The Philippines has long considered sustained growth of income and employment, along with poverty reduction and improved distribution of income and wealth, as major development goals. In pursuit of these goals, the country embarked on an industrialization drive after gaining political independence more than a half century ago. The drive continues today. The primary strategy involves transforming an economy that still has a large agriculture sector into an industrialized one. Through this strategy, policy makers aim to move individuals, households, and enterprises from low- to high-productivity sectors and activities to trigger and propagate the desired economic and social transformation.

A look at the Philippines' development performance over the past six decades, however, indicates that the country has not done as impressively as many of its East and Southeast Asian neighbors, such as Malaysia, Thailand, and the four newly industrialized economies—Hong Kong, China; the Republic of Korea; Singapore; and Taipei, China. Philippine economic growth has not only been slower, it has also been interrupted frequently by episodes of macroeconomic instability, financial and fiscal crises, and recessions. In the 1950s and 1960s, the Philippines had one of the highest per capita gross domestic products (GDPs) in the region—higher than the People's Republic of China, Indonesia, and Thailand. But, the country has now fallen behind. As a result, household incomes have not risen significantly, poverty incidence has declined only slowly, and inequality remains high. In 2006, about one in every four families and one in every three Filipinos lived below the official poverty lines.

Introduction

It's only very recently that the field of economics (and policy) has rediscovered development and/or evolutionary economics as an important area of research. According to the pioneering work of Schumpeter, innovation can be seen as a driving force for economic development and growth. Schumpeter's second important (and often neglected) cornerstone is financial capital. The innovator needs financial capital for the new combination of given resources from the outside, made available from the bank system in the form of credit. Schumpeter uses the static equilibrium as a reference point. To move beyond static equilibrium, dynamic skills in the sphere of financial and monetary systems as well as in the realm of public and private goods are necessary. Therefore the credit-drawing bank system and the value-drawing entrepreneur system must be counterparts. In addition, Schumpeter used the term capital– in contrast to the dominant neoclassical opinion – in a balance sheet-oriented sense as ‘financial capital’. Interestingly enough, Ragnar Nurkse, the best known Estonian economist, dedicated his scientific work (e.g., his books, Problems of Capital Formation in Underdeveloped ([1953] 1960) and Countries and Equilibrium and Growth in the World Economy (1962)) to very similar topics by referring to Schumpeter partly.

Introduction

‘Bretton Woods’ is many things. Superficially, it is the New Hampshire resort where the globe's soon-to-be victorious nations agreed in principle to a new postwar order. It is also the ‘Bretton Woods institutions’, which gave rise to the World Bank, the International Monetary Fund and, with some delay, the World Trade Organization. And it is the most ambitious international monetary experiment in human history: the ‘Bretton Woods system.’ Governments of most of the world's main trading nations agreed to guarantee the price of dollars in their local currency. To appreciate this brio, imagine a government agreeing internationally to guarantee the price of any asset: a home, a share, a bond. As one of the foremost monetary law experts at the time commented, ‘The new plans are of a complication entirely unprecedented in the history of international law’ (Nussbaum 1944, 256).

How was this possible? One answer is Ragnar Nurkse. His International Currency Experience: Lessons of the Inter-war Period perfectly supported the case made by Keynes and White for an audacious codification of international finance. Nurkse's book sought to uncover the sources of interwar economic implosion; its villain is the international monetary system. The account is so thorough, so accessible and so compelling that its basic premises were considered axiomatic well into the second half of the twentieth century.

The purpose of this essay is to consider some of the central issues of international monetary policy in the light both of pre-war experience and of the post-war plans concerning foreign exchange and finance. For the facts of recent history and the conclusions to which they point, our principal source is a League of Nations report entitled International Currency Experience: Lessons of the Inter-War Period. For the post-war plans, reference will be made to the agreements adopted at the Bretton Woods Conference.

Our discussion is concerned with relations between independent national currencies. It may be well to state at the outset that the system of relations here envisaged is not of the gold-standard type if that means immutable exchange rates with domestic monetary and economic policies subordinated to the balance of payments. Changes in exchange rates are accepted as a legitimate method of adjustment, and the conditions in which such changes are appropriate will be our first topic (Sections I and II).We shall then comment on “cyclical” fluctuations in the balance of payments for which the method of exchange adjustment is unsuitable (Section III); on the importance of foreign investment for the successful functioning of the international currency mechanism (Section IV); and on the interrelationship of monetary, commercial, and employment policies (Section V). One of our main preoccupations will be to determine the international monetary framework compatible, on the one hand, with the pursuit of national policies for the maintenance of employment and, on the other, with the fullest possible development of international trade.

This work is a reflection of my struggles with my own dualistic perceptions of societal processes as I have experienced them in Sri Lanka. Because of my upbringing and location in a plural society such as Sri Lanka, my responses have comprised concerns and frustrated despair at seeing Sri Lanka sundered by ethnic animosities and intolerance, instead of celebrating the plurality and diversity of culture and language which so richly endow our lives.

This book is about the repatriation of Tamils of Indian origin from Sri Lanka to India. Repatriation was the outcome of the decisions that were made by policymakers from two countries. In the end, it turned into a humanitarian crisis, which resulted in thousands of people being uprooted from a country they had legitimately called their home and in the separation of families who had once lived together.

Repatriation affected Tamils of Indian origin from all walks of life – the traders, the money lenders, the unskilled laborers in urban areas, as well as those who worked as domestic servants or labored on the estates.

Ever since Schumpeter's Theory of Economic Development (Schumpeter 1934), economists have been aware of the importance of finance as the enabling agent of the creative destruction that is necessary for the dissemination of innovation and capitalist wealth creation. In Carlota Perez' explanation (Perez 2002) of the technological developments as the instigators of surges of development, it is financial capital that commands this process in the ‘installation period’, leading the way to the hyperinflation of asset values and the creation of a bubble that allows for the full exploration of the attributes of the new technological paradigm. But the resulting bubble-driven inflation of paper values relative to real values eventually becomes an obstacle to further development as financial capital resists longer-term investment and instead increasingly focuses on shortterm gains, diverting funds from production into financial speculation, ‘quasigambling’, seeking financial gains for gains sake. The full deployment of the installed paradigm thus requires the elimination of the excessive financial layering through a financial collapse, and increased regulation of the financial system through more rigorous government control in a way that does not prevent the full deployment of the new technology led by production capital reaping the full economic and social potential of the now prevailing paradigm.

There are a number of familiar features in this description of the role of finance in the development process. It resembles closely the description of financial fragility developed by another student of Schumpeter, Hyman Minsky.

Introduction

It is difficult, in principle, to controvert the simple statement that institutions play a role in explaining growth. An institution, after all, is “a system of rules, beliefs, norms, and organizations that together generate a regularity of (social) behavior” (Greif 2006, 30). Viewed at this fundamental level, institutions are pervasive, and, therefore, affect all behavior manifesting any semblance of regularity, including behavior by politicians, bureaucrats, and the citizenry itself. In particular, to the extent that formal rules, informal norms, beliefs and convergent expectations, and organizations are implicated in the acquisition and exercise of political authority, then governance itself—“the manner in which public officials and institutions acquire and exercise the authority to shape public policy and provide public goods and services” (World Bank 2007, i)—must be understood as being an institutional outcome. This is straightforward, since the institutional elements just mentioned directly affect political behavior. At the most formal and superficial level, constitutions and statutes place obvious limits on the mode of acquiring and exercising authority (e.g., elections and executive–legislative relations). In many instances, of course, behavior will appear to deviate from or spill over the limits imposed by formal laws—a problem endemic to many developing countries—such as when clientist or patriarchal relations swamp outwardly democratic processes. Closer analysis, however, will typically reveal that such behavior actually accords with some other (perhaps competing) set of de facto institutions that operate alongside or in lieu of de jure institutions.

The publication of this book to crown the life and work of Carlota Perez in the service of research into technology cycles and their relationship with financial cycles comes at exactly the right time because, unfortunately, her analysis has proved to be absolutely right: about 30 years after the start of the fifth technology cycle based on information and communication technologies, the crisis is upon us. It is a global, systemic crisis similar to that of 1929, the one that separates the two phases of Kondratiev cycles (which do indeed always seem to last 50 to 60 years), even as those who waxed lyrical about the ‘new economy’ were predicting their disappearance. Carlota Perez steadfastly maintained in recent years that the dot-com bust in 2001 was not the ‘real’ crisis that, given the continuing split between the real and the virtual economy, was still to come. Her work helps give us a better understanding of the relationship between capitalism and society as a system based on disequilibrium, emphasizing the specific role of a financial capitalism that first fuels, then dampens, entrepreneurial ardour, this being the genuinely new anthropological model of capitalism as identified by Schumpeter.

The cyclical hypothesis having proved its worth, we can therefore look forward to a period of great turbulence, accompanied by social and political strife, if not war. October 2008 will go down in history as the time when the most orthodox of economic liberals were won over to the most radical state interventionism, to the point where The Economist (2008) was able to run the headline ‘Re-bonjour, Monsieur Colbert’.

Introduction

‘I do not know’, Alexis de Tocqueville says in Democracy in America, ‘if one can cite a single manufacturing and commercial nation – from the Tyrians to the Florentine and the English, – that has not also been free. Therefore a close tie and a necessary relation exists between those two things: freedom and industry.’ Tocqueville expresses what could be called a development truism of half a thousand years from late Renaissance city-states to Marshall Plan and Havana Charter. Indeed, during the Enlightenment, civilization and democracy were understood, through the analysis of people like Montesquieu and Voltaire among many others, as products of a specific type of economic structure. When German economist Johan Jacob Meyenn stated in 1770 that ‘it is known that a primitive people does not improve their customs and institutions later to find useful industries, but the other way around’, he expressed something which could be considered common sense at the time. We find the same idea – that civilization is created by industrialization or, to put it more specifically, by the presence of increasing returns activities – in the nineteenth century in thinkers across the whole political spectrum from Abraham Lincoln to Karl Marx.

It seems probable that Schumpeter thought of ‘Business Cycles’, at least before publication, as his magnum opus. It was, of course, immediately recognized, at least in the United States, as a major contribution to business cycle theory and economic theory more generally, and was accorded a major review article by Kuznets (1940) in the American Economic Review. Yet, half a century later it cannot be said that Business Cycles occupies a place in the history of economic thought comparable to the major works of Marx, Keynes or Ricardo, or even other works of Schumpeter himself.

The ambitious scope of the book is evident from the full title: Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process and its two volumes, comprising more than a thousand pages, bear further witness to the magnitude of the enterprise. Schumpeter always regarded business cycles not as a sideline or a speciality, but as a major manifestation of his theory of economic development and growth in capitalist economies. Already in the Theory of Economic Development he included a chapter on business cycles that foreshadowed his later work. Moreover, although he greatly admired Marx's intellectual achievement and gave him credit for being one of the first theorists to recognize cycles and address these problems, he nevertheless chided Marx (Schumpeter 1943, 36–39) for supposedly failing to develop any systematic theoretical explanation of crises and for holding an eclectic view embracing many possible causes.

Introduction

Please note that the word “succeeded” is used in an ironical sense. It must not be forgotten that although some writers maintained that the agreement was a success in bilateral relations and it was lauded in certain political circles, in reality it meant the pain of uprootedness for hundreds of persons.

Repatriation became a real and menacing finality when an agreement was signed in 1964 and was accepted by the parties concerned both in Sri Lanka and in India. The investigation in this chapter is whether this agreement became a reality because of India's compliance underlined by her foreign policy requirements, or whether it was also a result and an indication of the abandonment of pluralist democracy in favor of majoritarian tendencies that prevailed in the socio-political trajectory of this time. This potentially divisive and destructive tendency was not only to engulf the major Sinhala-dominated political parties, but was also to draw in the left-wing parties. Therefore, did this process of political mobilization have ideological and moral implications and impact upon the ways in which the Indian Tamil issue was publicly debated? The 1964 agreement was not only about the entrenchment of Sinhala nationalist tendencies in politics, but also about the abandonment and betrayal by different parties and interest groups that had supported the aspirations and sentiments of the Indian Tamils.

The last two decades or so have seen considerable advances in thinking on development policies. The thinking in the late 1980s and early 1990s was very much guided by the Washington Consensus. Subsequent experiences of many countries, including those in Latin America and Africa, however, showed that the policy prescriptions based on the Washington Consensus did not always deliver the expected development outcomes. The disappointment with the Washington Consensus led to a continued search for new approaches to development strategy. A new consensus has in the meantime emerged that the economic and political environment differs a great deal among countries, and there is no “onesize- fits-all” solution to development problems; thus, identifying the binding constraints to development and sequencing policy priorities contingent on country-specific circumstances are critical for igniting and sustaining growth and accelerating the pace of poverty reduction.

The Asian Development Bank (ADB) is committed to achieving its vision of an Asia and Pacific region free of poverty. This vision is restated in its recently adopted long-term strategic framework 2008–2020 (Strategy 2020), under which ADB will support its developing member countries to reduce poverty and improve their peoples' living conditions and quality of life. Strategy 2020 directs ADB to do so by focusing its development assistance, finance, policy advice, and knowledge solutions on three distinct but complementary development agendas: inclusive growth, environmentally sustainable growth, and regional integration. Under Strategy 2020, ADB is also committed to continuing efforts to enhance the effectiveness and results of its development aid.

Task and Background

The following considerations derive from Carlota Perez theory of technoeconomic paradigms (TEPs). They are intended to further explore the role of the state, both empirically and normatively, within the TEP model. They also propose that nanotechnology will very likely be the paradigm-leading technology for the sixth surge (see in detail Drechsler 2009); this is not necessary for the main argument but will facilitate a much more concrete and specific discussion, and hopefully will be interesting in its own right as well. In the present context, the model itself may be presumed known; for this reason, I only briefly reiterate those aspects that are specifically important for the current topic:

There have been five technological revolutions, five surges, in the last 250 years. We are now in the middle of the fifth, namely the age of information technology, knowledge and global telecommunication (Perez 2002, 10–12, 14) – in brief, ICT (information and communication technology, sometimes also referred to as just IT) – which started in 1971.

Any reader of Carlota Perez' work who has been following the global financial meltdown beginning to unfold in the Fall of 2008 must pinch herself as ‘it’ is indeed happening again. ‘It’ is not only a financial crisis of enormous proportions, but in fact, what Perez calls a turning point in the middle of the diffusion of a techno-economic paradigm. Such turning points have taken place rather regularly since the Industrial Revolution with roughly half-century intervals between them, and they consists essentially of two aspects: huge financial meltdown (think of the canal panic of 1793, the railway panic of 1847, or the great depression following 1929 stock market crash) followed by an institutional renewal of historic dimensions (think of the Victorian boom preceded by the repeal of the Corn Laws and introducing legislation to improve factory conditions and urban sanitation, professionalization of the civil service, etc., or the welfare state reforms and the Keynesian policies and institutions facilitating the post-World War II Golden Age). Accordingly, the Perez framework predicted that the turning point for the current ICT-led techno-economic paradigm should have taken place during the first years of twenty-first century. What started as a bursting of the dot-com bubble in 2000 ended in 2008 as a full-blown global financial crisis. This is, then, the turning point and thus, we are confronting the need for sweeping institutional changes to bring forth a golden age based on the global spread of the growth potential of the current paradigm based on information technology.