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In surveying the experience of today's advanced economies, including the latest graduates in East Asia, it is difficult to avoid the conclusion that a broad industrial base is critical to establishing and sustaining a robust process of economic growth. At a fundamental, conceptual level, industrialisation can play a pivotal role in promoting the circular and cumulative processes of development which break definitively with the straightjacket of equilibrium economics. A number of empirical regularities are associated with industrialisation and more particularly with its manufacturing component which is especially important: its contribution to growth has been found to be greater than its share in total output, i.e., it tends to be an engine of growth; faster growth in manufacturing output generates faster growth in manufacturing productivity; and faster growth in manufacturing is linked to faster growth of output and productivity in other sectors of the economy1. [35] Industrial development and accompanying changes in the pattern of employment also appear to be closely associated with reaching a high threshold level of income and a sustainable pattern of insertion into the international economy. There is an additional reason why industrialisation should be given a prominent place in the design of development strategies. It is closely associated with the expansion of productive capacity, the creation of new capital equipment and the progressive substitution of capital for labour, i.e., with the process of capital accumulation.
Putting these elements together in a coherent development strategy is no simple matter. Gregory Mankiw, a former head of the Council of Economic Advisors to the US President, has suggested that «basic theory, shrewd observation and commonsense» remain the most reliable guides for promoting economic growth (Mankiw, 1995:308-09). Such advice leaves plenty of room to discuss local heresies, but in this spirit, an examination of the linkages and feedback mechanisms between investment,
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structural change and trade seems a sensible starting point for a general discussion of development strategy2. [36]
The profit-investment-export nexus
Harry Johnson long ago described economic development as «a generalised process of capital accumulation» and this still has much to commend it. As discussed in the previous chapter, fixed investment simultaneously generates income and expands productive capacity. It is also closely attached to other elements in the growth process, such as technological progress, skills acquisition and institutional deepening3. [37] Moreover, due to the sensitivity of the investment decision to the level and stability of economic activity, investment plays an important bridging role between the cyclical and longer-term features of economic development. A given rate of accumulation can of course generate different rates of output growth depending on its nature and composition as well as the efficiency with which production capacity is utilised. All this means that policies will have a significant bearing on the outcome4. [38] This was certainly understood by the founding fathers of development economics:
... any theory of development must start with a consideration of the forces that determine investment in
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underdeveloped countries, especially when it is realised that savings are by no means the only limiting factor, and may be low because investments are low rather than vice versa.... Current writings on development are almost devoid of attempts at building up a theoretical framework to answer this question. One finds in them valuable hints on how investment should proceed, and on investment criteria useful for policy makers, but little systematic discussion of the forces that govern the process of capital accumulation (Hirschman, 1958:35)5. [39]
As suggested in the previous chapter, that discussion needs to focus more closely on the links between accumulation and the functional distribution of income, i.e., what we have called the profit- investment nexus. Profits not only provide an incentive for investment but are also an important source of financing it. Ideally, these should be mutually reinforcing; indeed, cumulative and interdependent links between profits and investment are central to any healthy growth regime in any market-based economy. However, the link from profits to investment is neither spontaneous nor direct, not least because the firm is comprised of owners and managers with potentially different objectives and strategies to realise them, and because most investment involves debt and equity financing in addition to retained profits (Bhaskar and Glyn, 1992)6. [40] The link can be broken by competing claims on profits, including by labour, or through alternative ways of spending those profits, whether on consumer goods or financial assets7. [41] Thus while accumulation is necessary to the
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survival and expansion of the firm, it is also a source of risks and tensions. Dealing with these makes investment an institutionally and historically grounded process (Crotty, 1990).
As discussed earlier, a good deal of evidence shows that after the initial stages of industrialisation, when agricultural and commercial incomes provide the main source of investment finance, capital accumulation is financed primarily by the retention of corporate profits, often in a symbiotic relation with long-term bank loans. A recent study of 30 developing countries in the late 1980-s and early 1990-s finds a strong relationship between a high savings rate, a large share of manufacturing output in GDP and a high profit share in manufacturing in the successful East Asian NIEs (Ros, 2000:79-83). This contrasts with other regions, such as Latin America, where savings rates are lower than expected, given the share of profits in national income, and where a fall in the savings rate has been associated with stagnant or falling shares of manufacturing industry in GDP. This profit-investment nexus provides an important criterion for assessing policies in search of faster growth8. [42]
On the argument made in this chapter, emphasising investment, both private and public, is also important because it allows for a more encompassing analysis that highlights the interdependent nature of socio-economic relations and also raises questions about their legitimacy. Keynes (1919:16-17) saw the repressed consumption habits of the «new rich» as key to the legitimacy of the 19th-century system: «If the rich had spent their new wealth on their enjoyments, the world would long ago have found such a regime intolerable. But like bees they (the rich) saved and accumulated, not least to the advantage of the whole community». As we noted in Chapter 5, investment acts like a social tax restricting the use of profits for the personal consumption of the capitalists, thus making for less personal inequality but also bestowing legitimacy on the broader pattern of distribution9. [43]
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Just how this legitimacy problem is handled opens the way for variations in the organisation of a capitalist economy. In many developing countries, where the basic policy challenge is to increase the rate of investment significantly, it cannot be taken for granted that markets will generate sufficient levels of profit to fuel accumulation or that elites will behave in the manner described by Keynes. The coexistence of a high share of profits in value added with a very unequal distribution of personal incomes, for example, suggests a low propensity to save and invest by the rich. The rich in developing countries do not always save and invest a large proportion of their incomes, but spend them on goods and services that, by developing- country standards, fall into the category of luxury consumption. Alternatively they often choose to siphon profits into financial assets at home or abroad. They also tend to consume goods with a relatively high import content, which, besides emphasising consumption over savings, also has the effect of tightening the balance-of-payments constraint on accumulation and growth. Just as significantly for the argument of this chapter, in most of the countries that have succeeded in generating sizeable resources for investment, market forces have not been left alone to dictate either the pace or the sectoral pattern of accumulation.
In an interdependent world, however, it is wrong to regard the profit-investment nexus as a sufficient condition for sustained economic growth. There must also be markets available to absorb the potential expansion in output that this implies. To paraphrase Young (1928), the profit-investment nexus is constrained by the size of the market just as the size of the market is constrained by the profit-investment nexus. Indeed, a set of feedback mechanisms between the supply and demand sides of the economy must figure prominently in any consistent growth story. Some of these mechanisms will involve recurring structural linkages between the urban and rural sectors, others are likely to involve government policy. However, there is a potential for breakdown if output runs ahead of markets.
In this respect, exporting is likely to play a major role in the process of industrialisation and economic growth, although that relationship can be envisaged in a number of ways. In more heterodox approaches, the advantages come from market size, whether through the gains from a more intricate division of labour, technological upgrading
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or by achieving minimum efficient scales of production. In these latter respects, exporting manufactures brings dynamic advantages through a virtuous circle of higher demand, greater investment and more rapid productivity growth. But for many developing countries, exporting is simply a matter of expediency, because in the absence of a domestic capital-goods sector, financing the imports necessary for faster growth is likely to meet a balance-of-payments constraint. In this case, the shift in the structure of economic activity towards the production and export of manufactured goods requires a «vent for surplus» to ensure that structural changes are not impeded by macroeconomic imbalances. Whatever the underlying rationale, however, successful exporting is itself contingent on a favourable investment dynamic. As incomes increase, rising labour costs and the entry of lower-cost producers can rapidly erode the competitiveness of labour-intensive manufactures, and new investments are needed to maintain productivity growth and to upgrade to higher-value-added activities. Indeed, as was argued in Chapter 3, to the extent that «making openness work for development» is contingent on capital accumulation, the export-investment nexus provides a second criterion for assessing development policies10. [44]
It is clear that the varied policy challenges facing most developing countries stem from these overlapping relationships connecting growth, structural change and integration; in our view, the profit-investment-export nexus provides a useful way of framing those challenges. The effort required to raise investment and exports in the initial stages of industrialisation increases considerably as the production process becomes more dependent on scale economies and knowledge-intensive activities: the technological and organisational capabilities required to compete internationally become more exacting, more difficult to master and more costly to acquire, and the investment climate becomes more uncertain.
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