Growing Infant Capitalists
Trade and Industrial Policies at Early Stages
of Industrialization
DRAFT
Akbar Noman
I. Introduction Adam Smith explicitly assumed the
institution of a class of capitalists -- “previous accumulation” of capital
Marx followed Smith, translating “previous” as "ursprunglich” in German which his translator rendered back into English as the famous “Primitive” accumulation
What about economies at an early stage of development without “previous” or ”primitive” accumulation?
Recent large literature on institutions, including those required for the existence and functioning of markets largely neglects this question– implicitly assumes existence of capitalists/entrepreneurs
An exception is the attention given to this in some analysis of privatization in the FSU, esp. Russia
The Russia disaster not just because of the absence of the “standard” institutions of property rights, contract law but also of capitalists
This has also been an issue in Africa where also cases of privatization without the requisite institutional underpinnings
Early literature on development focused on the issue of entrepreneurship but largely ignored more recently
II. Infant Capitalist Argument
The explicit assumptions of Smith and Marx and the implicit one of much recent institutional literature (and some reform programs) acquire particular salience at stage where embarking on development aimed at moving beyond simple agriculture and crafts to producing output for which capital and learning are important
By definition “modern” private sector and capitalists absent at this stage
Inevitable, the early stages characterized by a form of industrial organization where there is no divorce between ownership and management. The capitalist and the entrepreneur are one and the same
Industrial entrepreneurship requires capital, albeit much of it typically borrowed
Alexander Hamilton’s venerable 200+ years old infant industry argument matured 6 years ago with the infant economy argument of Greenwald & Stiglitz
The essence of these is well-known and revolves around learning and spillovers
As does the infant capitalist argument: protection by reducing risks and boosting profits can help create and nurture a class of capitalists and enable learning. Can also help to direct rents into industry and entrepreneurship.
Given that capital accumulation and entrepreneurship are intertwined at “infancy”, both physical and human capital are accumulated jointly
Accumulating physical capital is necessary for learning which in turns facilitates further accumulation
This is of special relevance to much of Africa
III. Infant Capitalists in AfricaAt independence, Africa lacked a
class with the wherewithal to become entrepreneurs in “modern” activities. More precisely, to the extent such a group existed, it was dominated by foreigners or ethnic minorities of relatively recent origin
Certainly more recent that say Malaysia with its “bumiputra” promotion program
At independence probably greater divorce than anywhere else between economic and political elites
Not surprising then the ambivalence, at best, in the 60s and 70s, towards the private sector and resort to public ownership and management
Many countries still characterized by infant or at best toddler capitalists, especially indigenous ones
Political economy imperative to protect/create/nurture them
Whilst individuals/groups have acquired significant wealth in some countries from rent-seeking; they are discouraged from investing in modern transformational sectors
Unproductive rents not associated with investment in industry and learning
Investment climate and related “governance” reforms have been very imperfect substitutes for infant capitalist protection and associated industrial policies
These reforms have not so much reduced rents as diverted them into unproductive activities
Rents acquired via incentives to invest by an infant class of industrial entrepreneurs can be vital and facilitate learning
Of the type that succeeded so spectacularly in East Asia and to varying degrees elsewhere in parts of Asia and Latin America
IV. Lessons of SuccessEast Asia is well-known, oft cited case.
Often said to be “unique” developmental state not easy replicated
The non-replicability in Africa much exaggerated. Argued elsewhere by some participants at this event, including myself
But even Pakistan is highly relevant, successful case of what was in effect infant capitalist protection (and surely its governance is not an impossibly high bar)
Excellent detailed study by Papanek of how Pakistan created a class of “industrialist-capitalist-entrepreneurs” from scratch almost overnight (5 years)
Documents how the high and assured profits contributed to the accumulation of capital and learning . Rents acquired by investing in industry
Package of protection and low-interest long-term credit
Even the seminal work of Little, Scitovsky and Scott (LSS), otherwise highly critical of “import substitution” acknowledges this achievement
No doubt static efficiency losses but much exaggerated by LSS and others (Noman, 1991) and not so high as to clearly drown out dynamic gains
GDP and industrial growth accelerated to Korean levels before Korea. As did the emergence and growth of manufactured exports.
Korea explicitly set out to learn from Pakistan, especially how to combine protection with export promotion
As in E. Asia, availability of long-term credit on reasonable interest rates was also crucial
If Pakistan could do it, surely several countries in Africa can
V. Concluding Remarks Danger of excessively high and
irrational protection should and can be avoided. The worst sins now much better understood. We have lessons of failure that were not available in the 60s and early 70s
Also now lesson of importance of an experimental approach, of abandoning failures
Still not all governments can do it
Avoid extremes of level and variability of protection but some variability needed: moderately high for simple consumer goods in which comparative advantage, lower on intermediates (none for exports); and very low or none on capital goods
There will be rents and corruption everywhere. The question is how to minimize their negative effects and channel them into productive activities and learning
Embed protection in a strategy, a vision, in industrialization policy
Ensuring infants grow and learn: exports and competition
Another challenge: avoiding exchange rate overvaluation in resource-rich and aid-dependent economies