Essay on nation states

Sovereignty: Organized Hypocrisy

The assumption that globalization increases inequality within each country is being confirmed by the facts, while the assertion that it is an obstacle to developing countries fell into discredit. Yet in other middle-income countries, particularly in Latin America, but also in the Middle East and Sub-Saharan Africa, the growth rates are being much more modest. In other words, we have fast growing and low growing developing countries. Commercial globalization implies a major opportunity for the developing countries that is being used by the nationalist and fast growing Asian countries, including two population giants, China and India, so that globalization - in global, not in national terms - is becoming a process of redistribution of income and wealth in behalf of the fast growing developing countries.

This expression absolutely does not announce the funeral of the West, because international trade is a game whose sum is higher than zero, but it indicates that the banner of globalization carried by the united States in the s is far from being favorable to rich countries as presumed.

Globalization also acts in their favor since the accelerated growth of an increasingnumber of middle-income countries and the ever growing trade they are involved are factors that benefit rich countries as well.

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Contrarily to what a great number of people in rich countries believe, globalization does not reduce but rather increases those countries' growth rates, and, although creating new challenges, particularly to the Social State that developed in Northwestern Europe, does not destroy it Glatzer and Rueschmeyer, What occurs is just a process of flexsecurity, by which the workers' stability in enterprises is reduced but, as a trade-off, the state's social expenditure is increased. The relations of power between rich countries and dynamic middle-income countries change in behalf of these latter, but the standards of living continue to increase in both groups of countries.

Rich countries, as well as a great number of developing countries, are growing at higher rates than in the past, but among them the dynamic middle-income Asian countries, Russia, and Argentina are growing faster and catching up.

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Asia, which for centuries was the world's richest region, regains importance in the world economy. The accelerated economic development that we are watching in middle in come countries does not happen by accident. They have nationalist business and bureaucratic elites who adopt a national development strategy that I call 'new developmentalism' which, on the long term is based on growth with domestic savings and a sensible balance between market and state coordination of the economy, and, on the short term, on competent macroeconomic policies that assure control of inflation, balanced public budget, interest rates at a moderate level, and a competitive exchange rate Bresser-Pereira, ; b.

A national development strategy is an informal agreement among social classes, under the leadership or the intermediation of the government, aiming at economic development; it is the key institution to economic development in so far as it is essentially concerned with the promotion of investment opportunities Bresser-Pereira It presumes the existence of a developmental state - that is, a state that puts the problem of economic development as one of its central roles, as has always been the case of the American state despite the fact that its orthodox economists insist on rejecting developmentalism.

In Latin America, between the s and the s, when growth rates were high, the corresponding states were called 'developmentalists'. More recently, since the pioneering contribution of Chalmers Johnson regarding Japan , the expression 'developmental state' has been mainly reserved, by international political economy, to define the state of the dynamic Asian countries Evans, ; Woo-Cummings, ed. Is not necessary, however, that the state is referred to as developmental to have a national development strategy. Ireland, for instance, grew in the last 20 years at extraordinary rates, as a result of a national strategy Godoi, Regarding national development strategies, we must for now just consider that they constitute an institution, or more precisely a set of laws, policies, and agreements aimed at creating lucrative investment opportunities to entrepreneurs.

Although the rich countries only realized the competition they suffer from the developing countries as of the s, when the NICs Newly Industrializing Countries appeared, there has always been conflicting rather than cooperative relations between them. At first, it was not the financial opening but the commercial one that was ideologically used by the rich countries to limit the competitive ability of the new countries.

Since the first industrial revolution took place in England, this country tried to obstruct the catching up of the other European countries. Friedrich List coined the phrase "kicking away the ladder" to illustrate this behavior; and Ha-Joon Chang gave it empirical content.

Since the beginning of the nineteenth century, the countries that industrialized tried initially to neutralize the competitive ability of the countries that came behind them, arguing and pressing for open international markets. This strategy worked for a period, but in the end each country realized the need of protection to ensure its infant industry, and tried to create high customs tariffs.

The united States and Germany industrialized in the nineteenth century based on this understanding. In Latin America, from the s on, the region's most important countries also reached industrialization by protecting their infant industries. Therefore, although, during some time, the strategy of neutralizing competitors based on the law of comparative advantages has been effective in persuading competitors not to industrialize, it eventually became exhausted as long as middle-income countries achieved industrialization despite the neo-liberal argumentation based on the law.

Trade globalization lost power as an ideological weapon. Today, protective measures emanate increasingly from rich countries, not from middle-income countries, that know how to take advantage of the opportunity represented by the trade opening. Yet, while commercial globalization is an opportunity for developing countries, financial globalization is a threat in so far as it leads countries to lose control of their exchange rates.

Financial opening is decisively favorable to rich countries, since it prevents developing countries from neutralizing the tendency to the exchange rate overvaluation. This is why, since the early s, when neo-liberal hegemony seemed to be invincible, grew the pressures for developing countries to open their capital account and to try growing with the use of foreign savings. Although many are the diagnoses, recommendations, and pressures made by rich countries, through the World Bank, the IMF, and agents of the international financial system, the core of the conventional orthodoxy is currently devoted to keep the exchange rate of the developing countries relatively appreciated.

This orthodoxy is not yet committed to denying the tendency to exchange rate overvaluation that I have recently identified, merely insisting on stating the unfeasibility of managing this rate. Therefore, it denies the existence or the relevance of the Dutch disease for developing countries, insists on proposing the growth with foreign savings policy, and claims that any intervention in the exchange rate is unfair - it is a way of growing at the neighbor's expense of 'begging thy neighbor'.

Besides, it insistently argues that the use of 'competitive devaluations' weakens technological progress and so productivity as it artificially protects business enterprises from foreign competition - despite the fact that what I am proposing is just the neutralization of the tendency to the overvaluation of the exchange rate.

Its best efforts are directed to protect the growth with foreign savings policy, ignoring that current account deficit implies a high rate of substitution of foreign for domestic savings. Actually, the growth with foreign savings policy is positive to the country only in a very particular situation, when the national economy is already growing fast and the prospects of profits are very high, because at that moment the wage increases caused by the exchange rate appreciation are not mainly oriented to consumption but rather to investment. Outside this particular situation, the consequence of the exchange rate appreciation will be, besides a decrease in exports and an increase in imports, successively: the increase in real wages, the increase in domestic consumption, the substitution of foreign for domestic savings, the growing financial fragility accentuating dependence, and, eventually, if the country does not wake up before, the balance-of-payment crisis.

In order to successfully compete in globalization, the necessary national development strategy of the successful Asian countries was always based on a severe fiscal adjustment and a competitive exchange rate. Differently from Latin America, the land reform that strongly reduced the differences of income between households made it possible for governments not to try to counterbalance the concentration of income with social expenditure.

This prevented fiscal populism. Yet, as concerns the exchange rate the dynamic Asian countries established strict limits to foreign indebtedness and limited capital inflow whenever necessary. They did not need to limit capital outflows because, except for the s, when four of their countries were attracted by the growth with foreign savings policy and went through the crisis, they have always kept their foreign accounts balanced, and when they went into debt they did it moderately, to profit from a growth whose dynamics was internal.

The key variable that distinguishes new developmentalism from conventional orthodoxy is the exchange rate. While conventional orthodoxy rejects the administration of the exchange rate, new developmentalism requires it because knows how strategic is the exchange rate.

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Whereas fast growing Asian countries have new developmentalism as national strategy, low growing Latin American countries accept passively conventional orthodoxy. Whereas the former grow with domestic savings and either do not have the Dutch disease problem or neutralize it, the later still believe that they need foreign savings to finance growth, and ignore the Dutch disease.

Rigorous fiscal policy and a competitive exchange rate are two central conditions for such stability. A competitive exchange rate is still more important in globalization, since it is a condition for the export-led growth strategy - the one that profits from the advantage that cheap labor represents for emerging countries.

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From those remarks, I finish this paper with a simple comparison of the Asian countries that adopt national development strategies with the Latin American countries that as of the late s Bolivia and Mexico or the early s Argentina and Brazil adopted the conventional orthodoxy. A more comprehensive ranking of the developing countries would consider, in addition to the dynamic Asian countries and the Latin American ones, the other middle-income countries that grow unsatisfactorily, and the poor or low-income countries. However, I will limit my comparison to those two groups, because there is a clear contrast between the independence of the former and the dependence of the latter.

In order to test if the superior performance of the dynamic Asian countries is due to the fact that those countries have a national development strategy based on a more competitive exchange rate, on greater fiscal balance, and, consequently, on a higher rate of investment than the same variables in Latin American countries, I present a simple econometric test.

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I will limit my comparison to eight dynamic Asian nation-states and to the major Latin American countries 14 that are listed in Table 1 with their corresponding growth rates. I will make the comparison as of - because in that year the foreign debt crisis was solved by the Brady Plan and it was also around that year that Latin American countries, weakened by the great foreign debt crisis of the s, began to adopt conventional orthodoxy, whereas the dynamic Asian countries continued with their own national development strategies.

Comparing the simple average per capita growth of both groups 7.

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During that period only Chile attained good growth rates. If we consider the last five years, Argentina would also show high rates. New developmentalism - the name of the strategy that is used today by the most successful middle-income countries - may be identified in a country if we can observe in it three economic measures reasonably easy to detect: low or no public deficit, which indicates a fiscal balance; surplus current account or a small deficit, which indicates a competitive exchange rate; and a high rate of investment as compared to the GDP - the main consequence of the other two variables and the fundamental condition for catching up.

Although the three variables are important, the surplus or small current account deficit is, in my view, the most important one, because it reveals that the exchange rate is being correctly managed and that the tendency to exchange rate overvaluation is being neutralized. This is a fundamental aspect, because the exchange rate is the most strategic macroeconomic price, to the extent that it influences practically all macroeconomic aggregates. If we ask what is the 'secret' of the extraordinary growth of the dynamic Asian countries, the answer will probably lie in a growth with domestic savings policy based on a competitive exchange rate.

This doesn't mean that they have rejected foreign investment, but simply that they do not incur current account deficits unless for brief periods. Foreign investments received by China, for instance, are not meant to finance the current account deficit, as it happened in Latin America, but to give access to technology and foreign markets.

Based on the remarks above, I understand that there should be a positive correlation between, on one hand, economic growth and, on the other, low public deficit, current account surplus, and high rate of investment - and, therefore, that, when we compare countries and their economic performance, those three variables are a good indicator of the existence of a national development strategy. The data on Table 2 confirm this assumption in the comparison between the dynamic Asian countries and Latin American ones, by presenting for both groups their public deficit, their current account deficit, and their average rate of investment in the period The predictions that the dynamic Asian countries would present a lower public deficit, surplus instead of current account deficit, and a higher rate of investment than Latin American countries, are fully confirmed: in Asian countries there is less public deficit, no current account deficit but rather a surplus, and the rate of investment is much higher.

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The coefficient of correlation between those three factors and the growth rates is significant and positive, and the correlation of growth with the rate of investment 0. The data were organized in a panel of 16 countries those included in Table 1 which covers the period between and A regression was initially conducted in a panel with fixed effects, whose tests pointed to the occurrence of autocorrelation and heteroskedasticity between the series.

Therefore, I decided to carry out a regression from a first-difference equation of those variables and from the use of heteroskedasticity-robust standard errors. The coefficients and the robust standard errors indicate that the three variables are significant to explain the behavior of the GDP per capita. The three coefficients are positive, confirming the role of those variables in an economy's higher or lower GDP per capita growth rate. Those three variables are associated with a strong, not indebted State, that works as an instrument of collective action for the nation, and, therefore, as an instrument of the national development strategy.

They are also connected to a growth with foreign savings policy that, combined with the policy aimed at neutralizing the tendency to exchange rate overvaluation, ensures lucrative investment opportunities on the demand side. Without denying the significance of this issue, the assumption in my analysis is that developing countries have abundant human and capital resources that are idle or poorly used due to the chronically overvalued exchange rate.

The success of the dynamic Asian countries is partly due to the fact that they always keep control of their exchange rate, preventing it from appreciating, and, therefore, ensuring the existence of good investment opportunities for entrepreneurs and the full employment of the factors. Beck, ulrich [] What is Globalization? Cambridge: Polity Press, Original German edition, Bresser-Pereira, Luiz Carlos b "New developmentalism and conventional orthodoxy". Brazilian Journal of Political Economy 28 1 : Journal of Post Keynesian Economics 30 3 : English version available at www.

Available in the original at www. London: Anthem Press.

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