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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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Easterly, 2006, p. 26.

However, along with the new line of thinking on development, evolving around the concept of capabilities, it has been recognized that there cannot be a ‗one size fits all‘. Rather, ―the payoffs to policy reform differ with circumstances and that appropriate strategies need to be identified and developed locally‖.683 Even the World Bank realized that it had to adjust its approach to development in recognizing the differences in growth despite similar policy regimes.684 In 2008, also the Commission on Growth and Development supported these findings. It claimed that for sustained growth ―no generic formula exists. Each country has specific characteristics and historical experiences that must be reflected in its growth strategy‖. That is also reflected in the rapid economic development of China, but also in countries such as Brazil and India.685 This dissertation is not occupied with the history and definition of development aid and its failures during the last ‗development decades‘ since WWII, but as the example of the transition of communist countries towards capitalist and sometimes also democratic systems illustrates, the notion of ‗one best practice‘ failed miserably for the post-soviet countries. The case of China, which did openly defy any advice from agencies such as the IMF and World Bank and which therefore should not have developed at all, demonstrates that also different strategies can work. As will be outlined in chapter 5.1.5. below, China‘s strategy was not to have a strategy at all.686 5.1.2. Transformation: big bang versus gradualism Transformation, similar to development, is a term that can be applied to diverse processes but in its modern definition is mostly used for the transformation of former socialist countries into capitalist-oriented economies. It stands for social change that - in contrast to transformations happening in the past - is not necessarily accompanied by revolutionary activities.687 The expression transformation is often also used in a broader sense to capture change in development countries outside Eastern Europe that are also on their way to market-based democracies.688 The term transformation (as well as transition)689 is used United Nations Development Programme (UNDP), 2010, p. 20.

World Bank, 2005.

Commission on Growth and Development, 2008, p. 2, similarly in Nohlen and Axtmann, 2000, p. 182.

Another very interesting phenomenon related to the subject of development will not be discussed within this dissertation; namely the role of China for Africa‘s development. Officially still considered a developing country itself (although the EU Commission, 2007 re-assessed this categorization), China became an important agent of African development, its role however being discussed controversially in the literature. See for example Dent, 2011.

Beyme, 1994, p. 99f.

Reißig, 2009, p. 31.

for modernization processes that aim to implement - from a Western perspective - ‗modern‘ institutions to a country to achieve a democratic, market-based, constitutional system.

As such it can be considered as a neutral term, merely meaning transition from one type of system to another. However, it is often associated with the notion of ‗one best practice‘ that fails to recognize local peculiarities. In reality, transformation is a multidimensional and complex process.

Nevertheless, in its standard definition a transformation process can take on two different forms: it can happen in a ‗big bang‘ or gradually.690 Basically, the two different approaches for transformation and thus in the end also for development, can be ascribed to two famous development researchers: Jeffrey Sachs and William Easterly. The first stands for the shock therapy (or what Ellerman terms ―social engineering‖)691, the latter is a proponent for a gradual approach. Sachs argues for ‗one best way‘ a country can develop, which is determined by professional development specialists and therefore is a top-down approach. For him, the bottom-up gradualism approach leads to ―costly and dangerous wrong turns‖ for a country.692 He also acts as an advocate for the ‗Big Push‘ that aims to overcome the so-called poverty trap, regarding poverty as a social engineering problem and by investments and actions directing a country toward a trajectory of self-sustained economic growth and progress.693 Sachs argues that ―the ‗big-bang‘ reforms…are attempts to create a ‗normal‘ capitalist economy…The long-run goals of institutional change are clear, and are found in the economic models of existing market-economies. The ‗big-bang‘ countries had social consensus on what economic institutions they wanted, and hence speed on a broad front was possible‖.694 An illustrious example of the shock therapy (hence of top-down implementation of markets, the official term ―structural adjustment‖ used by IMF and World Bank) are the reforms in the Eastern European countries, most famously in the former Soviet Union (see In the literature a distinction is made between those two terms, but as this difference is only in nuance, this dissertation will use them synonymously.

An overview on the comparison of the Eastern European versus the Chinese transformation can be found in Naughton, 1996.

Ellerman, 2010, p. 3. The term ‗social engineering‘ was used before him by Karl Popper and Friedrich August von Hayek who understood it as the planning of economic processes by the state. However, Hayek was very critical of social engineering in general whereas Popper, who differentiated between piecemeal and utopian social engineering, only supported the idea of piecemeal social engineering. Hayek, 1984, Gray and Hayek, 1998, p. 81.





Ellerman, 2010, p. 17.

As this dissertation is not occupied with methods of development aid and more practical issues of development, but is rather interested in the abstract notion of development, it will not discuss the concept of the poverty trap in depth. For a detailed discussion, please refer to Sachs, 2006, p. 14ff. and Easterly, 2006, p. 6, 39ff.

Sachs and Woo, 2000, p. 8.

also chapter 6.4.3 for a detailed description of the Russian experience), which had nearcatastrophic outcomes for the economy and society. The strategy has been implemented by the Russian government together with the IMF and World Bank and included fast privatization, price liberalization and establishment of an accompanying legal system. It thus exchanged both economic and political system at the same time, which in theory should have provided the appropriate institutions for a functioning market economy, to enable Russia to get rid of the old institutions and start fresh in one big sweep. In theory, Russia became a free-market economy on 1 January 1992. In practice, the Russian economy collapsed within one year and to this day a large share of the economy operates in grey and black markets, with a high level of corruption on all levels of government. Overall, since the beginning of reforms in 1992 production fell and resulted in a 50 percent drop in GDP.695 One reason is attributed to the fact that the approach failed to recognize the ―de facto‖ property rights people developed during socialist times, which were discarded by the newly installed system.696 The institutions copied from advanced developed countries, which in theory should have been the best solution, failed in practice.

In contrast, the gradualism approach regards, beside the implementation of a liberal market economy, as an equally important goal the establishment of good governance and democracy. However, also markets can only be successful when they are established by a process that originates at the basis instead at the top. The planner of the shock therapy is replaced by many searchers looking for the best strategies and solution on an individual basis. Gradualism changes a society incrementally and involves active participation of the population of a country in the transformation process. It is thus also a slow, piecemeal approach.697 Often the Chinese economy is given as example of a gradual transformation.

However, as will be outlined in detail below, this is only partially the case.

5.1.3. A brief recapitulation of the Western industrial revolution This chapter focuses on the actual historical development that transformed traditional (feudal) societies into capitalist (modern) ones and less on the reasons for this development. As already outlined in chapter 4 in detail and as only briefly indicated within this chapter, the development of Capitalism has a complex mixture of material and immaterial Easterly, 2006, p. 63ff., Ellerman, 2010, p. 7.

Ellerman, 2010, p. 10f. See also chapter 6.4.3.

Easterly, 2006, p. 5, 14f., 60-63, 117f.

reasons. However, here and in the following, this dissertation concentrates on the actual impact of the capitalist transformation on society.

In the 19th century, the European economy rested on a relatively persistent balance-ofpower system between states which contributed considerably to stabilizing the industrializing economy. This wider institutional environment hinged on the existence of selfregulating markets and the liberal state for its stability. They shaped the background of the Hundred Years‘ Peace after the turmoil of the Napoleonic wars. The new organizations of economic life helped to prevent a general war, ―while providing for peaceful business amidst an endless sequence of minor ones‖.698 Also, with the development of the ‗new‘ sciences since the 16th century together with the enlightenment movement, the view of the world and the idea of man have been radically altered. Individualism and self-interest increasingly were legitimated as base of action, the rational calculation reflecting the spirit necessary for capitalistic production. When during the 18th and 19th capitalistic production emerged, new, more liberal institutions were created. The interpersonal relationships of the traditional household699 slowly disappeared, but at the same time the members of the household became more and more equalized and individualized to fit into the new system. The traditional cultural institutions requiring a compulsory ethical institutional background for economic activity withheld the pressure of Capitalism for some decades. Gradually an economic society surfaced that was not structured in classes depending on one‘s social status anymore, into which one is born and which cannot be changed; but which defines its members in terms of their function for the market, for example as farmer, craftsman or merchant.700 Thus, the daily routines of people sustainably changed along with reforms, innovations and the enlargement of markets.701 Put differently, the institution of the self-regulating market is considered as ‗innovation‘ that ultimately led to a specific social structure that created the liberal state as a consequence. Hence, the market economy became the foundation on which Capitalism could arise, having in turn huge impacts on the lifestyle of the population. It also fostered the transformation of the feudal society into an industrialized one.

As outlined above in chapter 4, all factors necessary for production, including labor and soil, needed to be turned into commodities tradable on markets. Consequently, together with the emergence of Capitalism a labor market had to be established, determining calculPolanyi, 1944, p. 16.

In this dissertation ‗traditional‘ is defined as pre-industrial, mostly related to the (changes for) rural households.

Brunner, 1956, p. 53.

Plumpe, 2007, In: Jaeger, 2007, p. 363.

able prices for working power. This meant nothing less than a class of propertyless workers had to be created that was forced to sell its labor power. Thus, traditional social structures, including families, had to transform to be able to provide the human factors necessary for factory work and industrialization.702 While in the beginning markets were anarchical and self-regulated, people started to realize that to prevent nature and human labor to be destroyed, laws and regulations had to be initiated in order to control the market forces. Thus, the state intervened and – depending on the respective country but mostly decades after industrialization started– established a protective legal framework that at the same time created the necessary (contract) security for doing business. Although it can be easily argued that markets existed at all times in history, until industrialization they had been embedded into the social structure of society which was ruled by custom, autarchy and traditional households, not the motive of gain.

From the 16th century and thus, already under the mercantile system703, markets started to become increasingly significant and a main concern of governments. However, a market economy as described previously did not arise until the industrial revolution, as a prerequisite of Capitalism.704 As has already been outlined on a more theoretical basis in chapter 4, modern Capitalism emerged in Great Britain first and improved productivity by developing factories. It uprooted people from their traditional environment which often put them into extreme poverty, before the first regulations for protecting human labor were enacted. Polanyi argues that once Capitalism emerged and the ―liquidation of social structures‖ was under way, the development could not be stopped anymore. However, German reformers were able to slow it down in the case of Germany (see below). No matter where, individuals had no chance but to adapt to the new system and social formation. Many people were faced with extreme poverty and misery during the 19th century.705 As Polanyi shows in detail, the enclosures of open fields in Great Britain since the 17th century were the starting point for the industrial revolution 150 years later.706 Ultimately, they were an important component of the dislocation of common people, which forced Wehler, 1989, and esp. Wehler, 1987, p. 141 and 592 and Polanyi, 1944, p. 3, 16f and 55.

In short, Mercantilism and its German version Cameralism (roughly 16th to 18th century) holds that nations are depending on the incoming of capital, especially in the form of bullions, because trade is seen as a zero sum game. Mercantilism suggests that in a peaceful way this is best achieved through a positive balance of trade with other nations. The ruling government should advance these goals by encouraging exports while discouraging imports through the use of tariffs. Schmidt, 1994.

Wehler, 1987, p. 592f. and Polanyi, 1944, p. 55.

Wehler, 1987, p. 142.

Polanyi, 1944.



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