World Development, Vol. 25, No. 3, pp. 293-295, 1997
0 1997 Elsevier Science Ltd
Pergamon
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Editorial: The Golden Age of the Keynesian
Consensus -
The Pendulum Swings Back
H. W. SINGER
Institute of Development
Studies, Brighton, Sussex, U.K.
Development thinking in the postwar era which
opened in 1945 was dominated for 25 years or so and
is well described as the Keynesian Consensus. It is
now often described (frequently with a derogatory
implication) as “statist and inward-looking”.
Both
descriptions
are correct, although the derogatory
implication is not.
Thinking was statist in the sense that the state or
government was considered the natural embodiment
of the public good. The power of the state to mobilize
countries’ resources had been amply demonstrated by
the success of wartime planning in the United
Kingdom; even central planning seemed to be vindicated by the military success of the Soviet Union. The
Keynesian Consensus did not, however, advocate
central planning but rather indicative macroeconomic
planning plus the achievement of a level of global
effective demand corresponding to full employment
equilibrium, if necessary through public investment
and public works. Once full employment
was
achieved, the allocation of resources could be left to
follow market signals. The market alone, however,
would not be likely to achieve full employment.
Rather, as Keynes had explained in the General
Theov, it could perpetuate unemployment equilibrium, or even (with the lessons of the Great
Depression of the 1930s in mind) result in cumulative
decline and mass unemployment preparing the ground
for dictatorships and wars.
The acceptance of the state as representing the
public interest did not exclude the acknowledgement
of government failures but these were weighed less on
the scale (and also considered more easily tractable)
than market failures, such as the existence of extemalities, imperfect competition, absence of market institutions, etc. Later, under the Washington Consensus,
this judgement of relative choice of evils was to be
reversed. There is no known method or firm empirical
basis for an accurate comparison of government
failures vs. market failures. There may be a Nobel
prize waiting for someone who invents such a
common scale! In terms of policy, this may not matter
all that much: both schools could agree that it is
important to improve both government performance
and market performance. Today the pendulum seems
to be swinging back to such an intermediate position.
As it has been well put recently, “Just as the existence
of market failures does not necessarily
warrant
government intervention, so the existence of govemment failures does not necessarily mean that intervention is detrimental to economic growth”.’
As guidelines for government planning two different schools of thought emerged. The first, associated
with the name of Ragnar Nurkse, was the doctrine of
balanced growth. This was a recipe for using the
linkages between different sectors in the economy to
match supply capacities to demand expansion and
make expansion mutually supportive. The ultimate
intellectual source for this was the concept of the
multiplier, developed by Richard Kahn, and then
incorporated by Keynes in the General Theory. The
second school of thought, associated with the name of
Albert Hirschman, was the doctrine of unbalanced
growth. This involved the identification of growth
poles from which growth could spread throughout the
economy. This second school of thought, involving
“picking winners” and an active industrial policy, has
quite recently become the subject of a new discussion
centring on the role of active industrial policy in producing the East Asian “miracle”.
The road to full employment was through a high
volume of investment. In line with the General
Theory, the emphasis was on investment rather than
savings: savings would be generated by investment,
resulting in a basic identity. The danger of inflation
was recognized - Keynes himself was no more an
advocate of inflation than the later Washington
Consensus. But - again following experience during
and immediately after the war - it was assumed that
inflation could be controlled by fiscal policies,
income policies, and by enlightened wage negotiations emphasizing real rather than money wages.
293
294
WORLD DEVELOPMENT
After 25 years or so, however, inflation - or rather
the fear of inflation - turned out to be the Achilles
heel of the Keynesian Consensus.
The Keynesian Consensus was also inward-looking. This was indeed inherent in the emphasis on the
duty of the individual state to achieve full employment in the domestic economy, It was strengthened by
pessimism regarding the exports of primary commodities. The experience of the interwar period had
been of a collapse in commodity prices. Keynes was a
firm believer in the need to stabilize primary commodity prices. His proposals for the postwar intemational order, developed during the war, foresaw not
only the present International Monetary Fund (IMF)
and the present World Bank, but also an International
Trade Organisation (ITO) with the primary function
of financing international buffer stocks, commodity
agreements, and other means of stabilizing commodity prices. Although duly negotiated in Havana in
1947-48, the IT0 was not ratified by the United States
and never came into existence. In its absence, reliance
on primary commodity exports was thought to be a
very dangerous and harmful development strategy.
This view was further strengthened by the projections
by Prebisch and others of a long-term declining trend
in primary commodity prices in relation to those of
manufactures. This led to inward orientation because
export substitution by switching exports from primary
commodities to manufactures did not seem feasible at
that time for developing countries. Hence the recommendation was for import-substituting
industrialization (ISI) in the hope that the industries built up in this
way would become viable or even at a later stage
internationally competitive. Integration in the world
market on the basis of their present static comparative
advantages would be harmful to developing countries.
Instead they were advised to develop dynamic comparative advantages in manufacturing before integrating in the global economy. To those advocating IS1 at
the time it was, however, clear that this was a transitional strategy,
pending
the establishment
of
strong
dynamic
advantages
in manufacturing.
Retrospectively, the East Asian tigers seem to be a
successful demonstration of this strategy, although
this view is contested by the followers of the
Washington Consensus which was to follow on the
Keynesian Consensus.
As already mentioned, the Keynesian Consensus
had full employment as its chief objective rather than
control of inflation, although the latter objective was
also recognized as desirable. It can be claimed that full
employment as an objective is directly related to the
current emphasis on human development. A secure
job is still one of the main means of access to food
security, satisfaction of basic needs, access to health
and education, and the other objectives of human
development. By contrast, control of inflation has
no obvious relationship
to human development.
Although the Washington
Consensus
sometimes
claims that inflation hits the poor more than the rich,
this is an indirect and somewhat questionable link
with human development. Having said this, however,
at the time of the Keynesian Consensus the approach
through investment was still in terms of physical
investment and accumulation of physical rather than
human capital. The Harrod-Domar Formula was the
accepted expression of this emphasis on physical
investment. The denominator of the formula relating
to the capital/output ratio could well be interpreted,
however,
as accommodating
human factors of
production. A healthy, educated, well-trained labor
force will result in a lower capital/output ratio and
hence a higher rate of growth associated with a given
volume of physical investment.
The emphasis on employment in the Keynesian
Consensus soon came up against the dilemma that in
developing countries, especially in the rural areas,
there was no such thing as the kind of open unemployment made possible by social welfare payments with
which Keynes had dealt in the General 7’hem-y.Here
the concept of disguised unemployment formulated
by that loyal Keynesian, Joan Robinson, came to the
rescue. The problem was not so much to move from
full unemployment to full employment, but rather to
move from unproductive
employment,
shared
employment, or sham employment (Joan Robinson’s
“selling matches in The Strand”), to productive fulltime employment - to convert the “working poor”
into the “working self-reliant.”
This concept of disguised unemployment led to one
of the most important strands of development thinking
in the Golden Age of the Keynesian Consensus, i.e. the
strategy, associated with Arthur Lewis, of releasing the
hidden unemployment in agriculture and mobilize it in
the pursuit of industrialization - normally involving
also urbanization. This had an ancestry going back
well before Arthur Lewis to classical economics.
Adam Smith had already suggested that the development of “commerce”, i.e. in modem terms industrialization, was the road to increasing the wealth of
nations. He considered agriculture as hopelessly
restricted by feudal relationships, incapable of much
technical progress, and subject to diminishing returns.
By contrast, “commerce” offered all the advantages of
widening circles of division of labor and specialization
resulting in increasing returns and higher levels of pro
ductivity. So Arthur Lewis was not only directly in the
Keynes/Robinson tradition, but also (as he was fully
aware and acknowledged) in the classical tradition. His
strategy of “economic development
with surplus
labor” represented a perfect fusion of classical and
Keynesian thinking.
Today we would not be so pessimistic about agriculture. We realize that the mobilization of surplus
labor can also take place within agriculture itself.
Agriculture is not incapable of technical progress. We
GOLDEN AGE OF THE KEYNESIAN
have seen Green Revolutions. In fact the process of
urbanization and industrialization,
especially when
successful and leading to rapidly rising incomes, logically demands a higher productivity of agriculture,
especially food production. So, while it remains true
and an invariable empirical fact that development is
associated with industrialization, urbanization, and a
diminishing share of agriculture in GNP, this is no
reason to neglect agricultural investment, including
human investment, as among the priorities in development planning. The role of agriculture is much
more than simply to supply resources to the urban and
industrial sector.
All this was clearly realized in the later days of the
Keynesian Consensus. This was associated with a
gradual shift, within the Keynesian framework, from
employment creation and growth, associated with the
names of Dudley Seers and Paul Streeten, to poverty
reduction and satisfaction of basic needs. The bulk of
poverty in most developing countries being in the rural
areas, and basic needs including food with a high
priority, it would have been difficult to neglect agriculture. As a result it would be difficult to find neglect
of agriculture among the development plans and
strategies of the later Keynesian Consensus era. After
all, the Green Revolution in India and Pakistan, supported by massive US food aid, falls within this era.
CONSENSUS
295
The Keynesian Consensus era came to an end in
the early 1970s. Various landmarks compete for
defining the end of the era. One such landmark would
be the collapse of the Bretton Woods system of
exchange rates when President Nixon on August 15,
197 1 suspended the convertibility of gold into dollars
at the fixed exchange rate of $35 per ounce. But in
relation to developing countries perhaps the real landmark would be November 1973 when OPEC, in revolt
against the erosion of the real price of oil due to the
failure to establish ITO, quadrupled the price of oil,
This added in the industrial countries to the specter of
inflation which had already been raised by the wage
pressures and strengthening of the trade unions as a
result of a long experience of full employment. So
inflation became the nemesis of the Keynesian
Consensus, and control of inflation the icon of the
Washington Consensus. In its turn the nemesis of the
Washington Consensus, which has become visible in
recent years, has been the increased inequalities
between and within countries involved in globalization and free markets. As a result, the pendulum is
beginning to swing away from the Washington
Consensus, although not necessarily directly back to a
new Keynesian Consensus. But that is a different
story which cannot be pursued here.
NOTE
1.
Stephen Haggard and Chung H. Lee (Eds). Financial
Systems and Economic Policy in Developing Countries
(quoted from a review by William Easterly in Finance and
Development, September 1996).