5, 8, 8, 9, 18, 25, L
30–32, 34, 36, 52, 55, 57, 61, labour
63, 64, 66, 68, 115, 132 decent work, 14, 90
indicators of development disguised unemployment, 11
composite index, 29 employment, xiv, 7
dashboard, 37 full employment, 6, 7, 14, 90
industrial policies, 20, 66, 113, 133 productivity, xiv, 10–12, 66, 75, 76,
inequality, 14, 16, 18, 32, 40, 61, 62, 83, 86, 87, 93, 97–99, 108,
64, 71, 85, 91, 112, 117, 121, 129 118
concentration, 64, 67 surplus, 10, 11
institutions, xiv, 18, 21, 37, 45, 61, unemployment, 11
64, 91, 99, 103, 111–113, 135, wage, 7, 89, 98
139, 141, 143 land
interest rate, 7, 59–61, 65, 67, 121, landlords, 81, 84, 86, 89, 92, 96,
136, 137 105
international aid, 13, 56 rent, 81
international cooperation, xii, xiii, 8, Latouche, Serge, 116
25, 31, 40, 42, 43, 51, 71, 131 Lewis, William Arthur, 1, 10, 11, 76,
International Labour organization 83, 87, 132
(ILO), 10, 14, 70 liberalization, 22, 41, 64, 117, 132
International Monetary Fund (IMF), Locke, John, 83
40, 41, 57, 59, 67, 118, 136, long-term, 120, 121, 123, 136, 137,
137, 139 140, 142
investment, xiv, 3, 4, 6, 7, 11, 12, 17, lost decade, 26, 57
27, 53, 54, 59, 61, 65, 66, 68, low income countries, xiii, xv, 5, 8, 26,
77, 83, 88, 100, 103, 104, 106, 52, 54–56, 66, 68, 70, 130, 138
108, 109, 113, 114, 121–123, Lucas, Robert, 20
127, 129, 133, 137, 139, 142 Luxemburg, Rosa, 99
Foreign Direct Investment, 56, 117
Index 169
M backwash effect, 17
Machiavelli, Niccolò, 84 circular cumulative causation, 17
mainstream, xii, xiv, 2, 32, 52, 75, 97, cumulative causation, 13
100, 113, 115 spread effect, 17, 18
market, xii, xiv, 1–3, 6, 7, 10, 12, 16,
20, 21, 32, 53, 54, 56, 59–61, 68,
69, 78, 82, 85, 86, 88–91, 96, N
100, 104, 109, 110, 112, 113, national accounting
116–122, 133–135, 137–139 balance of payments, 13, 114, 135
free, 5 current account, 3, 13, 54, 59, 68,
Marx, Karl 117, 136, 137
economic base, 95 financial account, 64, 136
industrial reserve army, 98 fiscal deficit, 16
Marxian, xii, xiv, 15, 18, 19 natural resources, xii, xiv, 25, 27, 28,
modes of production, 95, 98, 99 31, 85, 95, 100, 105, 107, 115,
organic composition of capital, 97 116
rate of surplus value, 97, 98 necessaries, xi, xv, 14, 15, 21, 26,
relationships of production, 95 28–31, 34, 35, 38, 41, 42, 46,
Social Formation (SF), 95 55, 79, 80, 84, 86, 93, 97, 104,
Mercantilism 106, 108, 113, 116, 121, 129,
Financial Mercantilism, xv, 103, 139
119–121 needs, 20, 27, 28, 30, 33, 36, 71, 96,
Mercantilist, xiv, 60, 75–78, 85, 88, 100, 116, 140
103, 114, 117–120, 122, 132, basic, xiv, 10, 14, 27, 35, 39, 76,
134 79, 105
Mercantilist period, xiii, 76, 117 neo-classical economics, 2
neo-mercantilism, xv, 118 New Deal, 2, 142
migration, xiii, 51, 52, 68, 70, 71 New Institutional Economics
remittances, 56 Coase, Ronald, 111
Millennium Development Goals North, Douglas, 111
(MDG) Newly Industrializing Economies
global partnership, xiii, 25, 32, 40 (NIEs), 53, 63
Millennium Declaration, 32, 39
Minsky, Hyman, 58
mitigation, 8 O
monetary policy Organization for Economic
inflation, 65 Cooperation and Development
Quantitative Easing (QE), 60 (OECD), 36, 40, 56, 133, 138
tapering, 60 Development Assistance Committee
Montesquieu, Charles-Louis, xiv, 75, 84 (DAC), 42, 54
division of powers, 83 outcome-approach, 44
Mun, Thomas, 77, 119
Myrdal, Gunnar
170 Index
P duties, 16, 92, 93

Palma, Gabriel, 55, 64, 71 infant industries, 16
Palma ratio, 64 Purchasing Power Parities (PPP), 30,
Petty, William, xiv, 75, 78–80, 93, 34
100, 105, 106
Physiocracy, 80–82
Physiocrat, 82 Q
Piketty, Thomas, 62, 63, 67, 68 Quesnay, François, xiv, 75, 79–82, 84,
policy space, xv, 113, 127, 130–132, 86, 87, 93, 94, 105, 106
134
population, xiii, 4, 9, 17, 28, 30, 31,
51, 55, 62–65, 70, 80, 91, 93 R
ageing society, 65, 67 Randomized Control Trials (RCTs),
demography, 65, 67 xiv, 103, 110, 111
growth, 5, 6, 11, 65, 93, 96, 100 rate of interest, 4, 88
poverty Zero Bound Level (ZBL), 65
deprivation, 35 rational expectations
extreme, 32–34, 39, 55 game theory, 110
international poverty line, 34 market engineering framework, 110
labouring poor, 89, 90, 99 mechanism design framework, 110
Multidimensional Poverty Index Ravaillon, Martin, 34
(MPI), 35 re-balancing, xi, xii, xv, 123, 127, 131,
Poverty Reduction Strategy Papers 132, 137, 141, 142
(PRSP), 44 reproduction, xiv, 75, 78, 80, 82, 84,
reduction, xiii 86, 93, 98, 106, 113
trap, 17 cycle, xiv, xv, 103, 105–108,
Prebisch, Raùl, 15–17 114–116, 119–122, 128, 129,
primary goods, 15, 77 139, 140, 142
production cycle, 80, 105 Ricardo, David, xiv, 16, 75, 91–94,
production function, 3, 6, 7, 9, 11, 96, 100, 106
12, 79 Rodrik, Dani, 41, 113, 115, 131, 133,
productivity, 12, 13, 16, 17, 79–81, 134
83, 106, 116 Roosevelt, Franklin Delano, 2
marginal, 7–11, 16 Rostow, Walt Whitman, 10, 18
output per worker, 8, 12 Rousseau, Jean-Jacques, 83, 85, 140
Total Factor Productivity (TFP), 9
profit
-investment nexus, 53 S
profitability, xiv, 8, 28, 88, 92, 93, savings
97, 99, 100, 106, 107, 117 glut, 65, 66
rate of, xiv, 83, 88, 92, 97, 98 propensity to save, 3, 5
protectionism, 76, 109 saving ratio. See propensity to save
Index 171
scale structural change, xii, 20, 54, 136

decreasing returns to, 13 structuralist economics, 15
diseconomies of. See decreasing centre-periphery, 19
returns to subsistence goods, 10, 93
increasing returns to, 12, 13, 17, substitution, 6, 16, 20
87, 91 perfect, 6
returns to, 6, 8, 13 Summers, Larry, 65
sector supply-side, 4, 88
agriculture, 12, 80, 81, 94 sustainable development
manufacturing, 10, 12, 13, 79, 94, Agenda 2030, 37, 39, 62, 71, 85,
122, 127 100, 105, 107, 122, 129, 131,
modern, 10, 11, 16 140, 141
primary, 13, 83 Brundtland Report, xii, 25–28, 107
private, 21, 28, 42, 43, 131 economic sustainability, 14, 26, 39,
productive, 11, 83, 87 71, 90
subsistence. See traditional environemental sustainability, 39
traditional, 10, 11, 16 Sustainable Development Goals
unproductive, 11, 83 (SDGs), xi, xii, xiv, xv, 25, 28, 33,
Seers, Dudley, 10, 14, 70 37–39, 43, 44, 55, 56, 62, 70,
self-interest, xiv, 85, 100, 109 71, 80, 91, 103, 104, 106, 109,
Sen, Amartya, 26, 29–31, 36, 76 115, 116, 123, 128–130, 132,
Smith, Adam, xiv, 29, 31, 35, 75, 78, 134, 139–142
79, 81, 83, 84, 86–91, 93, 94,
100, 106, 118, 122
Social and Economic Structures (SES), T
xi, xii, xv, 1, 2, 84, 104, 111, 113, technical change, 10, 108
128, 142 neutral, 9
social safety net, 41 technical progress, xiv, 5, 8–12, 66,
Solow, Robert Merton, 1, 2, 5–9, 11, 76, 81, 87, 91, 93
66, 67 exogenous, 9, 12
Solow residual, 9 technology, xii, xiv, xv, 3–7, 15, 16,
stationary state, 8 27, 28, 54, 79, 80, 83, 87, 95,
steady state. See stationary state 100, 105–108, 110, 123, 129,
stages, xiv, 10, 12, 13, 18, 29, 39, 75, 132, 142
87, 105, 106, 111, 119, 121 trade
commercial, 85, 90, 96 carry, 60
four, 84, 85, 99 comparative advantage, 91, 92, 133
stagnation free, xiv, 75, 76, 82, 84, 91–93,
secular, xiii, xiv, 4, 51, 52, 65, 66, 118, 119
71, 108, 117 Special Differential Treatment
state intervention, 17, 21, 115, 118 (SDT), 131, 134
172 Index
trade cycle. See economic cycle Verdoorn, Petrus, 12

transnational groups, 53
trickle down, xii, 5, 32, 41, 61, 64,
104 W
wage goods, 87, 92, 93
Washington Consensus, xiii, 25, 26,
U 41, 53
Underdevelopment, 15, 18 Structural Adjustment Programs
United Nations (UN), 14, 15, 26–28, (SAPs), 21, 40, 41, 141
32, 37–39, 43, 83, 106, 129– wealth
132, 135, 136, 140, 141 artificial, 77, 78
unorthodox, 20 national, 76, 77, 79, 86
natural, 77
welfare system
V protection, 140, 141
value safety nets, 141
exchange, xiv, xv, 71, 75, 82, 86, social security, 63
93, 94, 96, 97, 99, 100, well-being, 25, 30, 35, 36, 104, 108,
103–110, 115–117, 119, 121, 109, 112, 116
122, 128, 139, 142 work. See labour
use, xiv, 71, 75, 86, 93, 94, 96, 100, World Bank (WB), 14, 30, 34, 40–42,
103–110, 115, 116, 119–122, 44, 45, 53, 57, 111, 118, 131
128, 139, 140, 142

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Development

ISBN 978-3-319-54878-4 ISBN 978-3-319-54879-1 (eBook)

Library of Congress Control Number: 2018958597

© The Editor(s) (if applicable) and The Author(s) 2018

Cover credit: © Harvey Loake

I want to thank Marta Marson, who has greatly helped me

1 In the Beginning, There Was Economic Growth 1

2 Towards a Broader Definition of Development 25

3 The Economy Strikes Back; Convergence, Divergence

4 The Founding Fathers and the Long-Run Visions 75

5 Sustainable Reproduction, on Use and Exchange Values 103

6 Making Global Partnership Work 127

Sections 2.5 and 2.6 examine changes in the approach to international

resources and favour a different system of production and consumption

Abstract After World War II, development was regarded as an increase

Keywords Economic growth · Convergence · Structuralism ·

Once upon a time, there was economic growth. Development was

© The Author(s) 2018 1

With no pretence of comprehensiveness, this chapter presents some

1.1 Harrod: When the Economic Cycle

Harrod’s contribution to economics, see Besomi (1999).

published The Trade Cycle (Oxford: Clarendon Press).

A1. Technology is characterized by a fixed ratio of capital to output: the

G is the growth rate of output, ΔY/Y. With a fixed C, economic growth

tion, which is not necessarily only physical capital.

incremental capital–output ratio, ΔK/ΔY.

Apart from the second condition, which is concerned with technol-

1.2 ‘Trickle Down’ Growth and Convergence.

1.2.1 Equilibrium Growth

Technology is such that there is perfect substitution between the

8 Solow considers a typical neoclassical production function of the Cobb–Douglas type

is much more relevant.

10 The remunerations of the factors of production depend on their marginal productivity;

Solow’s function shows decreasing marginal productivity.

1.2.3 The ‘Steady State’ and the Technical Progress Puzzle

the economy is equal to that of population, with no improvements in

to developing countries, Thirlwall (2011a: 158–162).

of the economy which cannot be ascribed to the increases in the quan-

1.3 Off the Main Track: Dualistic Economies

1.3.1 Lewis: The Dualistic Structure and Surplus Labour

try before the ‘take-off’ stage (Rostow 1960).

1.3.2 Kaldor and Technical Progress

‘knowledge’…depends upon the rate of accumulation of capital itself”

theory appear also in Arrow and Hahn (1971).

productivity increases in the order of 0.5% (Targetti and Foti 1997).

Kaldor’s view of economic growth integrates three elements: increas-

1.3.3 Beyond Economic Growth: Basic Needs and Employment

dency of the World Bank between 1968 and 1981.

aspirations and opportunities (Gough 2015).

1.4 The Structures of Capitalist Economies

1.4.1 The Structuralist Approach in Latin America

Fernando Cardoso, Albert Hirschman, Ragnar Nurske, Paul Rosenstein-Rodan and

Nations Conference on Trade and Development.

‘periphery’. Prebisch emphasizes inequalities between exporters of manu-

income distribution patterns. Some minority groups can diversify their

1.4.2 Gunnar Myrdal: Circular Cumulative Causation

tives to the neoclassical growth model (Krugman 1994).

economic activity away from poor areas. ‘Backwash’ effects prevail in

1.4.3 The Marxian Approach and the International Division

While rejecting the ‘dual society’ thesis, Frank proposes a model

1.5 Market Efficiency and Rational Agents

when talking about finance. Collectively, economic agents behave in a way

supposed to restore the economic viability of developing countries after

Abstract  After World War II, development was regarded as an increase

Keywords  Economic growth · Convergence · Structuralism ·

1.2 ‘Trickle Down’ Growth and Convergence.

1.2.3 The ‘Steady State’ and the Technical Progress Puzzle

1.3.1 Lewis: The Dualistic Structure and Surplus Labour

1.3.2 Kaldor and Technical Progress

1.3.3 Beyond Economic Growth: Basic Needs and Employment

1.4 The Structures of Capitalist Economies

1.4.1 The Structuralist Approach in Latin America

1.5 Market Efficiency and Rational Agents

Abstract  Since 1980, the notion of development has expanded to

Keywords  Human development · Sustainable Development Goals ·

the work of Amartya Sen, who has provided some decisive contributions

2.1 Human Development and the Millennium

by the World Bank and are revised every 6–7 years (http://www.worldbank.org/en/pro-

27–29) and Ravallion et al. (2009).

2.4.1 The Road to the SDGs

2.4.2 Old and New Goals

Table 2.1 Old and new goals and the five Ps

Table 2.1 presents a simple classification of the old and new goals.

2.5.1 The Washington Consensus and Conditionality

2.5.2 From Aid Effectiveness to Global Partnership

2.6 Bridging Empowerment and Ownership

29 ‘Mutual accountability assumes a more equal balance of power’ (Watson-Grant et al.

Abstract  Major changes have characterized the international economy

Keywords  Asian growth · International finance · Inequalities ·

1. the economic growth in Asia;

3. the worsening of income and wealth distribution;

3.2.1 The Bright and the Dark Sides of International Finance