Agriculture, transition, new structuralism:* rescuing development from new-classicals Michael Lipton Sussex Development

1. The State and the big push towards modern industry: "new" economics, defunct economists, and farmers[or: Why a little history of economic thought helps us to demystify development debates] Agriculture, transition, new structuralism:* rescuing development from new-classicals Michael Lipton Sussex Development Lecture, 2 Feb 2012 *Justin Lin, ‘New structural economics: a framework for re-thinking development’. PRWP 5197: World Bank Feb 2010

2. 1 Outline • Potted history of economic/development thought • Old structuralists and new: transitions, farms, States • Reading Asia: classic/structural, or a sequenced State? • Understanding Asia: open minds (classical, neo-classical, new-structural) v closed systems (new-classical, ??old-structural) • Non-new-classical foundations for new-structuralism • Incorporating non-growth goals: distribution, sustainability • Beyond structuralist farm-to-factory transitions: -- Small farms: Asia’s technical & land-reform pre-transition -- Population: re-linking economic transition to demography -- Finance: Asia vs. the new-classical model Conclusion: sector focus and the escape from new-classical dogma

3. 2 Potted history of economic thought on development • Pre-classical: goods better than services; food best • Classical: prices measure values; stationary state or ‘natural progress of opulence’ via law, easy tax, public goods, education?; free trade; population • Neo-classical: “static”? Equating marginal utilities (value-products) normal for consumers (producers) & optimal for each, but only under VERY strong conditions socially. Major State action is needed absent these conditions. • New-classical : ‘as if’ conditions met, so minimize State • Structuralism: devel=agind transition’; price-inelastic antidevel structures; devel needs active state: doing what?

4. 3 Old structuralists and new: transitions, farms, States • Old structuralism, OS: market failure v ‘big push’ to ag ind transition; State should own/protect/subsidize industry [Anglo-Saxon old-str, or Latin American dependencia?] • New structuralism, NS: OS‘State failure’, rents; facili-tating State still needed, but for comparative-advantage-friendly industrial policy: infrastructure, institutions, human capital for tech. progress in agind transition • Classicals, neo-classicals: ‘market’+ State [‘easy taxes’ but public & merit goods, regulation, infrastructure, redistribution]‘natural progress of opulence’, including agind transition. New-classicals (NwC): rational ex-pectations, efficient marketsmost State action useless.

5. 4 Reading Asia: classical v structural criteria for the State, or a sequence of types of States and of change? • Many agind transitions to much faster growth & poverty re-duction in Asia (few in Africa); but distribution, sustainability? • (At least) 4 claimed ‘fathers’ of Asian successes: liberalization, developmental state, farm change, demographic transition • 1 Prior old-structuralist Statesfacilitated 1) physical/human capital, insttns, infrastrucs 2) protection, subsidy: rents; cor-rupt, overstretched States; premature cap-intensity; urban bias • 2 Liberalizing State selective, classical/neo-classical not NwC; • 3 Developmental States: new-struc tech-upgrading priorities? • Not 1-2-3 rivals but entwined 1,32,3, 2-3 sequences, leading transition led by farms [as C18-19 Europe] and demog [new]

6. 5 Understanding Asia: open minds (classical, neo-classical, NS, ?OS) v closed systems (new-classical)? • Optimal pure-market outcomes need hugeassumptions; un-met, so big role for developmental states. That’s stressed by classics (Smith: public goods, collusion; Malthus: general glut, fertil.) , neo-classics (Pigou: tax, distribution; Walras: Left CGE; Arrow(-Debreu): ignorance; Stiglitz: asymmetry. • As-if perfect comp & markets: Coase; contestable mkets;  • NewCl ‘positive econs’: State action selfish (public choice), ineffective (rational expectations/efficient markets/Ricard-ian equivalence), counterproductive (crowding out). Maths, etric ‘barbed wire’Keynes/devtl state unarguably ‘wrong’ • NwC: markets optimize transition; ag; demog; dist; finance?

7. 6 Non-new-classical foundations, micro and macro, for new-structuralism • Micro-foundations: beyond new-classical models where everyone maximizes expected lifetime utility: --- 1950s: satisficing, second-bestness, Arrow --- 2000s: economics experimental, evolutionary, neuro; agent-based models; asymmetric info; “happiness” • Macro-foundations? Relations or individuals? • Adding-up problems, fallacies of composition or of thrift? • And in poor/developing/transition countries? --Finance outside new-classic macro-model; --NwC foundations not plausible for demographics ; --NwC rejects special or ‘prior’ sectors like farming

8. 7 Incorporating non-growth goals: poverty reduction; less inequality; sustainability • Classicals, neo-classicals but notnew-classicals see a State role against extreme inequality, for sustainability • For NwC, distribution and hence poverty are market outcomes, worsenedby State action in development • For NwC, private actions optimize sustainability (inclu-ding demographics) if prices, including interest, ‘right’ • New-strucgoals v. poverty, inequality, unsustainability • but vacuous if NS theory swallows new-classical foundations, imposing one goal:non-comparablelife-time utility = f (income, risk) both largely due to output

9. 8Beyond structuralist farm-to-factory transitions - small farms: Asia’s technical & land-reform pre-transition • Old-struc, to speed agind transition, imposed anti-ag policy bias: subsidy, exchange-rate, interest, educ.. • Elephant in miracle: Stateinv, land ref (Old-struc); tech/instns (New-struc): pre-trans smallhldr takeoff • ‘Smallholder-based pre-transition’ needs mainly new-struc developmental State for research/extn/tech, land reform (& some old-struc: water devel, fertilizer) • Labour-intensity & neocl ‘factor efficiency’ag, smallholders antipov, distribution, in green rev.agind transn. Surplus-first old-S counter-productive

10. 9 Structuralism and population transition: Asia v SSA • NwC: “pop-timal”. Neo-cl: Malthus+women’s ed (+ con-tracepn?) Old-struc: pop growth, cap/output ratioState inv. needed’ for growth. Contraceptive State:China/India? • New demog evidence: age transitiondemog gift, 1/3 of Asian growth; population-age earthquakes; all slower in SSA, as is ag growth and lab-absorption. Reaping demog ‘gift’ needs prices & strucs to employ extra workers (ag?) • Agind transition helps to speed fertility-transition but --- rapid prior child mortality falls are key; need active State, --- as do‘drag’ areas where ag, agind, fert fall all sluggish. --- Absent ag takeoff, pre- & post-gift ‘theft’ mop up gains.

11. 10 Beyond structuralist farm-to-factory transitions: finance - Asia vs. the new-classical model • Financial transition to get finance to growing sectors; so • all approaches tend to assume agind finance flows; yet • Initial ag pre-transition needs finance esp in early seasons • NwC assumes private flows (and constraints) optimal; efficient markets; no finance in macro-model. Collapse? • Classical/neocl case for free(r) trade does NOT imply • national/internat financial dereg, as per NwC; Asians resisted, especially after 1997, so West’s disaster avoided • Some good national experiences (rotating credit, some micro-finance, shroffs, public banks) but structuralism old and new lacks tested models for finance in development

12. 11 Conclusion: “sector” focus in transition helps rescue development studies from excess new-classical dogma • The State & big push towards modern industry: "new" (vs crude U-max) economics, defunct NewCl economists, (prior) farms. • Small-farm-based transformn , normally before ag-ind transitn, • helps neo/NwC factor-efficiency, dist, but needs non-NwC State, • as does ongoing, powerful demographic transition. • Sound financial transition requiresState to break NwC rules. • Distribn/sstnblty: externalities, myopia v NwC night-watch State. • Old-S saw partly-right State role, but anti-ag and slighted rent, class, overstretch, trade distortion: all anti-growth & unequalizing • New-struc techno-facilitating State necessary but not sufficient. • New-struc promising if and only if it shakes off NwC allegiances.