Bachelor Thesis Politics of Development Mees Kraaijenbrink 10787038 28/03/2018 Sebastian Krapohl 11274 words
The Ricardian and Kaldorian approach in a modern society - The cases of Argentina and Chile –
Abstract:
In this thesis research has been performed to understand why economic growth over the years differs between two countries which started in comparable economic and political conditions. The main research was aimed at understanding if and if so, an underlying strategy is the main differentiator or other conditions and circumstances play a more significant role.
The two countries and the two theories that were researched, are Chile, respectively Argentina and Ricardo’s Principle of Comparative Advantage and Kaldor’s a Model of
Economic Growth.
After the research the conclusion is that a strategy based on Ricardo’s Principle of Comparative Advantage lead to more economic growth however, it is not sufficient to leave it with this. In this thesis a closer look is taken towards the economic and political situation in these countries and the following can be concluded from the case descriptions. The countries started in a similar position but developed different. As can be seen during the Seventies in Chile and in the beginning of 2000, it is not only the strategy that matters. It is a combination of different factors. The regime and the economic institutions played a crucial role in the development of both countries. If the institutions would have been more open towards the people and if they would have created a level playfield, the result would have been higher economic growth than in a situation where this was not the case. To conclude: the Ricardian strategy combined with the conditions from Robinson and Acemoglu led to development and the most economic growth.
Content
1. Introduction
2. Modernisation theory
3. Ricardo’s Principle of Comparative Advantage 4. Institutionalist approach
5. Kaldor’s Model of Economic Growth 6. Method
7. Argentinian case description 8. Chilean case description 9. Limitation of the research 10. Conclusion
1. Introduction
The Western European countries started to develop their economies in the seventeenth century. The Western European countries started to surpass the rest of the world when they started to industrialize. To this day, the rest of the world is still trying to make up for the gap created centuries ago. The industrialisation of Western Europe created a new dimension of economic inequality. This new kind of economic inequality meant substantial differences in income between countries, which are still present now (Kingsbury et al.; 2016; 4-7). Before the industrialisation, economic inequality existed mainly within countries and was not considered in relation to other countries (think of kings, nobility, merchants, citizens and peasants). Subsequent to the industrialisation and the initiation of world trade, this started to change (Ibid.; 32-34). Economic inequality was increasingly used to compare countries with each other. After the industrialization Western countries established their hegemonic position and other countries compared themselves with the Western countries. The other countries tried to make up for this economic inequality with different policies.
In this paper, the main strategies to develop an economy and the main strategies on how to reduce this inequality will be discussed, analysed and evaluated. Also, in this paper two different country cases will be used that have both adopted different economic strategies and an analysis will be given how these strategies affected their economic positions in the world (Ibid.; 9-11).
The strategies that will be discussed are the Kaldor’s Model of Economic Growth (hereafter Kaldorian strategy) and Ricardo’s Principle of Comparative Advantage (hereafter Ricardian strategy). Both strategies have their foundation in two mainstream theories about
economic development. Therefore, both mainstream development theories will also be discussed. These are the modernisation theory and the institutionalist approach; these two theories propose both different views on why states end up unequal. The Ricardian and Kaldorian strategy both propose a clear view on how countries should develop their
economy. The Ricardian strategy which is part of the neoclassical theory, describes a rather marginal role for the state. In this theory, the state should facilitate the market and leave power relations as they are. The institutionalist theory, and thus the Kaldorian strategy, approaches this differently. This theory has a crucial role for the state and its institutions. The state should not only facilitate the market, but it should also determine its course. The institutional theory does not deny the neo-classical theory, but states that it is more
complicated than pure economics. This position is called the intermediate position: it states that the global markets create a hierarchy of potential production sites worldwide. In these regions, the incomes differ, and this income difference creates a hierarchy in economic positions. Institutions and policies ultimately determine the place of a country in the hierarchy. States can either accept these forces or try to overcome them.
The purpose of this paper is to answer the following question: does an open trade policy or a policy with state interventions leads to higher sustainable economic growth? The existing literature does describe how both strategies influence economies, but it does not put one strategy above the other. Moreover, there is insufficient evidence to conclude which of the two strategies works better for a country even when they have similar starting
positions. This paper will therefore contribute by analysing two countries in which different strategies were applied but were equal on a multitude of aspects, namely religiousness, colonialism, climate and economic situation. (Wigell; 2017) (Grandin;2005).
As stated, the cases that will be used to answer the research question are Argentina and Chile. Both countries were not industrialised countries and had a big gap to fill at the beginning of the industrialisation. The way they tried to develop their economy throughout the years differed in a substantial way and this makes the comparison of both countries suitable to answer the research question. The rest of this paper will be dedicated to the investigation of the consequences of the applied strategy for the respective economic growth. Therefore, a conceptualisation of the theories will be discussed in the theoretical
framework. Next to this, the context in which these countries have operated, and the consequences for the residing citizens will be described through an analysis of the economic background of both countries, leading to a comparison of both countries and a view which strategy eventually led to more economic growth.
Theoretical Framework
Since the start of economic development there has been economic underdevelopment. Throughout the years there have been multiple explanations for this economic
underdevelopment. Both development theories surfaced when the modernisation theory was dominant (Medeiros; 2013). Both theories do not suggest changing the whole capitalist system but rather propose changing factors within the system. Together with the
exponential economic growth during the industrial revolution, theories were born why some countries develop and why some countries cannot fill the gap with the developing countries (Ibid). There are two big developing strategies which are dominant in the world when it comes to development: one strategy proposes development with a strong state and a limited open market; this comes often with protectionism. The other strategy relies on an open market strategy (Stillwell; 2012; 58-60). In the literature, there are two interconnected theories which can be linked to these two developing strategies: The Modernisation Theory and the Theory of Institutionalism. These theories will be explained and further investigated to give an explanation of why countries develop unequal. Thereafter, they will be linked to the development strategies from David Ricardo and Nikolas Kaldor and the results of the strategies will be investigated by analysing two countries who implemented these strategies.
2. Modernisation theory
This neoliberal theory was developed in the late 19th century. The theorists believed that growth in a developed country could contribute to growth in an underdeveloped or
developing country. This theory is believed to be more dynamic than the static dependency or world system theory, but it has proven to be as controversial and elusive (Kingsbury et al; 2016; 83-84).
The Pareto efficiency model is central in the neoliberal tradition; this model gives an overview of supply and demand and how a market equilibrium is reached. According to the Pareto efficiency model the market will be inefficient when the optimum (market balance) has not been reached. The optimum is reached when no re-allocation of resources can be made without one person benefitting without someone else being worsened. As long as the optimum is not reached, supply and demand will not optimally meet. Tariffs (taxation) lead to situations where the Pareto optimum is further out of reach; this is why the neoliberal tradition advocates that the removal of trade restrictions (tariffs, taxation) leads to a better and a more efficient market. The theorists believed that poverty could be decreased through the removal of trade barriers, large investments and free exchange of technology (Krugman et al; 2015; 269-270).
Central in the neoliberal theory is the case against tariffs. The case for free trade is the reverse of a cost-benefit analysis of a tariff. A tariff will cause a loss to the economy because it will lead to an imbalance in the market. In this scenario, the market cannot efficiently locate the equilibrium price, and this distorts the economic incentives of both producers and consumers. A tariff leads to higher prices and this will lead to higher supply but less demand. In conclusion, tariffs are not good for an economy. This is the main reason why the neoliberal tradition is supporting free trade (Woller: 1994).
So far, the model is simple and straightforward. In the last century, however, the model has become more complex with a new form of tradable aspects. The introduction of technology gave the neoliberals a new challenge. For it suddenly seemed better for
countries to develop a technology and keep it for themselves, in order to produce against lower costs. The neoliberal school addressed this challenge with their view of sharing of technology. In the eyes of a neoliberal competition is good. Competitions lead to more efficiency and better products. This pro-competition view is incorporated in the just stated technology challenge: although keeping technological insights to yourself can be beneficial in the short run, it will lead to less incentives to keep on developing your technology and this will eventually result in a worse position than if the country would have shared its
technology (Ibid).
Technology has also a new role in the modernisation theory and the exchange of technology developments is crucial for developing countries in the modern world because it has a considerable impact on their industry. When technology is not exchanged freely, this
leads to higher costs of creating the new technologies themselves, especially when there is already a shortage of knowledge on this subject in the country. The equilibrium rate of growth in the developing country depends on the costs of re-creating the new techniques for the country but also on the already available knowledge on the subject in the country. Whether the developing country will benefit from this technology development, depends on cost of innovation and imitation. If the cost of innovation is higher than the cost of imitation, the developing country will not be able to reduce the gap with the developed countries. In this line of thinking, it is natural to assume that if the country has more openness, the cost of imitation will be lower, and it will therefore grow faster than closed market countries
(Edwards; 1998).
Within the modernisation theory it is now clear why free trade and free exchange of technology can be beneficial for all and can lead to economic growth. Before it is outlined how the Ricardo’s Principle of Comparative Advantage fits into the neo-liberal theory, the Theory of Rostow is conceptually explained. In this theory, he will give a time line and a clear view on which stages a developmental country goes through. (Scott, 1195 and Kraft 2007). In Rostow’s stages of Economic Growth (Rostow, 1960), he adds institutions to the stages he distinguishes in his theory that is based on the neoliberal tradition. Rostow believed that development was a developing model over time to achieve economic growth and
modernisation. He describes five stages of development and in each stage, he identifies the social structures (institutions) as an integral part of his model. The five stages are:
Traditional society, Preconditions for take-off, Take-off, Drive to maturity and Age of high mass consumption. The first stage of development is the traditional society. In this stage, the nation’s economy has a limited production function because of the absence of modern technologies and a limited increase in output level, where stability is prioritised, and change is seen negatively. The main form of labour is manual labour and most of the production is for own use and not for trade (Rostow; 1960: 4-8).
The second stage of economic growth (pre-conditions to “take-off”) is a process of change for economies and the start of conditions for economic growth. In this stage society is subject to a fundamental change, triggered by external demand for raw materials and is included in the development of national identity and shared economic interests. They leave their current economic, socio-political and technical dimension behind and develop these towards the next stage. The economic dimension changes from an agricultural to an
industrial or manufactural society at a slow pace. Next to this, trade will develop across borders, leading to international markets. Lastly, the surplus which is created will grow. Rostow points out that it is important that this surplus is, in this stage, being used as investments for a more self-sustained growth for the economy in a later stage. This investment should be in infrastructure or technological advancements. (Rostow; 1960; 9).
The Third stage is the Take-off stage in which the economic growth starts to ‘take-off’. This stage comes with a dynamic economic growth, political change and technological development. The goods-producing (“secondary”) sector expands quickly and the ratio between secondary and primary sectors shifts quickly to secondary. This all occurs when there is self-sustained economic growth and society is driven by economic mechanisms. This means that economic growth has become a mutual goal in society. To make a full transition from the beginning until the end of the third stage will take as long as fifty to hundred years. Rostow believes there are three requirements for an economy to fully take-off. First, the rate of productive investment should be above five to ten percent of national income. Second, there should be a high rate of growth in one or more manufacturing sectors. Third, the existence of a political, social or institutional framework in which the impulses of expansion of the system are exploited into a potential external economy. (Rostow; 1960; 10).
During the fourth stage ‘drive to maturity’, there has been a long interval of sustained growth and a period has come where the country has ‘effectively applied the
range of modern technology to the bulk of its resources’ (ibid.). Now modern technology has
spread throughout the whole economy and ten to twenty percent of national income is invested. The economy significantly changes as technology improves and new industries arise whereas the elder industries collapse in this stage, a nation’s economy finds its place within the international economy. This can be reframed as the leading production sectors in the economy are determined by nature of resource endowments. Or, to put it differently, their leading sector is producing something in which they are best, so where they have a comparative advantage and can produce enough of it (Rostow; 1960; 10-11).
The fifth and the final stage is the stage of high mass consumption; it is the stage in which most western countries nowadays are the concerns of people in this stage are being discussed by Rostow because they already have the economic welfare and a better position in society. Therefore, they do not worry about basic needs and rather focus on
entertainment. In a society of high mass consumption, people can choose on what to focus on, because they perceive no real economic struggle neither have to worry about their position in society. They worry about other issues, such as security issues, equality and developing additional luxuries. A big critique on this last stage is that it assumes that countries will only worry about domestic needs and do not worry about needs of others or other countries (Rostow; 1960; 12-16).
In conclusion, Rostow confirms why this liberal tradition contends that keeping cost of exchange in technology low, effective use of investments letting trade and economic mechanism spread throughout society and find your industrial specialisation is so important for a country that wants to develop. The role of the state is to make up for market failures, facilitate open markets, take down al trade restrictions and privatise industry (Reid-Henry: 2012).
In this thesis the following questions according to the Modernisation Theory and the Theory of Institutionalism will be addressed: What is free trade? And how will a state develop with free trade? Lastly, the final question will be answered: how can an economy achieve a free trade policy and which plan does a state then needs to follow? This is where Ricardo comes in and the Ricardian strategy will therefore be outlined in the following section.
3. Ricardo’s Principle of Comparative Advantage
David Ricardo is one of the theorists who made a concrete plan for states to develop their economy. In the literature of political economy, the Ricardian approach is a typical example of how to develop in a neoliberal way. The image Ricardo sketches is an image where countries can develop their economy by finding their place in the world economy just as Rostow describes in his fourth stage. David Ricardo was interested in the works of Adam Smith. As he believed in the working of the invisible hand and specialisation he advocated how market mechanisms could lead to optimal prices and optimal allocation of goods.
The theory of Ricardo is based upon the idea of comparative advantages. The general concepts of his theory are specialization and comparative advantages. His theory based on the opportunity to trade, presented countries a way how they could benefit from
would export goods that they produce relatively efficient and import goods that their labour produces relatively inefficient (Krugman et al; 2015; 57-59). The Ricardian theory was ahead of its time because it looked at strategy in an international way and focussed more on the distribution of goods and services instead of on production. Ricardo compared a world with lots of trade restrictions and one without trade restrictions. In this classic Ricardian model, he states that countries could do better if they specialised in goods and exchanged them with each other, even if another country would be better in making both products (Eaton et al: 2012). Ricardo sketched a world of England and Portugal which could make two goods, clothes and wine. In his example, he assumed the number of workers which is needed to make a unit of each good in a country. Since the number of workers needed to make a product is independent from demand, the number of workers would not change when production increased. Therefore, he assumed a constant return to scale. He also argued that trade could allow England, who needed more workers to make clothes or wine, by
specialisation on one product produce the same amount of goods with less workers and same goes for Portugal. Through this mechanism international trade will establish a price for one unit of wine and one unit of clothes which will be the same. It will be therefore
beneficial for both England and Portugal to trade with each other, instead of producing it themselves (Ibid). Thus, in the Ricardian theory the following strategy should be
implemented: remove trade regulations so that market mechanisms could make production efficient; specialize in goods which one can make relatively most efficient and invest
eventually trade surpluses in the economy or in things which could be beneficial to the economy. All these three conditions should be fulfilled to speak of a Ricardian strategy.
From neoliberal and Ricardian approach, the following hypothesis can be extracted and tested in the chosen cases.
Hypothesis 1:
A liberal open trade policy leads to more economic growth
The other development theory is the Theory of Institutionalism. This theory builds upon institutions in the economy and applies them to politics. The institutional theorists focus on the change in the economy from the laissez faire capitalism towards the current capitalism where more actors than just the market mechanism are active. In particular, the
institutionalists concentrate on the role institutions played and are still playing in the
creation of the new capitalism. Institutional economists believe that a pure market economy is too optimistic and that the market always has to deal with legal, financial and social institutions (Elliot; 1978). The main claim is that successful capitalist development had no direct relation with the market mechanism, but rather with the institutions surrounding them. According to the institutional economists, economics should return to the social sciences and this is why the focus is on history and the interaction between social values, technology and economic institutions. The variety in these factors clarifies the differences between the capitalist systems. These varieties make it impossible to define one capitalism, but certain guidelines remain. Because of the variety in capitalism and the varieties within intuitionalists ideas, two important institutionalists will be discussed in the continuation of this paper. These institutionalists explain the development of the theory and give a better outline to analyse the theory for further use (Ibid).
Firstly, Institutional economists do not have an explanation for economic processes as the neoclassic economists have, but they see a big role for politics. They believe that economic prosperity should be pursued by multiple factors and not solely by economic factors. In other words, besides economic factors, other factors such as, Ideology, norms and values also play an important role in the institutionalist approach; the economy is dynamic. Thus, when examining the economy, capital, labour and the role of the state should also be considered. Most importantly, institutionalists believe that economic development can be stimulated by the state. Again, the institutionalists do not deny the working of the market mechanisms, but they believe that multiple factors and actors play a role in development. The state can play an important role in improving these circumstances (Elliot; 1978).
Secondly, theorists who give an example of conditions that should be present for a country to develop, are Acemoglu and Robinson. In ‘Why nations fail’ (2013) they describe how states and their institutions can play a role in developing their economy and how it is possible that countries as South-Korea and Botswana have developed over the years but other countries in the same regions as North-Korea, Congo and Zimbabwe have not.
Acemoglu and Robinson seek an explanation for the underdevelopment of certain countries compared with others. According to them, this difference is not due to cultural, climatic or geographical differences, but due to political and economic differences, and the extent to which the population has the opportunity to participate in economic development
(Robinson et al; 2013; 79-83).
They indicate these circumstances by the terms 'inclusive' and 'extractive'. Inclusive political institutions give the population the opportunity to participate in the decision-making process. Freedom of the press, control of administrative bodies, transparency and appointments take place in a democratic or neutral manner. Inclusive economic institutes involve the entire population in the economic process. Society is generally equal; career opportunities and study opportunities exist for everyone and social mobility is high (Ibid). Extractive political institutions limit decision making and thus policy making to a relatively small closed elite group. There is little control over the institutions and as a result, society is sensitive to nepotism and corruption. Extractive economic institutions limit the benefits of economic growth to a small group, often the same elite group and this lead to extreme economic inequality. This is often done by means of control over the most important companies and key appointments. The differences between rich and poor are large and social mobility is low (Ibid; 372-375).
The result of an inclusive system is that innovation is rewarded with economic benefits. In addition, administrative bodies are considered legitimate, which reduces the chance of abuse of power. As a result, politicians will act more in the public interest than in their own interests. The result is that the whole country improves instead of a small elite. An extractive system, on the other hand, discourages every incentive to innovate. In fact, in some cases this is even deliberately obstructed. The elite, acting to protect their own interests will obstruct every change as change means a deterioration of one's own position. This also applies to technical progress and therefore technical improvements are
deliberately inhibited, so that creative destruction cannot take place (Woller; 1994). Moreover, it does not pay to be innovative or work harder, because this is either punished or the advantage only benefits the elite. It is true that under certain economic conditions it is possible to achieve economic growth through the exploitation of a temporary advantage (Argentinian agriculture in the early 20th century, the Soviet Union, the Arab Gulf States),
but this growth is usually temporary and will stop in due time, unless the country can reform itself to an inclusive system in time (Robinson et al; 2013; 79-83).
Acemoglu and Robinson also have an explanation on how inclusive economies emerged in certain parts of the world and not in other parts of the world. They found the explanation in the (colonial) history of the countries and in critical junctures. These critical junctures led to big turning points in the countries and for institutions to develop around these problems. These historical events led to a deviation of the world which still can be seen today and have been crucial in explaining the inequality in the world according to Acemoglu and Robinson (Ibid; 429-431). According to the authors there is no concrete plan which is the same for every country on how they should develop. But they do describe events that should happen for empowerment to occur. There should be some kind of centralization of the social movements so that these movements are not directly labelled as lawless, there should be some pre-existing political institution that introduce a modicum of pluralism so that broad coalitions can be formed and can endure. Lastly the presence of a civil society that coordinates the demands from the opposition movements so that these cannot be easily crushed by the current elites. To summarize: the elite should be forced to create more pluralistic political and economic institutions, so it will create a more equal level playing field. This explains exclusively why some countries developed and why others did not (Ibid; 461).
Thirdly, an overview is given how institutionalists think towards development and what the role of the state should be. It is important to add another institutionalist who elaborates more on how underdeveloped states should develop and one who creates are more complex view on the role of states in this process. With the developmental state, Leftwich has devised a model for countries that meet a number of specific characteristics that enable them to pursue and achieve explicit development goals through their political strategies (Leftwich; 2000; 155). With this model, Leftwich tries to explain their successful (economic) growth and tries to illustrate how important the role of politics in the developing country itself is. In this model Leftwich argues an elite based view which is in contrast with the view on elites given by Robinson and Acemoglu. Where Acemoglu and Robinson have a more liberal view on the role of the state, Leftwich proposes a theory with a bigger role for the state. The countries that Leftwich considers as developmental states are generally at a
later stage of their development. The model of the developmental state could therefore be regarded as a transitional form to a modern state (Ibid.)
A first important feature of the developmental state is that it is run by a developmental elite that is relatively low in corruption (Ibid; 160). This elite (the
government) focuses on achieving economic growth, has the capacity to continue this and is fairly nationalistic in nature. The core of empowered people around the government is relatively small. This manifest itself, among other things, in a relatively large exchange between the military summit, the bureaucracy and the highest government posts. A second important characteristic is that this elite and the institutional structures are relatively autonomous compared to the interests of special groups (Ibid; 161). The elite has the capacity to overrule the special interests in the national interest. The third characteristic of the developmental state is a professional and powerful bureaucracy with the authority to lead social and economic development. These two characteristics touch on one of the essential characteristics of the developmental state, the ability of politics in a country to pursue explicit development goals (Ibid.). A fourth characteristic is a weak civil society. Leftwich sees this as a condition for the emergence and consolidation of the developmental state. Only when significant changes have taken place in the socio-economic structures of a country will the call for more democracy begin to develop. A fifth characteristic is that the power, the authority and the autonomy of a developmental state have been consolidated before domestic or foreign capital can be influential. As a result, states are better able to determine the role of private capital (Ibid; 163-164). A sixth characteristic of a
developmental state is that human rights are by no means respected to the same extent as in Western countries (Ibid; 165). This applies in particular to non-democratic developmental states, a sub-category of developmental states. On the other hand, both the constitution and the political legitimacy of the administration in a developmental state are hardly threatened: a certain stability can be recognised. Leftwich points out that this may have to do with the relatively high score achieved on the United Nations Human Development Index (Ibid; 166).
The characteristics that Leftwich uses to characterize developmental states, indicate an important role for stability and for the (political) elite in a country. It would be more desirable in this situation for the government to have the capacity to give direction to the strategy than citizens have the same freedoms and rights as in Western countries. Civil
society must be suppressed and in particular in non-democratic developmental states the opposition will not be tolerated (Ibid; 165). A normative implication of this is that a regime tends more towards authoritarianism; this is in some cases more desirable for the
development of a country than a democracy. Leftwich says that it is necessary to look at the type of democracy that is possible in a country, to what extent it is possible to develop a democratic state (Ibid; 190). With this stability seems to be an important aspect since in a country where the legitimacy of the political administration is high, there is a lower chance on up rise. Only when the stability is guaranteed and therefore the government can give direction to the development of the country, it is possible to look at how much room there is for democracy.
When the institutionalist policy is framed and explained, it is imported to move forward to a theorist who puts that theory in a specific development plan. A theorist who also sees the state as most important actor in developing its economy is Nicolas Kaldor.
5. Kaldor’s Model of Economic Growth
Kaldor was a Hungarian theorist who was inspired by John Maynard Keynes. The basis of his theory is that global markets create a hierarchy of potential production sites worldwide. Between these places the incomes differ, and this creates a hierarchy with a hegemon or a leading power. A hegemon can be economically dominant, because its industry can produce products at the lowest cost and sell for the lowest price (Kaldor; 1939). By importing
products that are necessary for the production of the goods of the new sector, the hegemon can focus even more on the specialization of the new goods and create a bigger gap
between the hegemon and the non-hegemons. However, states must rely on national interests. If states want to pursue the Ricardian strategy, they must cooperate with the hegemon. The longer this continues, the more risky and costly it will be to end the
collaboration. Therefore, states might not prefer the Ricardian strategy, but the Kaldorian. At the beginning of the development period developmental states would still like to cooperate with the hegemon, but only to finance the import of the goods they needed. Under these circumstances, developmental states can either give in to these forces, or try to overcome them. In this line of thought Kaldor developed his theory and it became especially popular in the 1930’s. Kaldor saw industry as a crucial factor in developing your economy.
The state is in his theory responsible for developing its industry. He saw the development of industry as a mechanism that would be beneficial for the whole economy and for the state. To develop this industry a strong state was needed (Verdoorn effects and investments by the State in industry(ibid.).
Kaldor looked at the world in his time and noted that countries who had a developed industry also had higher living standards. With a few exceptions, countries who relied mainly on agriculture did not have these high living standards. He therefore started his research on industrial development. Central in the theory of Kaldor are political/economic institutions and the industry. Kaldor believed that the industry and manufacturing in particular, is the engine of growth in an economy. He explains this theory in three laws.
The first law Kaldor presumes that there is a positive correlation between manufacturing output and growth of GDP (General Domestic Product). Or to put it
differently, he assumes that a fast rate of economic growth (which is measured in GDP) is correlated with fast growth of the manufacturing sector in an economy. Kaldor argued that the above stated correlation is a perfect example of a transition from immaturity to
maturity. He describes this situation of immaturity as a period where productivity is higher in activities outside the industry like agriculture. There is a relative large labour supply for the industry, but this supply is not optimally used. Kaldor specifically used agriculture, because this was most often the main source of income when industry was immature. The transition from immaturity to maturity is therefore known to be a transition in productivity and from agriculture to industry (Milin et al.; 2005).
The second law, is based upon previous research by Verdoorn. He assumes that faster growth of manufacturing output brings faster growth in productivity in the
manufacturing sector. This means more production gives more productivity. This second law is generally known as the law of P.J. Verdoorn. He describes in his theory the Verdoorn effects. Verdoorn effects are the greater the ratio of growth of output in a company, the greater the growth of productivity (ratio between input and output) in a company. This effect happens because the more a company produces a given good, the more experience the company gathers and the more efficient the company is in producing not only the given good but also in comparable goods and tacit knowledge. Verdoorn effects require the mobilization of tacit knowledge, knowledge that is not yet formulated and not (yet) codified
or written down. He therefore assumes a difference between growth and productivity (Libanio; 2006).
Kaldor used these effects to explain the effect on labour and on economic growth that producing more has. Kaldor assumes that there is a positive correlation between productivity in the manufacturing sector and growth rate of the output from the same sector. Kaldor sets a crucial condition for the existence of the law of Verdoorn. That crucial condition is that an economy of scale can only be present when there is a strong positive statistic relation between employment in the manufacturing sector and the rate of growth of manufacturing output. He and Verdoorn found prove of this relation in eastern European countries (Milin et al.; 2005).
In the third law, Kaldor states that fast growth in manufacturing output can lead to positive effects in productivity beyond manufacturing. This phenomenon occurs when manufacturing activities need labour and different resources from non-manufacturing actors. This productivity growth is not at the expense of productivity in different sectors, it is therefore no trade-off but an expansion of productivity. How strong this effect is on
different activities varies, but it only happens in economies which have not yet fully
matured. In matured economies this effect is zero or close to zero because there is no more room left for productivity growth. In this situation productivity in different sectors of the economy is close to the same and the same goes for real income; the big transfer from agricultural towards manufacturing activities has ended. When this occurs, a country has made the step from immature to mature (Ibid.).
Based on the steps or laws of economic growth, it is important to understand how Kaldor saw the role of institutions and the State in this process. In this process of developing their industry it is important for a State to make multiple decisions. At first the State has to assign an industry which their economy could benefit most from in the world economy. It should disregard the current knowledge or cost of production and should focus on what it can become. Then it is important for that country to start and develop this industry by protecting it and investing in it. The state therefore needs to add regulations in form of taxes to protect their industry for competition from other countries. Next to these trade barriers a country needs to facilitate the industry, so it can grow when productivity starts to rise because of the formerly explained Verdoorn effects. When the industry reaches the level where their products have become competitive, the country needs to remove trade barriers
to complete the maturity process and let the productivity growth expand to different economic activities throughout the country.
The Kaldorian strategy comes with high investments from the formal institutions in the industry and they need to borrow it from the hegemon or others. Therefore, when the State chooses the wrong industry, or due to external factors the industry does not get as competitive as the others who produce that product in other countries, it can lead to a severe crisis in a country. Finally, to put the strategy more straight forward, a state should choose an industry, invest in it, protect it and facilitate the economy.
According to the Kaldorian theory the following hypothesis can be framed:
Hypothesis 2:
An economy needs state intervention in order to get sustainable economic growth 6. Method
As mentioned before, the objective of this paper is to elaborate on existing literature and conclude whether a Ricardian or a Kaldorian strategy leads to more economic growth. In order to reach a conclusion which strategy works better, a comparative case study is used. The purpose of such a study it to compare at least two cases to add or to develop a theory and is often used within political science. This is because a case study goes into depth and is therefore strong in qualitative research. By doing so, one can test or strengthen the theories which the researcher decides to work with. For this research the choice is made to use similar country cases design. Whilst both cases are very similar to each other, they yet differ in one aspect being the developmental strategy chosen by the respective Governments. This makes the research a qualitative study and not a quantitative one. It says more about the specific cases and circumstances, than that it can reject a whole theory. It rather contributes to the existing knowledge and theories about economic development.
The cases that are being used for the research are Argentina and Chile. These countries are the two most prosperous countries in South-America, but both countries managed to get there differently. These two South-American countries, who both used either one of the two earlier mentioned strategies, are similar in political, religious, cultural and democratic
their economy, it was Argentina who chose differently. Argentina decided to focus on their industry, by introducing a stricter trade regime and more regulations (Wigell; 2017)
(Grandin;2005). The conducted research has investigated how this influenced both their economic growth from the starting point until now.
7. The Argentinian Case description 1850- 1945
The Argentinian economy has a long and diverse history. Until the beginning of the First World War, Argentina was one of the most prosperous countries on their continent. Argentina was ruled by the agricultural elite and it exported grains, skins and meat in the middle of a boom of the world pricing of these commodities. They benefitted a lot from exporting these products. In this period the Argentinian government followed the Ricardian strategy. They did because they had open trade barriers, focused on comparative
advantages and had a financial liberal policy (Robinson et al.; 2015; 385). In the 1920’s, a downturn evolved in the Argentinean economy. As the economy was led under extractive institutions, the economic growth was only temporary. This meant that the growth did not involve any creative destruction or innovation which would lead to more productivity and that those mechanisms needed for sustainable growth did not occur. As a consequence, the growth was only favouring the elite. In this same period, the agriculture was faced with more and more competition from other, cheaper countries and the industry was not yet developed enough to compete with other industrialized countries (ibid; 385).
1945- 1983
The Argentinian elite had to do something to bring back economic growth and stabilize their political situation and at that time there were two big strategies they could choose from, the Ricardian and the Kaldorian strategy. The government choose the Kaldorian strategy. This meant that the Argentinian government started to restrict the free trade and initiated trade regulations. As the Kaldorian strategy describes, it started to protect their economy and at the same time it invested in the industry (Feltenstein; 1980). The circumstances under which they applied the Kaldorian strategy were as follows. Argentina was politically unstable and they oscillated back and forth between democracy and dictatorship. The elite was very
powerful and this power struggle between the elite and the people continued until the late 20th century. In the Peron period, a currency devaluation was set in motion and was not restored until 1991. This led to a high inflation rate of up to 700% in the beginning of the 90’s. The root causes for the economic downturn can be found in the 1930’s (low
productivity, poor export position, high government spending, speculation and capital flight by the financial elite). These were not tackled and the maturity stage of the Kaldorian strategy was not met yet (Veigel; 2005).
Because it took a long time for the economy to become competitive in their Kaldorian strategy, the public debt of Argentina kept growing and it put the economy
structurally under pressure. In the 1970s, a huge amount of money was borrowed abroad to reduce the government deficit and it gave the industry extra time to develop itself towards maturity. This led to a tenfold increase in foreign debt, but it did not solve the problems Argentina had. Most of the money went to the military regime/elite and they used it for stabilizing their own situation and to buy military goods instead of investing it in the industry (Prosser; 2017). Therefore, the borrowed money did not lead to the expected results and more importantly, the real problems, low productivity, poor export position, high
government spending, speculation and capital flight by the financial elite, were not
addressed. After more than 50 years of trying, the Kaldorian strategy did not seem to work and the result of this was a substantial public debt (Epstein et al; 2006; 6). The government therefore tried a different approach and started to buy election votes by designing economic policies and institutions in a way where it supported their supporters. It created support from the elite, but it did not stabilize the regime and led to more debt. This unstable position lasted until 1983 when the Alfonsín government came to power.
1983- 2017
This government ended the Kaldorian strategy and in exchange it received foreign support from the International Monetary Fund (IMF). The Alfonsín government loosened the trade regulations and opened up their economy introducing a more neoliberal policy. In 1991, an anti-inflation program was started which was successful and the national currency was linked to the US dollar. This led to a stable currency and more trust for the foreign investors (Ibid; 6-7). In addition, state-owned companies were privatized and public spending was significantly reduced. This liberalization of the economy stabilized the economy till the
recession. This new policy led to economic growth, but it did not tackle the structural problems Argentina had faced throughout the past century. When in 1999 the economic growth stopped and the government did not interfere, the investors were afraid to lose their money and pulled back their investments. This, together with the big public debt which was a result of the failed Kaldorian strategy, led yet again to a crisis (Ibid). After the recession, the Argentinian government decided to pick up where it left and slowly removed more and more trade regulations. Until a certain point where they stopped removing trade regulations and remained at a constant level of openness throughout the last ten years (Table 3). The reason, for not further opening up the economy can be found in the high level of the
dependency on agriculture (Veigel; 2006). The Argentinian government eventually ended the Kaldorian strategy, but they never really embraced the Ricardian strategy. Because they held on to certain level of economic protection and the state still remained actively involved in the development of the economy.
GDP per capita (general domestic product per capita)
We now have a holistic view on how Argentina has developed. But it is also important to see what kind of influence the policy had for the GDP per capita over the years. As one can see in Table 1, the trends of the policies and the difficulties Argentina faced, are clearly
represented in the numbers. The challenges the Argentinian government faced in the development of its economy and the shortcoming of their industry, lead to relatively less economic growth measured in GDP per capita (Data World bank; 2017). When in 1990 the Argentinian government sought help from the IMF this led to liberalized trade and reduced import barriers which led to relatively more economic growth than before, but this was temporary growth (this will be explained later in this thesis). This economic growth ended when the economy collapsed in the beginning of the 21st century. The crisis had a big impact and General Domestic Product per capita did not fully recover from the crisis till 2008. After this the Argentinian economy slowly started to recover. Nowadays the GDP per capita of Argentina is around the 19000 a person and is currently still growing (Ibid).
Table 1: General Domestic Product per capita from Argentina 1962-2015. Retrieved from
World bank data.
The Argentina case analyses 1850- 1945
How did Argentina apply the Kaldorian theory in to practise? In this period Argentina has gone through multiple policy changes and it therefore can be seen as a country which experimented with their policy and institutions. Starting with the first period where the Argentinian economy was the most prosperous in South-America, Argentina applied the Ricardian policy, the economy mostly benefited from its agricultural domain and lifted on the success of the western hegemons until the beginning of the Second World War. Argentina had relatively less trade regulations than other countries and focused on comparative advantages just as Ricardo describes in his theory. The Argentinian economy was competitive and benefited a lot from free trade. They therefore did not protect their economy as much as in the period after the second world war.
1945- 1983
In the period after the Second World War the Argentinian agriculture became less
competitive and its industry was not productive enough to compete with other countries. This was a result of what Robinson et al. (2010) called exclusive institutions. This meant that the growth did not involve any creative destruction or innovation which would lead to more productivity. Those mechanisms which were needed for sustainable growth did not occur. The Argentinian government decided to develop its industry and invest in this development. They did this in a Kaldorian way. This meant that they choose an industry, invested in it, protected it and facilitated the rest of the economy. Moreover, they came up with a policy of trade restrictions and economic protection of their agricultural sector until the industry was ‘matured’. This policy was in place for a few decades, but Argentina did not manage to develop their industry. The failure of the Kaldorian strategy has multiple explanations. The first and foremost is an explanation given by Leftwich. He states that an institutionalist approach can only work when there is a stable regime and the elite in a country serves the nations interest instead of just their own. Based upon the circumstances in the country when they applied the Kaldorian strategy, one cannot speak of a stable regime. The regime was controversial and changed a lot overtime (Londegran; 2007; 83-84). Moreover, the elite should put the nations interest first. But in Argentina the elite mainly served itself. An example of this was given by the military regime who used foreign loans to stabilize their own position instead of investing it in the industry (Woller; 1994). Another reason why the Kaldorian policy did not work could be because they picked the wrong industry to
developed. This point is harder to prove and can only be suggested because there is no alternative world. It is therefore hard to prove that if they picked another industry it would have worked and the Kaldorian laws would have applied. What is clear, is that this policy did not work at that time. The policy did give the country a large public debt which was later on the cause of a material crisis. The Kaldorian strategy either way did not lead to the stable economic growth as hoped.
1983- 2017
As a consequence, the government had to explore other possibilities to develop their economy. This new strategy was initiated in 1983 but was made in to policy in 1991, when it
looked for help abroad and found it with the IMF. Part of the structural development programs from the IMF is a neoliberal policy: open trade, privatization and reducing public spending. The liberal policy led to economic growth, but it did not solve the internal
problems Argentina faced during that period. These problems were a structural government deficit, corruption and a large debt. When the crisis started, the policy reaction was to reduce open trade and to initiate the protection of its economy. The crisis lasted until the middle of the new century, when eventually Argentina adopted a stable regime, reducing the power of the corrupt elite and the development of inclusive institutions. This led to more sustainable growth. The government also sustained the more liberal approach initiated before the crisis. However, Argentina also held on to a limited degree of openness (70 percent according to the world heritage data; 2017). It therefore kept certain trade barriers intact for its main source of income: the agricultural sector. This is a sector which is globally even at this point in time, heavily regulated. This strategy worked out well for Argentina and it scores on HDI and GDP per capita second best in their region. Argentina is an example of a country who applied the Kaldorian policy but did not succeed. This resulted eventually in a large debt and thus a crisis.
8. The Chilean case description 1930 - 1973
From 1930 to the end of the 1970’s, Chile used a Kaldorian approach to develop their
economy. It tried a state-controlled development with protectionism and started to develop a new national industry (copper mining) to replace the import industry (Frazier; 2007; 163-165). However, the domestic market was too small to generate internal growth and purchasing power did not rise enough to make this change a success. In the ‘60s, another development of industry was attempted through agricultural reform and the search for new markets in neighbouring countries (Ibid.). The socialist government wanted to increase the redistribution of income and production capacity and therefore tried a more protective approach. This did not have the effect what was aimed for. After trying this Kaldorian approach for a while without success a big U-turn in policy was implemented. This policy change was created by the Military that took over the government from Salvador
1973 - 2017
The military regime introduced the Ricardian strategy in the country. This happened in 1973, the strong liberal emphasis spilled over in the policies, among other things, on exports, the elimination of trade-restrictions and other protectionist measures like the release of prices and the creation of favourable conditions for foreign investments. These developments changed the whole course of the Chilean economy. Where it was first based on import and the agriculture domain, it now started to focus on comparative advantages, free trade and exports. Chile adopted the Ricardian strategy with these policy changes (Rosales; 1995). This policy turned out well in the beginning, but later on it caused some significant challenges. For instance, it led to many redundancies in the government and many domestic and international companies went bankrupt during that time. By the end of the 1970s, the economy grew by an average of nine percent a year and apparently an end came to the multiple attempts to develop the industry, as the industry was developing under the new policy rapidly (Ibid.).
But in 1982 another severe economic crisis emerged. After 1985 the economy recovered again thanks to an increase in exports and a favourable debt settlement with the International Monetary Fund. It still did not lead to economic growth which was expected in the Ricardian strategy. An explanation for this can be found in the regime at that time. A ruthless dictator, Pinochet, made the country unstable and created a lot of inequality in the country. The growth was in favour of the elite and not for the entire country (Londegran; 2007; 83-84). Therefore, the economic growth can be described as unsustainable according to Robinson et al. (2010) and according to (Leftwich; 2000; 155). The institutions were exclusive and therefore the growth did not involve any creative destruction or innovation which would lead to more productivity. The mechanisms which were needed for sustainable growth did not evolve. Therefore, the growth was unsustainable. As a consequence, foreign investors did not have any trust in the country and did not invest in the economy. When the dictator Pinochet and its military regime fell in 1990 this all changed (Londegran; 2007; 74). The new democratically chosen government chose to reform the country and its institutions to ensure that no longer only the elite was served but the whole country. This level playing field led to a period of economic growth and reached a record value of ten percent. From 1985 to 1997, inflation fell back to record low levels. The neoliberal policy implemented by
the new democratic government finally appeared to pay off (Ibid.). From 1998 on the economy was dominated by a deficit on the Chilean trade balance (French et al.). The gross national product also declined for the first time since 1984. In addition, unemployment doubled to twelve percent within a year and a fiscal shortage arose. In the period from 2003 till 2013, the economy of Chile was growing by an average of five percent. (Ibid.)
GDP per capita (general domestic product per capita)
Zooming in on the industry of Chile, one can see a completely different picture than seen in the Argentina case. In November 2002, the European Union and Chile signed an association agreement including a free trade agreement; this agreement was effective per 2003 (French et al.) and was aimed at stimulating international trade. Trading has been beneficial for Chile and they have become an export depended country. Therefore, more trade leads to more export which is good for economic growth and developing its industry even more. Chile does not only focus on the western markets. Chile also strives for full membership of Mercosur to even become more dominant in the South-American economy (Ibid.). That the Chilean economy relies heavily on international trade can also be seen in the number of different export products, which increased rapidly from 1500 in 1989 to 3800 in 2000. Traditional export products are gold, nitrates, fishmeal and especially copper, which in 2014 accounted for 34 percent of goods exports. Copper in particular is important for the Chilean economy. The dependency of Chile on copper has dropped over the years. Where it was responsible for 75 percent of the exports in 1975 it has dropped till 34 percent in 2016 (French et al.).
Table 2: General Domestic Product per capita from Chile 1962-2015. Retrieved from World
bank data.
With this a clear view has been established how the economic policy developed in Chile. The same comparison between growth in GDP per capita and policy is performed as with
Argentina. As shown in table 2 the policy changes resulted in positive change in GDP. In general, the policy changes led to more economic growth and to a more diverse industry. When in 1985 Pinochet became president, the economy started to grow but it really took off when the military government was replaced with a more stable democratic regime. This democratic regime gave the investors more trust in the Chilean economy and this had a very positive result on the GDP per capita growth. This can be seen in the upward sloping GDP per capita line in table 2. According to the World Heritage Data Bank (2017) Chile currently has one of the most open trade policies in the world and is seen as one of the most solid and reliable economies of South-America (Table 3). The GDP per capita is around 24000 in 2017 and they score 0,847 on the Human Development index. They therefore score best in both categories on their continent (World bank; 2017).
The Chilean Analyses 1930 – 1973
In the middle of the 20th century the government of Allende still held on to a protective vision on the economy. This approach can be compared with a Kaldorian strategy, given the high investments in industry, protectionism and strong state centred development. In this period Chile tried to develop its economy according to this theory but this did not lead to the expected results as it didn’t lead to much economic growth or a productive industry (table 2). Chile maintained this modus from 1930 un till the socialist government was overthrown by the military regime in 1973. The new military regime led by Pinochet stopped the old strategy and started a new economic strategy.
1973 – 2017
This neoliberal strategy was in line with the Ricardian strategy, because it meant removing trade regulations, specializing in goods which you can make relatively most efficient(copper) and investing potential trade surpluses in the economy. The resulting effect on economic growth was rather marginal. An explanation can be found in the institutions running the country during that time. The military regime of Pinochet might have had a neoliberal regime, but this regime was controversial domestic and abroad (Londegran; 2007; 50, 83-84). The institutions in the country were exclusive and not inclusive. The regime of Pinochet was known to be good for a part of the country but certainty not for the whole country. This situation led to temporary economic growth and a non-levelled playing field. And, although the economic conditions were set according to the Ricardian strategy, this still did not lead to the developing industry and constant economic growth as expected. This changed in 1990 when the regime ended, and a new regime came to power)Ibid; 74, 104). This democratic regime created inclusive institutions in the country which brought a levelled play field in the country. A substantial bigger part of the people was given a voice, resulting in a more sustainable growth. Since the start of this stabile regime the combination with a Ricardian strategy and inclusive institutions, the economy of Chile started to flourish. It became one of the most prosperous states in South-America, with the highest Human Development Index and highest General Domestic Product per capita in its region (Retrieved from Worldbank;
2018). Therefore, it can be concluded that on these grounds the Ricardian theory did have success in Chile.
It is relevant to investigate the limitations of the Chilean economy. As a result of how the country developed throughout the years, their economy looks different in a way that they specialized in different kind of products although they initially invested heavily in agriculture and natural resources. The specialization of the economy is undeniable with 34 percent of the GDP still depending on the copper industry in 2017. But the dominance of the copper industry has its limitations. It also means that Chile is dependable on the supply and demand of one natural resource. Although copper is a sustainable product, as it can be recycled, it makes its economy also vulnerable and dependable on a natural resource. Moreover, the second condition from the Ricardian strategy which stimulates specializing in a product which you can make relatively most efficient, needs an addition. If this product is a natural resource, which one can run out off, one can create an unsustainable economic development. Therefore, Chile has tried to diversify its economy over the years leading to a decrease of its dependency on copper from 78 percent in 1978 to 34 percent in 2017. The Chilean government still invests in opportunities to diversify its economy even more in order to develop its industry and to become less dependable on one product.
Table 3: Trade Freedom measured from 1995- 2017. By World Heritage Databank (2017).
9. Limitations of the Research
The above analysis has some limitations being the choice of a comparative case design which are most similar. This case design has multiple positive and negative sides.
The positive side of this particular research design is that it is good on the internal validity of the research, meaning this is a research design that goes into depth on the cases one can detect relations and recognise causal relations with more certainty. The reliability on such a specific case is thus higher compared with quantitative research. It therefore aims more on forming a theory than testing it, but it can also help to make a theory stronger. Therefore, the relation between the policies and growth as seen in the cases is a quite strong relation and this can be said with more certainty than would be possible using the
quantitative approach.
The negative side of this kind of research can be split into two parts: theoretical and methodological. The theoretical critique can be found in the analysis. Both theorists describe an optimal situation so either one can achieve open trade or on the other side complete control from the state on the industry. In practice, this is often not the case and therefore it is impossible for a country to perfectly follow one strategy. This non-optimal situation is often given as a counter argument why a theory worked or why it did not work.
The methodological critique has its foundations in the quantitative research designs. A case study can be difficult to generalize, or it can undermine a general theory based on a generalization. Frequently mentioned criticism of case studies is that they are subjective, that they are difficult to falsify, that they are not representative on other cases and that the subject is only explored superficially in a case study. This can also be mentioned as critique on my thesis while the cases are specific, but the theory is general. Therefore, with the analysis of this thesis you cannot emulate or acknowledge a theory. It only can contribute to research on this matter (Landmann; 2008).
For future research, it is therefore important to acknowledge the flaws in this research and try to improve them. This means that this thesis is subjective and future research can make it more general or rather quantitative to elaborate more on general conclusions about the grand theories.
Lastly, to answer the earlier mentioned research question and hypotheses. The research question was: does an open trade policy or a policy with state interventions lead to more sustainable economic growth? To answer this question hypotheses were set to help answering this question. First there needed to be an analysis of certain underdevelopment reasons and see how the strategies fit into that theoretical background. Then these
strategies were explained and framed into policy advices.
To start with the Ricardian approach which was dominant until the 1930’s but still is the basis of economic thinking today. This liberal approach preached for less trade
restriction, more trade and how this would lead to specialization and industrialization in their economies. The theorists believed that poverty could be decreased through the removal of trade barriers, large investments and free exchange of technology. They did not suggest becoming independent from the hegemon but rather to profit from it and find its own place in the economy. This theory was put into practice in Chile where it first led to a small economic growth. When the military regime was deposed off and the country started to develop inclusive institutions, higher economic growth started and sustained. The same strategy was used in Argentina and led to economic growth before the 1930’s. The strategy did not lead to sustainable economic growth because of the presence of exclusive
institutions. Therefore, it can be said that the Ricardian strategy does lead to economic growth but, to connect this alone with economic strategy would be not right. As could be seen in the economic growth could only occur in certain political conditions. Therefore, political and economic strategy cannot be seen separately from each other because the two influence each other. In specific in these two cases, the Ricardian strategy only led to
sustainable economic growth with the existence of inclusive institutions. Therefore, hypothesis 1 still stands and is within this research partly correct, as in this case it led to economic growth in combination with the presence of inclusive institutions as described by Robinson and Acemoglu.
Next, the Kaldorian approach, which was used by the Argentinian government who invested heavily in its industry. This approach was a reaction on the ‘failure’ of the Ricardian approach and was aimed at the industry becoming independent from the hegemon. This was a reaction on the beurskrach which had a tremendous effect on all participating economies in the world trade. The theory states to specialize in a product which is needed
and where you ‘most best’ in. At first one needed to protect this industry with trade barriers, but because of increasing productivity and Verdoorn effects the industry will become more competitive. The role of policy is to find an industry which is needed or could be more efficient in the world, invest in it and protect it with trade barriers. The industry has time to develop and become competitive. When the maturity stage is reached, these barriers should be removed, and economy could grow. In the process of this approach, there is no need to create a level playing field, however it is important to be stable and strong as elite and government and be focussed on the interest of the country as a whole. This policy was found in the Argentinian and Chilean case. When time came that their agricultural domain was not competitive anymore, both tried to develop their industry and modernize it to become more competitive. This strategy was followed for multiple decennia but did not lead to the
promised economic success. Where Chile dropped the strategy, Argentina held on. This lead to a big public debt and political and economic struggle till after the recession. The failure of Argentina can be an example of the failure of the Kaldorian approach but Kaldorian theorists would reply that they did not fully follow the strategy. Argentina did choose a strategy and held on, but because of the political instability and the lack of the proper investments this did not work for them. Argentina picked a strategy with a lot of risk and ‘lost’. They eventually chose a different course and this strategy led to a sustainable development in Argentina. Therefore, the second hypothesis can be falsified. It does not lead to more economic growth than the Ricardian strategy.
Finally, with this information the research question of this paper can be answered. The research question was: does the Ricardian or Kaldorian economic development strategy leads to more economic growth? The answer found in these two cases reads that the
Ricardian strategy led to more economic growth. However, this did not happen immediately. This conclusion holds under the circumstances of a stable regime and inclusive institutions.
11. Bibliography
De Medeiros, C. A. (2013). The political economy of the rise and decline of developmental states. In Sraffa and the Reconstruction of Economic Theory: Volume Two (pp. 223-241). Palgrave Macmillan, London.
