Do not Throw Out the Baby with the Bathwater

Michael Kalecki’s Advice on Financing Development

Michael Kalecki (1899-1970) was a rare economist of Polish origin who could be referred as the unknown prophet in economics. He actually developed his theories before or at the same time as the famous British economist J.M. Keynes’ ideas that revolutionized economics and economic policy from 1930s to 1970.These Keynesian policy ideas were viewed as outdated until the recent 2008/09 global economic crisis, when the United States government started to use exactly his policy recommendations (“the Stimulus Package”) to help remedy the economic downturn.
Among Kalecki’s corpus of economic work was his famous idea about “the problem of financing development,” especially for developing economies. Kalecki came from a relatively poor country (Poland), and, in the 1960s, his ideas were helpful in advising poor countries such as India, Cuba, Bolivia and Israel on financing development.
Thus, his insight about developing countries’ problems is quite relevant for many countries in Africa, including Ethiopia, which seems to confront similar challenges today.
One of the major points in Kalecki’s problems of development finance is the notion that in the course of development “there is no financial limit, in the formal sense, to the volume of investment [as they can be financed by credit creation or money printing]. The real problem is whether this financing of investment does or doesn’t create inflationary pressure.”
This seems to be the case in Ethiopia, because today investment as a share of gross domestic product (GDP) is 40Pct, while gross domestic saving is about 10 to 22Pct (the range 10-22Pct is big, because since 2010, the official saving figure is problematic, as it doubles in just one year; moreover, saving in the banking sector today is just 10Pct of GDP).
In any case, this reality establishes Kalecki’s first point: if your investment is more than double your saving, it is in line with Kalecki’s notion that investment financing is not a problem; rather, the inflationary pressure is. When a country fails to live by its means, debt accumulation and policy surrendering pressure could follow, like what happened to Greece recently.
The second important point about problems of financing development for Kalecki is whether a certain level of investment will bring about inflationary pressure or not depends on the expansion of the supply of the consumer goods (especially food) in response to the demand. The implication for the current government here is twofold.
First, in the second phase of the Growth and Transformation Plan (GTP II), the government doesn’t need to ‘throw out the baby with the bathwater’ by shifting its focus significantly from agriculture in general and food supply in particular. If this is not the case, all the industrial investment in the GTP II will lead to inflation and foreign exchange shortage and a fall in the value of the birr.
In fact, the government may need to recognize analytically that the first phase of the GTP is Kaleckian, as its investment was accompanied by significant wheat, edible oil and sugar imports in the face of inflationary pressure and shortages.
The second Kaleckian point to note is that it doesn’t matter for the Ethiopian mass – the poor – if the economy is growing by 10Pct if food prices are increasing by 15Pct, because their standard of living will decline by 5Pct, assuming very generously that the income of the poor increases by the growth of the economy, no distributional income problems exist, and population growth is not an issue.
Finally, Kalecki emphasized the limitation of the view that the high rate of growth of food supply can be developed by mobilizing the supply of labour in rural areas to urban or industrial centres, thereby allowing more land and more output per household in rural areas following this migration of labour from rural to urban areas. Kalecki argues that the notion that migration from the countryside will leave behind an extra surplus of food that will find its way to urban markets is not correct.
This is because a large proportion of this extra surplus will be used to increase the food consumption of the peasants. In addition, the standard of living of an industrial worker will frequently be higher than that of a poor peasant. Thus, the demand that could be generated by higher investment as envisaged in the GTP II and the high employment that will accompany it will only in part be met by the extra surplus to be created in the course of migration.
It follows that the rise in investment may create strong pressure on the available supply of goods, while at the same making it possible to increase the production of industrial consumption goods in line with the demand. It may be shown that in some instance the rigidity of the supply of food (farm size, low productivity, low irrigation, and dependence on rain-fed agriculture, among others) may lead to underutilization of productive facilities both in food and in non-food consumption goods.
In particular, if the resulting rise in food prices doesn’t accrue to the peasants and instead to big merchants and land owners, the reduction in real wages due to the increase in food prices will not have as a counterpart increased demand for mass consumption goods on the part of the countryside, for increased profits are not spent at all or are spent on luxuries – bringing about stress on the limited foreign exchange supply of the country instead.
So what should be done? One angle that Kalecki examined relates to how this could bring about challenges in foreign trade, balance of payment and aid as well as its implications for policy that we may address in a future issue of EBR.
In relation to the issues above, Kalecki’s advice is “…the expansion of food production, paralleling industrial development, is of paramount importance in avoiding inflation pressure. Investment in industry, transportation, public utilities, even long-run development projects in agriculture itself should be accompanied by measures which will expand agricultural production in general and food production in particular in the short term.”
Thus, Kalecki’s advice is important not only to avoid inflation and the misery of the poor but also to maintain Ethiopia’s attractiveness for foreign investment, which is partly related to low-wage workers. This can’t be sustained if food prices continually increase.
These measures range from land reform and cheap bank credit for peasants to improvements in the methods of cultivation, small-scale agriculture, and cheap fertilizer. It should be noted that after the problem of the rigidity of the supply of food has been overcome, the problem of supply of industrial consumer goods usually becomes more acute –but this is, again, for another issue of EBR.


3rd Year • August 16 – September 15 2015 • No. 30

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