Introduction

While the focus of this book is on the period after independence, this chapter has an overview of the period prior to independence – that is, the colonial period – and specifically the era of the British Raj and the legacy the British left by way of an export-oriented economy together with a politico-juridical system and the attendant infrastructure. In particular, the focus is on the impact of the plantation economy and the changes and configurations it brought to the people, as well as its effects on the country's broader socio-political milieu and economic development. The aim of this chapter is to present the ways in which existing social processes in the pre-colonial past were redefined and re-created during the colonial experience. The post-independent experience is in many ways a continuation of the transformations that took place in the colonial period.

But before laying down the different socioeconomic and political aggregates that interacted and took root in the colonial period, it is necessary to present a contemporary view of the land and the people who inhabit it at present.

The Land and the People

Sri Lanka is an island situated off the southernmost point of the Indian subcontinent. The island is about 270 miles long from the southern tip at Dondra Head to the northernmost point at Point Pedro. It is 140 miles wide, and covers an area of 25,332 square miles.

Nurkse, Early Development Theory and Modern Monoeconomics

Ragnar Nurkse was part of a group of early theorists of economic development who questioned orthodox Ricardian trade theory as the basis for development policies: ‘In many of the less developed countries today the dominant practical question is whether the available investment funds … should be used to provide activities specialized along lines of comparative advantage internationally or diversified so as to provide markets for each other locally.’ He noted that this ‘clash of prescriptions on the policy plane reflects … a gap between the neoclassical allocation economics and … growth economics’ (Nurkse 1961b, 235–6). The emphasis on growth economics engendered a debate over whether ‘balanced’ or ‘unbalanced’ growth was the best strategy for developing countries to support growth through industrialization. In difference from modern discussions of development, there was a general agreement amongst economists that industrialization was the most efficient means of supporting economic development.

Ragnar Nurkse, along with Paul Rosenstein-Rodan, was the most important and influential advocate of ‘balanced’ growth as a means to support the industrialization of ‘undeveloped’ (to use Oscar Lange's terminology; Lange 1946) economies. It was taken as given that a developed economy was an industrial economy. Nurkse and Rosenstein-Rodan supported balanced growth with what might be called ‘classical’ arguments concerning long-run determinants of the interaction between demand and supply, in particular those advanced by Allyn Young and Josef Schumpeter in the 1920s, joined to an historical analysis of the changing structure of international trade and payments in the twentieth century.

Introduction

The concepts of “compulsory repatriation” and “statelessness” are introduced and discussed in this chapter as they occurred in the context of the 1954 agreement. In 1954, an agreement deciding the fate of those who were disenfranchised was concluded between India and Sri Lanka. The agreement failed to be implemented. But most significantly, the agreement was about shifts in focus by both India and Sri Lanka. This chapter addresses the reasons the Sri Lankan government shifted from the position held by the former Prime Minister, D. S. Senanayake, which was one of keeping the Indian Tamils in Sri Lanka as a disenfranchised community, to one where the government actively sought to repatriate them.

This chapter addresses the compulsions that caused India to shift to repatriation as an option, whereas Nehru had stood steadfastly by his view that the Indian labor should be accepted as citizens of Sri Lanka. This decision was to significantly change the course of future negotiations. In Sri Lanka, it also made “statelessness” – a concept that had not been part of the Sri Lankan vocabulary – a common word as India refused to accept all those who had been denied Sri Lankan citizenship.

Instability of Export Earnings: Causes and Effects

Agricultural production suffers from a good deal of natural instability due to weather, pests and plant diseases. As if this were not enough to relieve the monotony of rural life, the notorious cyclical variations in export proceeds are superimposed on the random changes in output. If movements on the supply side were the dominant factor in the export trade of primary producing countries, then export prices and quantities would tend to fluctuate inversely. Actually, prices and quantities accentuate—instead of mutually offsetting—each other in their effect on the export proceeds of primary producing countries. This fact is brought out clearly in a recent United Nations study. Based on the experience of the first half of the present century (1901–1951), this study finds that, on the whole, price and quantity changes contribute about equally to the cyclical ups and downs in export proceeds realised for the leading primary commodities that enter into international trade. Indeed, the cyclical variability of export quantities is, rather surprisingly, somewhat greater than that of export prices: the average fluctuation per annum turns out to be 17 % for the quantities and 14% for the prices of the 18 major products.

The parallel movement of export prices and export quantities reflects unmistakably the dominant role of demand conditions. It furnishes conclusive proof—if proof were needed—that the export fluctuations of primary producing countries originate in the world's industrial centers.

The most essential condition for achieving a fuller convertibility of currencies is a removal of the persistent disequilibrium in trade and payments between the dollar area and the rest of the world. Inconvertibility has not been the disease itself so much as a symptom of the stubborn maladjustment commonly called the dollar gap. In these circumstances discrimination in trade and exchange control has appeared to the dollar-deficit countries as a way of preventing their mutual trade from being strangled by restrictions imposed on payments grounds on imports from the dollar area.

Absence of such maladjustment as a prerequisite to convertibility is particularly important for a currency like sterling, in which some 40 or 50 per cent of the world's trade is conducted. The pound sterling, being a world currency, would, if it were made more fully convertible, inevitably feel some of the strain of the world's dollar disequilibrium, even if the dollar position of Britain herself or the sterling area as a whole had been brought into balance.

But now, as we take a new look at the dollar gap, we find that it seems to have closed. Since the middle of 1952 the current account of the United States balance of payments has been practically in equilibrium: United States exports and imports of goods and services have almost exactly balanced. For a statistical account of this remarkable change I refer to the Federal Reserve Bulletin of October 1953.

The main features of India's development policies are matters of common knowledge. The First Five Year Plan placed the emphasis on agriculture. The Second Plan, which came into effect in April 1956, seeks to promote an expansion of small-scale village industries for the production of consumer goods. At the same time it calls for a big increase in steel production and engineering capacity. Before considering these specific programs it is necessary to deal with a subject that dominates the background of economic policy in India.

The Problem op Unemployment

Concern with the problem of unemployment is paramount in current Indian thinking. Professor P. C. Mahalanobis, one of the chief planners, regards this as “the most pressing problem.” A panel of Indian economists speaks of it as “a problem of enormous dimensions.” The urgent need to create more employment opportunities is stressed in nearly all documents relating to the current Plan.

This emphasis may seem surprising, perhaps even incomprehensible, to some economists outside India. What are the facts? There is first a certain amount of open unemployment, mostly in urban centers, which is said to have increased in the years 1952–1955 and is estimated at somewhere between five and ten million persons. India has rightly been proud of her success in expanding production since 1951 without any price inflation, at any rate up to the end of 1955.

Introduction

Carlota Perez (1983, 2002, and with Freeman 1988) has been in the vanguard of a small group of economists and other social scientists who have been arguing that the driving force behind the economic development that has taken place over the last two centuries has been the co-evolution of technologies and institutions. I use the term ‘development’ here rather than ‘growth’ to connote that, under this view, an essential feature of the process has been the rise over time of new technologies, institutions, and industries, and the decline or radical reshaping of others, and to think of the economic progress as simply being able to produce more, and using aggregate statistics like GNP or GNP per worker as an indicator of what has happened, is to miss the heart of the story.

As we know, the latter perspective is a hallmark of the neoclassical economic growth theory that grew up in the 1950s and remains the basic story about economic growth taught in mainline economics departments. From its genesis, neoclassical growth theory has recognized technological advance as a key driving force. However, even its modern versions do not come to grips with the processes by which technology advances, as these have been documented by empirical scholarship, and while a few recent models do incorporate a characterization of ‘creative destruction’, that characterization is not just highly stylized, but, from the point of view of Perez and her colleagues, misses most of the action.

Introduction

W. Arthur Lewis is a canonical figure in economics and can be considered as one of the key thinkers in twentieth-century development thought. His output over more than a half century was voluminous and varied in subject matter. By the time of his Nobel Prize lecture, Lewis had authored ten books and 80 scholarly articles on topics as wide ranging as industrial economics, world trade, development planning, agricultural economics, race and economic development, education, politics, economic integration and economic history (Tignor 2006).

Lewis was a contemporary of Nurske. Both men were among a small group of theorists and analysts working on the problem of economic development in the 1950s. Strangely, there are little or no references to each other's work, even though there are clear areas of contention and synergy. For example, under what became known as the Lewis model of ‘industrialization by invitation’, the modernization of the peripheral economy would tend to favour the interest of foreign firms and the local elite whose tastes and ideologies are aligned to foreign consumption. On the other hand, Nurske's (1952) balanced growth thesis is critical of the view that productivity gains and increased savings can accrue to peripheral economies through external sources, for example, foreign investment. Indeed, Nurske argues that the problem is not just one of production, but of the widening gap between developed and developing countries and the problem of emulation of lifestyle and consumption. What Nurske is outlining is that development is a relational construct; it is always about invidious comparisons and it is always about filling gaps and catching up with the ‘leaders’.

The concept of Unequal Exchange played a large role in the debates on economic development in the quarter century after 1950, and it surfaced in three traditions – Latin American structuralism (Raul Prebisch, Hans W. Singer), Marxism (Arghiri Emmanuel) and Dependency (Andre Gunder Frank, Samir Amin). Yet Unequal Exchange made its first formal appearance in the work of Mihail Manoilescu, the Romanian trade theorist who challenged neoclassical trade theory between the two world wars. His place in the trade debate is often ignored in the postwar discussions of Unequal Exchange.

A man of many parts, Mihail Manoilescu had an international reputation as a theorist of corporatism as well as an economist. Yet it also seems that he wanted to succeed at politics more than at anything else – he was ‘'furiously ambitious’, in the words of the British Ambassador to Romania in 1940, and Manoilescu was a stereotypical Balkan politician in his opportunism. Born in 1891, Manoilescu came from a modest background. His parents were secondary school teachers at Iasi, the capital of Moldavia. Manoilescu studied engineering at the School of Bridge and Highway Construction at Bucharest and led his class every year. There he also became a friend of the future King Carol II. Manoilescu received his engineering degree in 1915, and during the First World War worked in the National Munitions Office. His energy, cleverness and ability to form useful connections allowed him to become Director-General of Industry in 1920 and to organize the first industrial exhibition of Greater Romania in 1921 (Manoliu 1936, 10).

Introduction

There is little doubt that over the last three decades, the world economy has witnessed the emergence of a cluster of new technologies – that is, a new broad techno-economic paradigm in the sense of Freeman and Perez (1988) – centred on electronic-based information and communication technologies. Such ICT technologies not only gave rise to new industries but, equally important, deeply transformed incumbent industries (and for that matter, also service activities), their organizational patterns and their drivers of competitive success.

Granted such ‘revolutionary’ features of the emerging ICT-based (and possibly life science-based) technologies in manufacturing and services, what has been their impact upon the vertical and horizontal boundaries of the firms? What is the evidence supporting the view according to which the new techno-economic paradigm is conducive to a progressive fading away of the Chandlerian multidivisional corporation, which was at the centre of the previous techno-economic paradigm, in favour of more specialized, less vertically integrated structures? Is it true that large firms are generally losing their advantage in favour of smaller ones? And more generally, how robust is the evidence, if any, of a ‘vanishing visible hand’ (Langlois, 2003) in favour of a more market-centred organization of economic activities?

In this work we address these issues, drawing both on several pieces of circumstantial evidence and on firm-level statistical data. In fact, if the sources of competitive advantage conditional on firm size had significantly changed, this should reflect also on changes in the size distribution of firms, on their growth profiles and on the degrees of concentration of industries.

The Philippine experience after World War II, relative to that of other countries in East and Southeast Asia, has caught the attention of eminent economists studying growth and development. Lucas (1993), for example, asked why the Philippines was not part of the “economic miracle”–the remarkable East Asian transformation featuring Hong Kong, China; the Republic of Korea; Singapore; and Taipei, China. This section describes and tries to account for performance in growth and poverty reduction in the past several decades and the evolution of the Philippine Government's development policy.

Synopsis of Philippine Growth

Following the Philippines' political independence in 1946, in the 1950s, the country embarked on an industrialization drive. During 1950–2006, the Philippine gross domestic product (GDP), expressed in 1985 prices, expanded 11.2 times—an average growth of 4.4% each year. But the growth rate was never smooth. For instance, the economy contracted in 1984–1985, 1990, and 1998.

Accounting for growth in population—which rose from about 19 million in 1950 to 87 million in 2006, for an average annual growth of about 2.75%—in 1960 the Philippines had a per capita GDP of about $612 expressed in 2000 United States (US) dollars (Table 2.1). By this measure, it was ahead of Indonesia, with a per capita income of $196, and Thailand, with $329. The Philippines trailed Hong Kong, China; the Republic of Korea; Malaysia; Singapore; and Taipei, China. By 1984, Thailand's per capita GDP of $933 had overtaken the Philippines' $908.

The object of this paper is to consider the international implications of national policies aimed at maintaining high and stable levels of employment. It is now widely realized that such policies are not only compatible with, but actually prerequisite to, a large and steady flow of world trade. Substantial progress has been made since the end of the war in setting up the framework for a new international system of monetary and trading relations. The two Bretton Woods institutions are ready to start operations; and a conference just concluded in London has produced a draft charter for an International Trade Organization. This is a good time to inquire how this new system can be operated so as to agree rather than conflict with the domestic objective of stability at full employment.

The search for domestic stability at full employment must nowadays be accepted as a datum. The international monetary system should be—and, I believe, is now—so devised that the balance of international payments can never force a country into a state of deflation or inflation. Foreign trade fluctuations may continually necessitate relative shifts in the structure of prices and production, but should not compel any country to depart from the general norm of domestic stability. On occasion, domestic stability may of course break down; inflation or deflation may occur; but, if so, it will be for autonomous internal reasons, not as a means of bringing a country's external accounts into balance.

Introduction

According to modern growth theory, the accumulation of human capital is an important contributor to economic growth. Numerous cross-country studies extensively explore whether educational attainment can contribute significantly to the generation of overall output in an economy. Although macro studies have produced inconsistent and controversial results (Pritchett 1996), several micro studies that look into the same problem have shown a positive relationship between the education of working individuals and their labor earnings and productivity. To put it differently, the general finding is that individuals with more education tend to have a higher employment rate and greater earnings and to produce more output than those who are less educated. These findings provide a strong rationale for governments and private households to invest substantial portions of their resources in education with the expectation that higher benefits will accrue over time. In this context, education is deemed an investment, equipping individuals with knowledge and skills that improve their employability and productive capacities, thereby leading to higher earnings in the future. The Philippine education system is characterized by high attendance rates, implying that, unlike in other developing countries, social interest in education is widespread in the Philippines. As a result, the average years of schooling of the labor force has increased over time and excellent performance in education by the Filipinos has been widely acknowledged in international circles. Yet, the performance in labor productivity contrasts with the increasing level of education of the country's workers.

The Idea of Stages

History – it has been said – was created to prevent everything from happening simultaneously. History obviously implies that events happen in a sequence, and stage theories are attempts, based on different criteria, to organize the historical process in sequential stages. In their most general form, stage theories postulate that a key factor in the process of socioeconomic development is the mode of subsistence, i.e., what, how and with which tools a society produces. Stage theories are tools that can be used to study both the qualitative changes in the division of labour over time, and the processes of institutional design and change that accompany these changes. Stage theories point towards areas where the focus of human learning is concentrated at any point in time, and as such, they serve as a basis for a qualitative understanding of processes of techno-economic change and of income inequality. It is to this ancient tradition of organizing history that Carlota Perez has made the most original and path-breaking contribution of the last 100 years. As I see it, understanding the qualitative differences between economic stages – the relationship between technology, social organization, and wealth – is a prerequisite for understanding, designing and implementing appropriate institutions and mechanisms both for the technology policy and for income distribution in a society.

Technological Revolutions and Financial Capital is one of the most important books written on capitalism. Historically and theoretically! How can such a statement be made on Carlota Perez' first and (so far) only book? How can a slim volume of about 180 pages be mentioned together with works such as the 2,350 page Das Kapital by Marx, Schumpeter's 1,400 pages of Business Cycles or Å;kerman's 930 pages of Ekonomisk Teori?

Åkerman? Why mention a scarcely-ever-quoted Swedish economist (1896–1982) together with always-quoted scholars such as Marx and Schumpeter? One reason is that I happen to know that Carlota Perez appreciates his main book (Å;kerman 1944, which was translated into Spanish in 1960) above Schumpeter's work, although she – like most others (except Kindleberger 1978, Goldstein 1988) – commits the sin of not quoting it. But a more important reason is this: There is a close connection between the claim that Perez' work is theoretically important, and the paradoxical fact that most of Åkerman's work entitled ‘Economic Theory’ contains an empirical analysis of the core capitalist countries in the 1820–1940 period.

Åkerman and Perez share the same basic substantive research problem: How can patterns in the development of the core capitalist group of countries since the late eighteenth century be reconstructed in a way that serves the analysis of present economic developments? Å;kerman was a founding member of the Econometric society, but rather than converting to the econometric program of statistical inference (the Cowles commission approach as pioneered by Haavelmo and others), he continued to pursue a ‘low tech’ approach to the analysis of economic time series.

Introduction

The open economies context implies increasing globalization and interdependence between countries and a reconfiguration of industrial powers and, hence, of prevailing international equilibria. The rise of China and India are only two examples of this tendency. At the same time, we are facing the emergence and the consolidation of new technological paradigms, mainly information technology, biotechnology and nanotechnology, which are engendering a radically different meaning and scope of what has been traditionally called ‘industrialization’. The borderline between science and business is continuously redefined, and it is increasingly less sharp. Intangibles and knowledge are more and more relevant, and the reshaping of intellectual property regimes at a global scale amplifies this tendency.

This set of broad reconfigurations of dominant actors, prevailing technological paradigms and new international trade and production rules redefines the opportunities and the constraints for development, which, unfortunately is still a goal to be reached in many regions of the world. Reports on the state of the world abound with figures showing the persistency of poverty, the marginal participation of developing countries to global trade and the poor quality and articulation of production structures in developing economies.

Classical development economists shared the perception that developing economies differ in major structural ways from developed economies, mainly, in their dependence on exporting primary products, and in their technological backwardness (Prebisch 1950, Hirschman 1958, Myrdal 1956, Nurske 1953a, Lewis 1954, among others).