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.

Ragnar Nurkse (1907-1957) belongs to the handful of economic thinkers associated with early or high development theory, also referred to as classical development economics or pioneers of development. This group is typically seen to consist of the following key thinkers: Paul Rosenstein-Rodan, Hans Singer, Arthur Lewis, Albert Hirschman, Gunnar Myrdal and Ragnar Nurkse. It can be argued that collectively, their thinking epitomized the best development practices of the past 500 years. It is not a coincidence that the post-World-War- II era, when Nurkse and others ruled the development mainstream, is one of exceptionally good performance for many poor countries. During the 1980s, development economics was replaced by the Washington Consensus thinking and policies that became for all intents and purposes Washington Follies. In recent decades, most developing regions – with the well-known exception of East Asia – experienced growth rates that go clearly against the more or less positive trend of the last 200 years from a long-term historical perspective. In other words, the world after the industrial revolution has not seen such a dismal development performance.

Introduction

Carlota Perez' intellectual development and research interests have been well covered in other papers in this volume. This paper focuses on one lesser-known dimension of Perez' life long work, namely, her leading role in translating academic research into practical strategies and ways forward (called visions) for Latin America. Carlota's recent work in this area builds on substantial early working experience in carrying out import-substitution policies in Venezuela and her subsequent observations of (largely unsuccessful) attempts to move to export-led growth paths on the part of Latin American countries under ‘neoliberal’ or Washington Consensus policies.

Carlota Perez' working experience is very impressive. From 1975 to 1977, Carlota worked for the Institute of Foreign Trade (in the Ministry of Foreign Affairs in Venezuela) in charge of technology issues, then from 1980 to 1983 as director of technological development in the Ministry of Industry. From 1985 to 1987 she worked with members of CENTRIM, training innovation consultants in Venezuela. After this (until 1999) her work included various projects for both the Industry and S&T Ministries (including one for the Institute of Engineering that involved benchmarking S&T institutes around the world). Then from 1999 to 2002, Carlota worked as consultant to the Venezuelan oil holding company PDVSA, focusing on the R&D company INTEVEP. In addition, Carlota has advised the top management of major corporations, including IBM, on future techno-economic paradigms. This rich practical experience has fed back in to Carlota's research, giving it enormous practical resonance and relevance.

The above illustrates what for many was, in effect, the end result of repatriation, namely, total and utter disillusionment.

Introduction

This chapter deals with the period 1970–77, which was when the United Front (UF) government was in power. The UF was essentially a coalition made up of the SLFP and the traditional left-wing parties. It is thus a reflection upon a significant period in the progress of repatriation, when under the UF government there was a definite impetus toward accelerating the process of implementation, unlike in the previous five years under the predominantly UNP government. The compulsions that hastened the process also created economic hardship as well as political pressures, which gave rise to this period being popularly described as being the “Sirima Times,” which explains part of the title above.