In the title of this paper readers will recognize a standard subject of theoretical discussion and practical concern. Yet the relationship in question is worth reexamining. Why exactly should two individual items—domestic investment and the balance of external payments—be picked out from the national income accounts and viewed as having some direct connection with each other? And why should this particular relationship be looked upon as one of rivalry? In the economy as a whole a given claim on resources competes with all other claims on resources, and any causal connection assumed between two particular groups of claimants must be a priori suspect. A peculiar link between home investment and external balance can nevertheless be said to exist on certain general grounds which will be considered later. The connection is especially close in the British economy because of some structural features of British trade and industry. In fact, a recurrent conflict between the needs of internal capital development and external trade balance has figured prominently in British experience during the ten-year period since the war. In this paper we start, then, with a discussion of the United Kingdom's economic structure and experience (sections I, II, and III), attempting thereafter to look at the matter in more general terms (sections IV and V). In a final section we return to consider the special case of the United Kingdom, with some reference to current economic developments and policies.

An Indian Economics?

Historical Background

When the East India Company, and later the Crown, established peace under a single paramount power, India was confronted, for the first time in its history, with a foreign power that set the economic agenda to suit the long-term interests of the ‘home’ country. The short-term economic interests of Britain had to be balanced against the need to maintain peace, keep costs down, ensure that British strategic interests were met and, especially after the events of 1857, secure the support of influential groups within the country. As a result, the door was opened to a dialogue with educated Indians on economic and social policies. This was an unequal exercise, as the monopoly of decision- making remained with the colonial power, which could in many cases ignore or override Indian opinion.

Indians nevertheless engaged in this dialogue, partly to try to convince their imperial masters of the need for policy changes and partly to get their compatriots to understand what was holding back Indian development. By the early twentieth century, the debate was best carried out using familiar and generally accepted theory. This made it much more difficult for the government and their sympathizers to refute the arguments of Indian economists who could also draw support from their teachers and counterparts in Britain and elsewhere.

Foreword and Postscript

When I was invited to give a contribution to the Festschrift for Carlota Perez, I proposed that my contribution should be based upon a paper on ‘the new economy’ and its crisis that I started to draft before Christopher Freeman's 80th birthday, September 2001. This choice was quite natural, since the original paper was written in honour of both Chris Freeman and Carlota Perez. In the light of the current crisis, this choice of an ‘old paper’ has become even more appropriate. Much of the argument in the paper relating to the ICT bubble is highly relevant also for the current crisis. I have therefore decided to leave the text in its original shape while adding this postscript as a foreword.

The basic message in the paper is that while Information and Communication Technologies (ICT) offer a great potential for productivity growth, it was naïve to assume that it could bolster permanent high rates of noninflationary economic growth. What Greenspan and others neglected was the central insight in Carlota Perez’ work that the productivity potential can be fully exploited only after a sequence of radical institutional changes. The institutional changes that did take place – the weakening of trade unions, the deregulation of financial markets, the increased used of share options and, in general, the increased freedom for capitalists to move capital across borders and to change the form of capital through leveraging – was highly biased and it certainly did not establish a framework supportive for technical, organizational and institutional learning.

Introduction

The impact of Keynesian Economics on the theory of international monetary relations has been powerful. Keynes himself, though he was well aware of the international policy implications of his doctrines, did very little to apply his General Theory to the analysis of international equilibrium. But he provided a theoretical framework which subsequent writers had no trouble in adapting to the special case of international relations. From this work of adaptation there emerged a whole system of international economics, set up in terms of the money income and expenditure analysis.

The income approach to international trade was not by any means entirely new. For over a century, writers on international trade had referred occasionally to shifts of purchasing power or changes in relative demand. The Keynesian approach, however, seemed to yield a more comprehensive and consistent account of international monetary relations than had ever been given before. It furnished at one and the same time an explanation of two related matters: (a) the adjustment process of the balance of payments and (b) the international transmission of fluctuations in economic activity and employment. The result has been a fruitful marriage of two subjects that previously led quite separate existences under the conventional names of international-trade theory and business-cycle theory.

The Philippines, under a succession of administrations since 1986, has been committed to sustained growth of income and employment, stable prices, poverty eradication, and improved distribution of income and wealth in an open economy setting. In pursuit of these development goals, the national and local governments have ushered in wide-ranging economic and social policy reform programs. Under the reform programs, real gross domestic product (GDP) doubled between 1986 and 2006—a growth rate of about 3.5% each year. However, this pace of growth leaves much to be desired when compared with that of many of the Philippines' East and Southeast Asian neighbors. In recent years, growth has picked up and in 2007 real GDP grew at 7.2%. But there is no room for complacency. Private investment remains weak, raising the question of whether the current pace of growth is sustainable. In 2006, about 26.9% of families and 32.9% of the population still lived in poverty, a reminder of the difficulties that many individuals are still going through. And inequality in the distribution of household incomes remains high by regional standards.

Moving forward, the challenge for the Philippines is to sustain the current pace of growth or even accelerate it, while making every Filipino a winner in the growth process. To meet this challenge, a key step is to identify the most critical factors that constrain growth and poverty reduction. The diagnostic approach this study adopted to identify the critical constraints is informed by basic insights from recent literature that seeks to account for international differences in the levels and growth rates of per capita income.

Introduction

One of the central preoccupations of the international research and policy agenda after the end of the Second World War was to come to terms with underdevelopment. Arguably, one of the most influential schools of thought on development during this period was the Latin American Structuralist Approach (LASA). Development theory and policy was shaped mostly by the analysis of the economic and social processes of production and knowledge creation. It followed a long-standing tradition that advocated that wealth originates from immaterial forces (creativity and knowledge) and that the accumulation of assets occurs through the incorporation of new technologies and innovation (Reinert and Daastøl 2004). Structural change and the connection between technical change and structural change were central to such developmental lines of argument.

There were two central arguments of LASA. First, the ideas that technical change plays a significant role in explaining development and underdevelopment and that specific knowledge and policies towards structural change were necessary to overcome backwardness. Technical change is a crucial component of an explanation of capitalism's evolution and in the determination of historical processes through which hierarchies of regions and countries are formed.

Second, the proposition that underdeveloped countries were significantly different from industrial advanced ones. Hence, they could not follow the same paths towards development and that the catching-up idea had to be reconsidered. In the words of one of the leading Latin American structuralist economists, ‘underdevelopment is … an autonomous historical process, and not stages that economies that already achieved a superior degree of development had necessarily to go through’ (Furtado 1961, 180).

The period prior to independence was signified by considerable effort made by the government of India and that of Sri Lanka in creating a dialogue aimed at settling the problem over the status of the Indian Tamils in Sri Lanka. Unfortunately, their dialogue did not result in a compromise or an understanding on the issue. India took the stand that the Indian Tamil community had the right to live in Sri Lanka as bona fide citizens, while the government of Sri Lanka took the view that India had the responsibility to take them back. In 1948, as Sri Lanka gained independence, in what seemed to be a symbolic assertion and identification of sovereign and independent nationhood, the new government of Sri Lanka passed citizenship laws that effectively disenfranchised the Indian Tamil community.

Preface

The greater part of this book is a revised version of six lectures which I gave in Rio de Janeiro in July and August 1951 as a guest of the Brazilian Institute of Economics under the chairmanship of Professor Eugenio Gudin. A Portuguese translation of these lectures, with English and French summaries, appeared in the quarterly Revista Brasileira de Economia, December 1951.

I have incorporated a paper read at a symposium on ‘Growth in Underdeveloped Countries’ at the Boston meeting of the American Economic Association on December 29th, 1951, published in the American Economic Review, Papers and Proceedings, May 1952. I am indebted to Professors Arthur R. Burns, J. Marcus Fleming and Gottfried Haberler for some detailed criticism of this paper, which I have tried to take into account in the present fuller version.

Some of the material that has gone into this book was delivered before the Société d'économie politique in Cairo in April 1952 as part of a lecture programme of the National Bank of Egypt, on the initiative of Professor N. Koestner, chief of the bank's research department, and was printed by the bank for limited private distribution.

Even though the text has been revised and largely re-written, all traces of the lecture form in which the bulk of it first took shape can scarcely have been removed. The treatment is of necessity selective and cannot claim to give a balanced picture.

The Departure

Before the morning twilight comes over the mountains, most of the people at Robgill are awake, packing the few things left to pack. And the sun has not had time enough to heat up the damp and chilly soil before the farewells are taken from those who are either going to work or are too old to join the people leaving for India. Mr K. Sithuravelu, his wife Sellama and their three children start their laborious descent to the Hatton railway station. Five more families are leaving Robgill today, among those Sithuravelu's two brothers and their dependents.

Sithuravelu and the others do not arrive at Hatton till noon. Although it is four hours before the train comes, the station is packed with people. Most of them estate workers bound for India, standing in groups, surrounded by bulky parcels and trunks and speaking with subdued voices. Friends and relatives have come to say a last goodbye to those they probably won't see again.

As soon as the diesel engine of the train is heard approaching the station, there is a great clamor. The women crouch with their arms on each others' shoulders crying helplessly while the men push their way toward the train to get their seats.

A prominent feature of economic fluctuations in the United States is the part played by changes in inventory investment, i.e., in the net flow of goods into or out of commodity stocks held by the business system. These changes accounted on the average for 23 per cent of the changes in Gross National Product in the five upswings and for as much as 47 per cent in the five downswings that occurred during the twenty years between the wars. In the period since the war the recessions of 1948–49 and 1953–54 have been strongly marked each time by a cutback in inventory investment. The quarterly data now available show that this accounted for practically the whole decrease in GNP from the fourth quarter of 1948 to the third quarter of 1949, and again from the second quarter of 1953 to the first quarter of 1954, according to the last figures reported.

The large share of inventory changes in the ups and downs of business activity cannot be explained without reference to the timing as well as the extent of the swings in inventory investment. If these swings occurred irregularly, their share in the fluctuations of aggregate output could easily turn out to be zero or even negative. In reality, net inventory investment fluctuates closely—more closely than we might perhaps expect—with the volume of activity (not with the rate of change in activity).

Introduction

This chapter analyses one of Carlota Perez' main insights regarding the contradictory nature of the ‘installation’ period of the current new technoeconomic paradigm, as well as the role of these contradictions in the genesis of the ongoing financial crisis. Basically, despite the enormous potential for increased productivity growth unleashed by the current technological revolution, productivity growth in industrialized countries (and in most of the developing world) has actually declined since the irruption of the new ‘Age of Information Technology and Telecommunications’ (for the case of the US, see Figure 17.18). In essence, the period of ‘installation’ not only creates all the conditions for unleashing economic progress, but also generates ‘tensions’ of an economic, social and political nature that can turn into formidable obstacles to economic growth.

Perez identifies three main ‘tensions’ that are bound to arise during the period of ‘installation’ of a technological revolution: the first is the tension between ‘the paper economy and the real economy’ (i.e., between financial capital and productive capital); the second is the tension between ‘the size and profile of effective demand and those of potential supply’ (i.e., the real-economy effects of increased inequality); and the third is the political tension between ‘the poorer poor and the richer rich’ (Perez 2005, 16–19).

The first ‘tension’ relates to the very essence of the technological bubble that characterizes the period of ‘installation’ (see Figure 17.15); according to Perez: ‘[this is] a process of asset inflation in which the stock market (paper) values decouple from the real value of the companies they represent.

Introduction

Ragnar Nurkse (1907–1959) is one of the founding fathers of classic development economics (also called classical economic development theory, or early development economics) as it emerged during the times after World War II. His work on capital formation, balanced growth and international capital flow was highly important, and his influence as an academic teacher at Columbia University was significant. In several respects, Nurkse is quite easily applicable today, not least because his ideas of globalization and governance are largely the ones used currently (see Nurkse 1952a, 576) – even down to the importance of tourism (1935a, 21).

The purpose of this essay is first, to show that Nurkse can also be classified as a Law & Economics thinker. Given the recent interest in the Law & Economics of Development, showing how a classic figure in the field successfully used such an approach might be of considerable interest, especially because development economics is an emotional field that may well profit from the ‘objectivizing’ the function of Law & Economics. Nurkse's classic contribution underlines that, and how development economics can be done sine ira et studio, and perhaps to a greater effect, via, or at least including, such an approach.

The year 2009 marks a round and significant birthday for Carlota Perez thus presents us with a welcome occasion to celebrate her work. There could not be a better time to do this, because the events, as this book goes to press, have impressively proven its relevance and accuracy. By now, this has been widely noticed in scholarship and media, by large corporations, governments and supranational organizations, and NGOs alike, and Carlota has attracted what could almost be called a cult following. Well beyond her home base of Evolutionary Economics, we see the economic world, as it is really unfolding, with other eyes because of her theory of Techno-Economic Paradigms (TEPs) – and there are few economists today about whom this can be said. For us, her friends and colleagues at Tallinn University of Technology's Technology Governance graduate program – which has served as the academic-institutional center both for Carlota and for the reflection of her work in recent years – who have worked closely with her over many years, the idea of a Festschrift seemed obvious.

However, as many references as there are to her work (and as many unacknowledged takeovers of her theory!), a detailed and somewhat comprehensive account of the work is still missing. We had discussed and tentatively planned such a book, or special journal issue, for quite a while, and so it seemed obvious to combine this project with the current celebration.

Carlota Perez was born in Caracas, Venezuela, on 20 September 1939, the oldest of five children. Her father, Jose Henrique Perez Perez (1913-1978), was a very successful civil engineer as well as an international chess player who enjoyed playing up to twenty simultaneous games, including one in which he wasn't even allowed to look at the board. He devised a system for geographers to define the exact coastline in relation to tides, which was patented by the German company that built the equipment, and a method for scheduling his construction projects that predated PERT-CPM. Her mother, Carlota Perez Arenas (born 1919), is a painter and a determined, charming and courageous woman who, at ninety, drives a car and surfs the web.

The children were raised with very high expectations, and all, including the three girls, were expected to become engineers like their father. By the time Carlota entered kindergarten, at the age of three, she was already reading and writing. Her father's work took the family around the country, and Carlota ended up attending five different elementary schools.

The year Carlota turned eleven, the family got their first TV, she started high school and her parents divorced. Her mother, then 30, embarked for Buenos Aires with the five children – aged 6 to 11 – her sister, her aunt and her Oldsmobile. The Venezuelan petro-dollars were hard currency in Peron's Argentina and the children all went to private schools.