Patrick Sarsfi eld O'Hegarty (Padraig O h-Eigeartaigh), was born in Carrignavar, Co. Cork, on 29 December 1879, the eldest of two, the younger, Jack (known later as Sean 1881–1963), born to John and Katherine (née Hallahan) Hegarty. P. S.'s father, a probable member of the Munster IRB, and also a Cork man from Macroom, was a plaster-and-stucco worker by trade. Katherine came from West Cork farming stock, the daughter of a forester from Macroom, Patrick Hallahan, and Katherine Grainger who lost two of her uncles during the Great Irish Famine of 1845–1849. In the lean years that followed, as with many other families of this generation, the Hegartys and the Hallahans emigrated to the United States.

I start these conclusions with a reflection about the present crisis. As I write these final pages in July 2009, the crisis that started in the housing market of the United States (US) during the summer of 2007 has spread and now is a full-blown depression that affects all spheres of economic activity in both developed and developing countries. Policy makers and economists show great concern with the future of the world economy, and some even question the viability of capitalism as a model for the future (if Karl Marx could see it…). No matter what happens, it is clear that capitalism, in all “mixedeconomy” forms into which it developed during the 19th and 20th centuries, is subject to crises and depressions. To solve the crisis, economists are advocating different Keynesian-type policies. In my view, this must be a period of reflection that demands thinking outside the box. Given the severity of the crisis, I do believe that we need to return to the analyses of Keynes, Marx, and Minsky to understand its genesis and the consequences it will have. It is still too early to see where all this will lead to.

In this chapter, I address the question of how a country can induce structural change and diversification, and plan transitions to higher growth rates. This is a fundamental aspect of the problem of developing countries, namely, the need to increase productive capacity. Indeed, the transition from agriculture into a modern industrial and service economy, and decisions about how much to invest and where, can be viewed as problems of self-discovery and of understanding the externalities that lessen incentives for productive diversification. Today's developed countries directed policies to industrialize. Chang (2002) argues that today’s developed countries—such as the United Kingdom, Germany, France, the United States, Sweden, and Japan—used industrial, trade, and technological policies when they were developing and catching up. They used some form of infant-industry policy or tariff protection. More recently, the Republic of Korea is the clearest case of successful economic development achieved through infant-industry protection measures.

Industrial policy has traditionally been understood as any type of selective intervention or government policy that attempts to alter the structure of production toward sectors that are expected to offer better prospects for economic growth than without such intervention. This type of intervention has its adherents—those who believe in market failures—and its detractors— those who believe in the efficient working of markets. The latter argue that industrial policy interventions have often degenerated into an exercise in “picking winners,” a game played by government officials deciding what activities and sectors to promote and to spend public money on.

In a series of papers, Rodrik (2004, 2006a) has argued in favor a new type of industrial policy. He acknowledges the existence of generic market failures, but argues “that the location and magnitude of these market failures is highly uncertain” ( Rodrik 2004, 3). He argues that information and coordination externalities are more important than technological externalities, for the former weaken the entrepreneurial drive to restructure and diversify low-income economies. Rodrik argues that industrial policy is not about addressing distortions in the traditional way (i.e., by enumerating technological and other externalities and then targeting policy interventions on these market failures), but about eliciting information from the private sector on significant externalities and about the constraints to structural transformation (hence industrial policy also encompasses activities in agriculture and services) and the opportunities available.

Surat, Gujarat (West India), 40+ Degrees and Mercury Rising

On the night of Tuesday, 12 May 2009, one of my informants, Rohit, got married to his girlfriend from Mumbai who he had met in Melbourne in 2005. They had fallen in love while living in the same student house in Melbourne and studying at the same university. They were now both proud PR holders, and Rohit's wife was even planning to apply for Australian citizenship soon. Watching Rohit wait for the priest to finish a particular ritual, I joked that he was in fact marrying an Australian girl. It amused Rohit, though earlier that evening he had already mentioned that they had no intention of settling in Australia. As a newly married and soon to be Indian-Australian couple, they would move in with his parents and find jobs in Delhi. The struggle for Australian permanent residency had been a stressful one, and their friends talked about little else. They had all come from various parts of India to Australia as international students and almost all had ended up getting a permanent residency as well. One of Rohit's friends had recently married her boyfriend from Melbourne. She was now living with his family in Mumbai while he was setting up his mining business in Australia, though soon she would join him there. They had all attended a wedding of another friend from Melbourne in Delhi a couple of months earlier, and less than a month from now they would all be heading for Tamil Nadu in the South of India for a similar wedding.

I start these conclusions with a reflection about the present crisis. As I write these final pages in July 2009, the crisis that started in the housing market of the United States (US) during the summer of 2007 has spread and now is a full-blown depression that affects all spheres of economic activity in both developed and developing countries. Policy makers and economists show great concern with the future of the world economy, and some even question the viability of capitalism as a model for the future (if Karl Marx could see it…). No matter what happens, it is clear that capitalism, in all “mixedeconomy” forms into which it developed during the 19th and 20th centuries, is subject to crises and depressions. To solve the crisis, economists are advocating different Keynesian-type policies. In my view, this must be a period of reflection that demands thinking outside the box. Given the severity of the crisis, I do believe that we need to return to the analyses of Keynes, Marx, and Minsky to understand its genesis and the consequences it will have. It is still too early to see where all this will lead to. But in terms of short-term consequences, it is obvious that one of the most significant will be higher unemployment.

A report by the World Bank notes that “the economic crisis is projected to increase poverty by around 46 million people in 2009. The principal transmission channels will be via employment and wage effects as well as declining remittance flows … The latest estimates for the Ministry of Labor in [the People's Republic of] China [PRC] show 20 million people out of work … The garment industry has laid off 300,000 workers in Cambodia (10% of workforce) … In India, over 500,000 jobs have been lost over the last 3 months of 2008 in export-oriented sectors … ILO [International Labour Organization] forecasts suggest that global job losses could hit 51 million, and up to 30 million workers could become unemployed” (World Bank 2009, 9).

This final chapter (before the conclusions) deals with the role of education, in particular with issues: (i) knowledge as a public good that produces externalities; (ii) the “low-skill, low-tech map”; and (iii) education, unemployment, and structural change.

In Solow's (1956) neoclassical model, saving rates do not affect longrun growth. The latter is determined by the exogenously given rate of technological progress. Diminishing returns to capital in this model mean that higher savings lead to a decrease in interest rates to the point where the economy saves to keep up with technological progress. Therefore, no matter what the incentives to save are, long-run growth will be at the rate of technological progress. The key issue here is whether diminishing returns to capital do set in. The so-called new theories of growth developed since the 1980s claim that this is not the case if one considers capital in a broader sense. One possible cause is that people have incentives to accumulate human capital, e.g., knowledge of new technologies that economize on labor.

As I noted in the preface, globalization has thrown development economics into a quagmire. Often arguments in recent growth debates are framed in the context of competitiveness (especially when the speaker or writer wants to appeal to policy makers). This is very problematic because while in the business world the term “competitiveness” has a clear meaning—a firm that is not competitive will lose market share and eventually will go out of business—its counterpart at the aggregate level (a nation) might be a “can of worms.” In this chapter, I will elaborate on some of the implications of competitiveness and globalization, particularly on the policy prescription that developing countries should adopt a liberal policy stance.

At the level of the firm, competitiveness is a question of competition among individual companies, that is, about the mechanisms that help more productive and efficient companies expand and take market share from the less productive ones, which then go out of business or become more efficient. The most effective way for policy makers to help individual firms to increase productivity is to create the conditions in each sector for fierce but fair competition among all participating firms. This means that policy makers in an economy can help speed up growth by enacting regulations that support more competition in each sector and by removing factors that obstruct competition. When government actions stand in the way of competition through policies that distort it and render it less intense, then inefficient companies are not pressured to change. Poor countries, in general, have in place much more severe market-distorting measures than developed countries have.

This usage of the term “competitiveness” is meaningful and legitimate. It requires, however, that one believe that the end result of competition, namely that uncompetitive firms will end up going out of business while the competitive ones will flourish, indeed happens and improves the welfare of society, resulting in not only a bigger national income but also higher employment. Although individual firms may become more productive by adopting less labor-intensive processes and shedding staff, the combined impact of reinvesting their larger surpluses back into the economy will be higher aggregate demand.

Theobald Wolfe Tone, pioneer of Irish Republicanism, believed the best way to end sectarianism among ‘Catholic, Protestant and Dissenter’ was to drive English rule out of Ireland. A backer of the Universalist ideas born of the Enlightenment, Tone rejected discrimination and institutionalized religion, believing instead that political destinies should rest with the nation's citizens. Thus, he saw Republicanism and its championing of civil liberties and representative government as legitimizing statehood. However, the divisions Tone and the United Irishmen set out to heal nonetheless proved crucial factors in deciding the disastrous outcome of the expected patriotic 1798 Rebellion, which not only failed to achieve military defeat of England but also deepened sectarian hatreds.

In this chapter, I discuss the roles of fiscal and monetary policies in achieving full employment. These two are the main tools that governments have at hand to achieve this objective. I start with a discussion of fiscal policy and budget deficits and address the widely held belief that budget deficits cause inflation, lead to increases in interest rates, and crowd out private investment. I move in the following section to a discussion of monetary policy and the evidence of the role of interest rates in stimulating investment and averting inflation. In this chapter, I argue that governments and central banks have powerful tools to contribute to full employment. In fact, failure to understand how these tools operate in modern economies is an important reason for pervasive involuntary unemployment.

For a long time, economists have distinguished between policies for stabilization (short- and medium-term issues) and policies for growth (long-term issues). The tools to stabilize the economy (i.e., to counter- act economic fluctuations) are monetary and fiscal policies that focus on aggregate demand. Some economists think that these have no impact on long-run growth (i.e., the neutrality-of-money proposition). Growth policy, on the other hand, concentrates on aggregate supply. This artificial division of areas (and policies), however, is not shared by other economists. In the words of Stiglitz et al. (2006, 245): “Stabilization policy cannot be separated from growth policy. Failure to stabilize may hurt growth, but stabilization, in the traditional sense of the term (price stability and fiscal adjustment), does not necessarily lead to economic growth.” Indeed, after the financial crises of the 1990s, many developing countries sacrificed their long-run growth potential to show fiscal discipline. Ball (1999) and Blanchard (2002) have argued that monetary and fiscal policies affect both short- and long-run trends in unemployment. And most likely, changes in aggregate demand permanently affect potential output. In a world where prices adjust slowly to equilibrium following a shock, the argument that economic policy is ineffective need not be true, especially in the presence of unemployment. This slow-adjustment scenario is particularly realistic in the labor market because of the conflict between firms and workers over the distribution of income.

As I noted in the preface, globalization has thrown development economics into a quagmire. Often arguments in recent growth debates are framed in the context of competitiveness (especially when the speaker or writer wants to appeal to policy makers). This is very problematic because while in the business world the term “competitiveness” has a clear meaning—a firm that is not competitive will lose market share and eventually will go out of business—its counterpart at the aggregate level (a nation) might be a “can of worms.” In this chapter, I will elaborate on some of the implications of competitiveness and globalization, particularly on the policy prescription that developing countries should adopt a liberal policy stance.

At the level of the firm, competitiveness is a question of competition among individual companies, that is, about the mechanisms that help more productive and efficient companies expand and take market share from the less productive ones, which then go out of business or become more efficient. The most effective way for policy makers to help individual firms to increase productivity is to create the conditions in each sector for fierce but fair competition among all participating firms. This means that policy makers in an economy can help speed up growth by enacting regulations that support more competition in each sector and by removing factors that obstruct competition.