Towards a Pro-Poor Development Strategy for Middle-Income Countries: a Comment on Bresser-Pereira and Nakano

Abstract

This paper draws upon Bresser-Pereira and Nakano (2003), in order to outline a pro-poor growth strategy for middle-income countries. This strategy avoids the pit- falls of the neoliberal model implemented in several countries in the aftermath of the 1982 international debt crisis, and is conducive to income distribution and sustain- able growth simultaneously. In a recent issue of the Brazilian Journal of Political Economy, Bresser-Pereira and Nakano (2003) published a remarkable paper that will surely become an im- portant reference in the contemporary Latin American economic debate. In their essay, Bresser-Pereira and Nakano cogently criticise the neoliberal ("dependent", p. 11) growth strategy of most Latin American countries in the closing years of the twentieth century, convincingly demonstrate that sustained growth must be based on domestic rather than foreign savings, and skillfully outline an alternative devel- opment strategy for middle-income countries. This paper builds upon the latter feature of Bresser-Pereira and Nakano's con- tribution. It is clearly important to devise alternative development strategies for middle-income countries. Neoliberal programmes based upon the so-called (post-) Washington Consensus have failed throughout Latin America. Voters in several countries, including Argentina, Bolivia, Brazil, Ecuador, Venezuela and elsewhere have expressed their dissatisfaction, and in several countries the majority is clearly unwilling to bear further costs of "adjustment". In nearly every country, these costs include increased external vulnerability, slower growth, rising unemployment and

Full text

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Brazilian Journal of Political Economy, vol. 24, nº 1 (93), January-March/2004
Towards a Pro-Poor Development Strategy
for Middle-Income Countries: a Comment
on Bresser-Pereira and Nakano
ALFREDO SAAD FILHO*
This paper draws upon Bresser-Pereira and Nakano (2003), in order to outline a
pro-poor growth strategy for middle-income countries. This strategy avoids the pit-
falls of the neoliberal model implemented in several countries in the aftermath of the
1982 international debt crisis, and is conducive to income distribution and sustain-
able growth simultaneously.
In a recent issue of the Brazilian Journal of Political Economy, Bresser-Pereira
and Nakano (2003) published a remarkable paper that will surely become an im-
portant reference in the contemporary Latin American economic debate. In their
essay, Bresser-Pereira and Nakano cogently criticise the neoliberal (“dependent”,
p. 11) growth strategy of most Latin American countries in the closing years of the
twentieth century, convincingly demonstrate that sustained growth must be based
on domestic rather than foreign savings, and skillfully outline an alternative devel-
opment strategy for middle-income countries.
This paper builds upon the latter feature of Bresser-Pereira and Nakano’s con-
tribution. It is clearly important to devise alternative development strategies for
middle-income countries. Neoliberal programmes based upon the so-called (post-)
Washington Consensus have failed throughout Latin America. Voters in several
countries, including Argentina, Bolivia, Brazil, Ecuador, Venezuela and elsewhere
have expressed their dissatisfaction, and in several countries the majority is clearly
unwilling to bear further costs of “adjustment”. In nearly every country, these costs
include increased external vulnerability, slower growth, rising unemployment and
* Department of Development Studies, SOAS — School of Oriental and African Studies, University of
London, Thronhaugh Street, Russell Square, London WC1H 0XG, UK (e-mail: asfilho@aol.com).
[Submitted: July 2003; accepted: August 2003]

131
a deteriorating distribution of income and wealth. However, it remains to be shown
how alternative macroeconomic programmes can deliver rapid and sustained growth
with poverty alleviation and distribution. Latin American political economy can offer
an important contribution towards the achievement of these worthwhile objectives.
In this respect, the key insights of Bresser-Pereira and Nakano’s contribution
are the following:
• Middle-income countries should rely primarily on domestic rather than for-
eign savings to finance investment and growth. This requires a resolution of the
balance of payments, fiscal and financial constraints in these economies.
• Countries should adopt floating exchange rate regimes and avoid currency
overvaluation (exchange rate “neopopulism”, pp. 18, 20). This obviously presumes
that inflation can be tamed by other means.
• Foreign capital flows should be controlled in order to avoid destabilising ex-
change rate movements and excessive vulnerability to sudden capital outflows. These
controls should include, in different ways, foreign direct and portfolio investment,
and foreign loans. In this context, governments should attempt to reduce the for-
eign debt/exports ratio to manageable levels (e.g., below 2).
• Finally, it is essential to achieve long-term fiscal balance in order to prevent
runaway inflation and excessive (and costly) expansion of the domestic public debt.
In order to achieve this objective, Bresser-Pereira and Nakano suggest the imple-
mentation of contractionary fiscal policies, “beyond the levels usually required by
the IMF, together with a reduction of the domestic interest rates and currency de-
valuation” (p. 23). This combination of policies, and the ensuing macroeconomic
stability, may allow foreign savings to contribute to sustainable domestic growth,
rather than generating instability.
Most political economists will find these suggestions uncontroversial. Bresser-
Pereira and Nakano’s recommendation that countries should rely primarily on do-
mestic rather than foreign savings is supported not only by the pioneering work of
Feldstein and Horioka (1980), but also by recent research by Calvo (1996) and Calvo,
Leiderman and Heinhart (1996). A political economy interpretation of these find-
ings is provided by Palma (1998). Relative undervaluation of the exchange rate is
strongly supported by recent work on trade and industrial policy, including Agosín
and Tussie (1993), Chang (1994), Gereffi and Wyman (1990) and UNDP (2003).
Capital controls are advocated by Epstein, Grabel and Jomo (2003). In contrast,
however, fiscal restraint is likely to be the most hotly debated aspect of Bresser-Pereira
and Nakano’s suggestions. In what follows, this paper supports this particular as-
pect of Bresser-Pereira and Nakano’s agenda. It also outlines, in further detail, pos-
sible directions for an alternative (pro-poor) economic strategy that may be imple-
mented immediately (with suitable adaptations to local conditions) in a range of
middle-income countries. This strategy draws upon the rapidly growing literature
on “pro-poor growth policies” (see, for example, Cornia et al 1988, Dagdeviren et
al 2002, MacEwan 1999, Rao 2002, Saad Filho 2003 and Winters 2002).

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TOWARDS AN ALTERNATIVE STRATEGY
Pro-poor policies should fulfil two primary objectives. First, growth must benefit
the poor more than the rich (in other words, it must reduce absolute as well as relative
poverty), and lead to sustained improvements in the living standards of the major-
ity. These outcomes must be independent from trickle-down effects, and they should
be unambiguous across a broad spectrum of measures of social welfare. Second, as
was mentioned above, these policies should be efficient, consistent, and sustainable.
Policies that are excessively costly to implement and monitor, that generate welfare
traps and disincentives, or that create macroeconomic instability are unsustainable
in the long-term, and should be avoided.
A pro-poor growth strategy for middle-income countries starts by recognising
the importance of growth. Economic growth contributes to poverty reduction in
several ways. Growth increases the availability of goods and services and expands
the country’s consumption possibilities. It creates employment, expands markets and
sales income, and raises wages through the creation of labour scarcities. Growth
also funds social programmes and finances the provision of public goods (see be-
low). Finally, economic growth generates the savings and the financial development
required to fund investment and consumer spending. In the absence of growth (and
foreign transfers, e.g., international aid), poverty-reducing outcomes must rely on
distribution alone, which tends to create severe political tensions. Having said this,
the success of a pro-poor strategy should not be judged by the economic growth
rates alone. Rather, it should be assessed through the quality of the growth process
and its outcomes. Specifically, a pro-poor strategy increases welfare and empowers
the majority of the population, whereas neoliberal strategies generally lead to the
opposite outcomes (this conclusion is cogently demonstrated by Bresser-Pereira and
Nakano; see also Milanovic 2002).
In this context, investment is essential. Investment is the driving force of growth
but, as is well known, growth is also the driving force of investment, because rapid
and sustained growth generates the demand that makes individual investment pro-
jects viable. In order to kick-start this virtuous circle of growth and investment, the
state should select priority sectors through targeted (vertical) industrial policies, and
offer incentives to the expansion of capacity and output, especially in areas likely
to relieve the balance of payments constraint. These policies and activities should
be financed by a progressive tax system, and by the additional tax revenues gener-
ated by economic growth.
In this context, fiscal policy becomes critically important. Critics of neoliberalism
often argue that alternative strategies should be based on loose fiscal, monetary and
exchange rate policies. This suggestion is misguided, for three reasons. First, it draws
upon a narrow reading of the experience of the United States (as well as key West-
ern European countries) between the mid-1930s and the mid-1970s. This is largely
inapplicable to middle-income countries, because of their much tighter balance of
payments constraint. Specifically, developed countries could either print the world
currency (especially Britain before World War II, and the US afterwards), or had

133
much easier access to foreign currency than is currently possible for middle-income
countries. Second, in semi-industrialised middle-income countries loose fiscal, mon-
etary and exchange rate policies tend to generate unsustainable booms, which are
destabilising both economically and politically. This is especially true in economies
starved of investment for long periods, and where high unemployment coexists with
low spare capacity in critically important industrial sectors. Third, the “fully” ex-
pansionary alternative is not politically feasible. The rapid reversal of the fiscal stance,
from a surplus (or balance) to a significant deficit, is likely to trigger strong resis-
tance from the IMF and the US Treasury Department, the local media, financial sector
interests, and conservative ideologues of every stripe. This is likely to destabilise the
government and demoralise the alternatives long before their expansionary impli-
cations can be felt.
It follows that the investment projects required by a pro-poor strategy must be
financed adequately. This will not only avoid the difficulties outlined above, but also
ensure that the liabilities of the central government (including the stock of circulat-
ing money and the domestic public debt) will not increase excessively rapidly, lead-
ing to inflation, high interest rates and high interest payments on the domestic debt.
Recent experience in Latin America and elsewhere shows that these consequences
of fiscal, monetary and exchange rate policy laxity eventually block economic growth,
generate political instability, and make distribution very difficult.
In order to achieve the desired outcomes, fiscal policy should generally have a
restrictive bias, with deficits under recessions but significant surpluses during the
boom, leading to a (possibly modest) surplus over the economic cycle. Bresser-Pereira
and Nakano are correct. Furthermore, this fiscal policy stance can play a more
constructive role than is generally acknowledged.
A pro-poor growth strategy should support worker representation through trade
unions and impose rising minimum wages, as well as providing incentives for the
payment of high and relatively equal wages within and between industries. These
will be at least partly funded by high (progressive) income taxes and social security
charges. These policies, together with a restrictive fiscal policy, can stimulate tech-
nical innovation and productivity growth.
Low inflation, a relatively undervalued exchange rate and low state demand
will stimulate exports rather than production for the domestic market, prevent in-
efficient firms from profiting systematically from price increases, and curtail their
reliance upon state procurement. Moreover, state regulation and inspection will make
it difficult for firms to increase profitability by cutting wages, arbitrarily extending
the working day or bypassing health and safety rules. By the same token, relatively
high wages across the board will guarantee extraordinary profits to those compa-
nies with the most productive techniques, while increasing the pressure on their
inefficient competitors. Workers unemployed because of the unavailability of low-
paid jobs or the bankruptcy of inefficient firms should be supported and retrained
with public funds. Finally, these workers may find it easier to move to other sectors
of the economy if the wages are relatively equal across different industries. This will
increase economic flexibility and help to reduce structural unemployment.

134
In this context, the choice of monetary and exchange rate policy is trivial. They
should be accommodating, as is suggested by Bresser-Pereira and Nakano, in order
to stimulate investment and keep the currency moderately undervalued. The poten-
tially inflationary implications of these policies will be cancelled out by the contrac-
tionary impact of fiscal policy.
Bresser-Pereira and Nakano are correct in arguing that the balance of payments
constraint must be considered carefully. The tax rates required to support pro-poor
policies will necessarily be higher than abroad. Therefore, capital controls are es-
sential not only to support domestic economic stability (as was argued above), but
also to minimise capital flight. Moreover, international trade must also be regulated
to the extent permissible under WTO rules (see UNDP 2003), since the international
experience shows that relatively autonomous late development is possible only if
domestic industry and agriculture are protected (see Amsden 1997, 2001, and Chang
2002). However, specific interventions must be justified, and progress must be che-
cked against clear performance standards.
Finally, a pro-poor strategy necessitates specific polices to protect the poor and
improve social welfare. These policies should prioritise the provision of public goods
(social wage) rather than monetary handouts (although the latter should not be
excluded). Programmes including the expansion of education, training and health
provision, water and sanitation, parks and public amenities, state-sponsored envi-
ronmental preservation programmes, staple foods, clothing, shoes and public trans-
port, have relatively low administrative costs and they can reach the poor directly.
In most middle-income countries, including Brazil, the required administrative in-
frastructure is already in place. In contrast, cash transfers (e.g., along the lines pro-
posed by Suplicy 2003) are less desirable. On the one hand, they assume that social
welfare is determined by the individual capacity to purchase private goods, rather
than the access to public goods. On the other hand, they foster the commodification
of social life and the development of competition. In contrast, a high social wage
ensures the provision of key goods and services to all, contributes to the de-commo-
dification of the social relations, and fosters human solidarity. The importance of
these objectives is widely acknowledged, for example by the UNDP Human Devel-
opment Index.
CONCLUSION
This paper has reviewed briefly the contribution of Bresser-Pereira and Nakano
(2003) towards an alternative development strategy for middle-income countries,
drawing upon the recent literature on pro-poor growth strategies.
Needless to say, implementation of alternative strategies depends less on their
internal consistency (which has nevertheless been demonstrated above) than on
political limitations. More specifically, the most important constraint preventing the
introduction of pro-poor economic strategies in middle-income countries, includ-
ing Argentina, Brazil, Indonesia, Thailand, Turkey and South Africa, among oth-

135
ers, is not resource scarcity. It is, rather, the lack of political will to confront neoli-
beralism and build alternatives based upon the interaction between progressive
governments and civil society organisations.
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