Industrialization and redistribution

There have been serious disagreements in the literature on economic development as to the strategies that developing countries should follow to foster the development process. Two unsettled issues refer to: (1) the advantages of stressing agriculture or of fostering industrialization; (2) policies that take as given the current income distribution and depend on a trickle-down of the fruits of economic growth to the poorer segments of the population, as against a a strategy heavily oriented towards meeting basic needs. Discuss in detail these two controversies and how the current world economic situation affects them.

Democratic governments in developing nations have their preferences for economic development paths set in often contradictory or contrarian ways, for while it is possible to pursue many development policies at once, ideology--which is an important factor in politics in most democratic governments--may get in the way of practicality. So it is with agricultural versus industrial development and with trickle-down economics versus redistributive economics. The debate of agriculturalists versus industrialists may vary according to domestic contexts, but usually agriculturalist arguments assume a degree of autarkic control over the domestic food supply is a necessary good, and attach great importance to the sustainability of farmer livelihoods. Industrialists, on the other hand, stress the need for technological innovation and greater connection to the mercantile world in order to achieve prosperity, and may argue that control over the domestic food supply is good, but not necessary. Similarly, the clash over proper usage of redistributive policies may differ by region. Those embracing redistributive arguments tend to express alarm at widening income gaps and stress the need for properly funded social services such as schools, hospitals, and police departments. Meanwhile, the trickle-down camp will argue that redistribution hampers entrepreneurship and innovation, causes domestic talent to flee to societies where they will be better able to prosper, and discourages domestic and foreign investment. Naturally, all arguments are affected by current events and the relevant economic situations of the time.

Agricultural development policies have varied proponents, but most put forth a certain set of similar arguments: food security, the preservation of farmer societies, and the concomitant stability that this implies. Arguments for food security stem from varied concerns about the wisdom of the importation of food. Proponents of food security mostly tend to fear that a loss of control over the nation's food supply may endanger national survival if the producer nation refuses to sell, or is unable to sell food to the consumer nation. These fears are not unfounded, as the recent spike in food prices around the world had many poorer countries scrambling to outbid each other for supplies. In times such as these, food security arguments become much more convincing. However, some nations that import all or most of their food, such as Singapore or Malta, having no choice but to import, outgrew these arguments early on.

The preservation of farmer's livelihoods is another relevant topic for agriculturalist arguments. Apart from the cultural and anthropological gains that preservation implies, there is the politically sensitive issue of the preservation of stability, which is what governments are usually most concerned with. Typically developing nations will have large farmer constituencies, which though disenfranchised to some degree, are able to wield enormous amounts of political influence if and when they feel the government has betrayed them or somehow sold them short. The emphasis on preserving farmer societies stems from the need of governments to maintain a status quo where this potentially explosive constituency will stay in check. There have been instances of governments being toppled when they have failed to satisfy or have neglected this constituency, e.g. Ecuador in the late 90s and early 2000s.

The industrialist camp often attacks agriculturalists with efficiency arguments and points to the most successful development stories, like Korea and Taiwan, for support of industrial policies. The benefits of specialisation are touted as answers to poverty and underdevelopment. Technological innovation and globalisation are seen as the way towards greater economic prosperity, while the need for food security is downplayed. Indeed, the most successful stories in economic development show that industrialisation can peacefully and stably deliver prosperity and mitigate poverty on a national level. To achieve such prosperity, however, there are many governance and macroeconomic prerequisites domestic governments must fulfil before embarking on successful industrialisation campaigns: government must be transparent, open, and democratic; it must successfully prosecute corruption and reward efficiency; and it must promote investment and stability. Monetary and fiscal policy must move in lockstep to fight inflation and minimise waste.

In this time of globalisation and global recession, both arguments can profit from the situation. Agriculturalists may point to the unfolding fiscal crises in the least liquid countries and argue that a crisis of food security could be averted if production was local rather than imported. Industrialists may argue that attaining specialisation in the right products lends any country a competitive edge that will fend off recession and keep imports flowing.

The arguments over the proper use of redistribution have a long history and have fierce ideological and philosophical backings; however, the basic tenets of the more liberal and more conservative approaches may be briefly analysed. While liberal redistributionists argue of the necessity of providing governmental social services, conservatives argue higher taxation discourage entrepreneurship and thus hamper economic innovation and prosperity; the liberal perspective emphasizes social equality while the conservative stresses efficiency.

The conservative approach bases itself on the economic assumption of self-interest and the incentives that align to foster entrepreneurship and innovation. Entrepreneurs are individuals that invent new concepts or products that they disseminate or sell at a profit, or that seek opportunities to exploit new markets via price arbitrage. The economic argument against greater redistribution is based on opposition to the higher taxes that redistribution presupposes. Higher taxation deprives those who do not derive their sustenance from the government--a category that includes entrepreneurs--from a greater part of the fruits of their labour. Once a certain critical point is passed, entrepreneurs have no self-interested incentive left to pursue their ideas or exploit their knowledge of arbitrage opportunities. The society as a whole loses out on the efficiencies that would have otherwise been created.

The liberal approach, on the other hand, argues that society as a whole benefits most from a healthy, educated, lawful populace, and that a sustainable economic model must take into account the well-being of all citizens over the self-interest of its wealthiest, as only then will maximum efficiency--labour and otherwise--be achieved.

The current economic crisis has seen divergent arguments for both of these viewpoints. Liberals may argue that government spending on services and human resources are the best way to emerge successfully from recession, citing both humanitarian and countercyclical Keynesian arguments. At the same time, the conservative model sees increased spending as wasteful for two reasons: firstly, most government spending in times of recession is politically geared towards short-term consumption rather than long-term investment; and secondly, because most of this spending is financed with issuance of debt, which must be eventually repaid and is therefore merely pushing the pain of the current recession into the future, when taxes will inevitably be raised to pay both principal and interest.

Although invariably governments around the world must respond to the current economic crisis, it will be of much interest down the road to study and comprehend the reasons behind the failure or success of particular cases.